In many respects, during his campaign Trump embraced the legacy of Ronald Reagan, including borrowing his commitment to ‘make America great again’. Like Trump, Reagan made his reputation as an anti-establishment, iconoclastic Republican. He came to power with a plain-talking and personal approach to politics at a time when there had been a decade of considerable economic hardship for the American people and American industry. But Trump may want to avoid following Reagan too far, or he may bump up against the same barriers that ‘Reaganomics’ ran into in the 1980s.
The view from the debt mountain
Like Trump, Reagan promised smaller government and reduced taxes but instead he embarked on an era of unprecedented rising government debt. The slogan ‘Reaganomics’ was invented to describe cutting taxes while increasing spending, particularly on defence. Trump plans to mimic Reagan’s tax cuts for the wealthiest in order to achieve the elusive ‘trickle down effect’ of increased growth through spending and investment by the richest individuals and corporations. But the intellectual foundations of Trump’s eclectic policy agenda seem less well-grounded than those of Reagan, which were founded on replacing Keynesianism with monetarism and embracing free markets.
For Reagan, the ‘trickle’ never accumulated beyond a very slow drip, so his tax cuts did not generate the growth that would increase the tax base sufficiently to meet the government’s spending ambitions. The ratio of debt to GDP had been relatively stable during the volatile 1970s, but it rose sharply from 30% to 50% from the time Reagan entered office in January 1981 through his two terms. This trend continued under his Republican successor, George HW Bush, stabilizing at around 60% of GDP when Bill Clinton took office in 1993, and staying around that level until the global financial crisis.
Trump’s plans to invest in infrastructure rather than defence may have more lasting positive effects on American productivity if they are carefully targeted, but his reliance on an increased tax base (from higher growth) in order to fund this investment suggests that the debt/GDP ratio will rise. And this time, Trump is not starting from the low levels of debt/GDP that prevailed in the 1970s but from today’s historically high levels (public debt/GDP ratio was about 105% in 2016). Relying on international markets to absorb this debt could create global imbalances reminiscent of the 2000s, when the fragility of the global financial system increased. During the 2000s, the appetite for holding US public debt among countries with surpluses like China and Japan facilitated the accumulation of US government deficits. With China’s growth slowing down and its reserves now falling, this appetite may not support Trump’s ambitions.
Reagan’s international economic policy was also focused on ‘America first’, in a similar if less drastic way to Trump’s rhetoric, yet he presided over a mounting deficit in goods and services – from $5 billion when he took office to $27 billion by the end of his term. This was partly due to a sharp fall in net exports of services, from about $4 billion at the start of 1981 to a net deficit by 1985. The strong rise in the dollar in the wake of Paul Volcker’s tight money policy (aimed at finally choking off inflation) undermined the competitiveness of US exports and increased imports sharply. Rather than prompting a shift to protectionism, however, the thrust of trade policy in the 1980s was toward gaining access to overseas markets for US production, in particular Japan and Europe (culminating in the 1988 Ominbus Trade and Competitiveness Act).
In the 1980s, unlike the 2000s, there was no World Trade Organization to govern international trade disputes and the GATT (its predecessor) had stalled in its progress to liberalize trade further. Like China in the 2000s, Japan loomed as a threat to established manufacturing sectors in advanced economies like the US. An apparent flood of textiles, electronic and automobile imports threatened American producers in vulnerable sectors such as the steel and car industries.
But the slogan was ‘fair trade’ rather than protectionism, and the impetus was to force open overseas markets rather than to close US markets to foreign competition. Nevertheless, voluntary export quotas were imposed on Japanese automobiles from 1981 and countervailing duties on steel protected this industry from ‘unfair trade’ (at the expense of producers who consumed steel).
While the 1980s is viewed retrospectively as a period of liberalized international markets, tariff and non-tariff barriers were heavily contested in US politics, with Congress resisting tariffs that damaged consumer and producer interests. Today the US is bound by the cumbersome WTO dispute mechanism as the main way for settling such disputes, but in the 1990s regional free trade agreements proliferated outside the WTO to allow more agile agreement on services and investment as well as merchandise trade. Trump seeks greater room for manoeuvre by renegotiating the merchandise trade aspect of these agreements, which might imperil the investment and services aspects.
The past is never a perfect guide to the future – Reagan operated in a Cold War, pre-WTO environment with a new economic toolbox to explore – but the echoes of the 1980s were purposefully evoked by the Trump campaign. If Reagan’s fiscal dilemma returns to constrain Trump and Congress frustrates his bolder protectionist tendencies, the echoes might become less welcome.
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