Trump and the shifting mood on austerity

Posted on July 21, 2016

Republican U.S. presidential candidate Donald Trump speaks at the Republican National Convention in Cleveland, Ohio, U.S. July 18, 2016. REUTERS/Aaron Josefczyk©Reuters

At the Republican party’s 2012 convention in Tampa, Florida, a gigantic “debt clock” hung over the stage showing how America’s national debt was swelling in real time. It was intended to remind delegates of the need for tough fiscal measures.

At the 2016 convention in Cleveland, Ohio, this week some speakers — such as Mike Pence, the vice-presidential nominee — have deplored the size of US debt. But the comments have been brief, almost ritualistic, and there has been almost no call for an austerity plan.

    Instead Donald Trump, the presidential nominee, has called for a package of infrastructure spending and tax cuts. If enacted they could raise the national debt sharply from its present levels — calculated by some to be as high as $19tn, or about 100 per cent of gross domestic product.

    Is this just another sign of Mr Trump’s drive to disrupt the status quo? Yes, in part: he seems determined to move the party away from an economically conservative platform towards a more populist, quasi-nationalist agenda. As one senior Republican observed yesterday: “The point about Trump is that he is a Republican, not a conservative.”

    But there is another way to interpret the disappearance of the debt clock: Mr Trump has caught the policy mood, not just in America but also across the western world. For the Cleveland convention is certainly not the only place where fiscal austerity is going out of fashion.

    On the contrary, when the Democrats hold their convention in Philadelphia next week, there will be little debate about the national debt. Hillary Clinton, the presumptive nominee, and other senior Democrats are likely to echo Mr Trump’s call for infrastructure spending to boost growth.

    This is not purely a made-in-America phenomenon. Canadian prime minister Justin Trudeau this year unveiled a C$60bn fiscal stimulus programme that includes spending on infrastructure. In the UK, Prime Minister Theresa May has made clear her commitment to balancing the budget. But Philip Hammond, the chancellor of the exchequer, has indicated that he is not averse to using his Autumn Statement to help boost the economy — in sharp contrast to George Osborne, his predecessor.

    Meanwhile, this weekend’s meeting of the Group of 20 leading nations finance ministers and central bank governors in Chengdu will echo this rhetorical trend. A few years ago, the platitudes that emanated from G20 meetings did not champion fiscal stimulus too loudly. Most finance ministers were reluctant to draw attention to high levels of sovereign debt — not least because they were still reeling from a crisis caused by excessive levels of private-sector debt.

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    The main weapon for stimulus measures was instead monetary policy in the form of ultra-low interest rates. But this weekend’s meeting will almost certainly stress that such measures need to be employed alongside structural reform and fiscal support. And since nobody expects structural reforms to deliver growth quickly — and central banks’ ability to impose further rate cuts is almost exhausted — it is fiscal measures that will provoke the real debate.

    “There was a debate when I came in [to office] between growth and austerity,” Jack Lew, the US Treasury secretary, told me this week. “That debate is pretty much over. There has been a heavy reliance on monetary policy through this recovery. [But] I think that fiscal policy taking equal billing is a significant move forward.”

    Even the International Monetary Fund is echoing this shift: though it has been one of the loudest voices championing austerity in the past, it is now stressing the opportunities for some G20 countries to exploit “fiscal space”, or their ability to spend more to boost growth. As Christine Lagarde, IMF managing director, recently told me: “We think that monetary policy has to continue — it has to support fiscal policy and the structural reforms. But we believe that the three [policies] have to operate together.” Debt is no longer taboo.

    A cynic might point out that it is unclear whether this subtle rhetorical shift will turn into anything tangible. Canada, for example, is viewed as leading the trend — but even its stimulus is not that hefty relative to its GDP.

    But, if nothing else, the shift in rhetoric is a powerful sign of rising disenchantment among western policymakers, not to mention voters. Relying on monetary policy alone no longer seems viable. Mr Trump’s policy approach may seem incoherent but he is showing his genius for reading the zeitgeist.

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