OECD premature in its praise of Donald Trump’s economic plan

Posted on November 28, 2016

Remember all that economic doom and gloom about Donald Trump’s presidency? It seems a world away from the OECD’s first economic forecast since his election victory. The club of mainly rich countries has lifted growth predictions for the world economy and much of this can be attributed, it says, to the fiscal stimulus the US president-elect has promised.

This sudden wave of optimism may seem bewildering. On the one hand, it is not surprising to see why Mr Trump’s fiscal stimulus — with the grand promise of an “infrastructure plan” — is being praised by the OECD. For the past year, it has urged rich economies to boost fiscal spending in the hope of helping the global economy break out of the sluggish growth cycle it has been trapped in since the financial crisis.

The OECD’s excitement about the Trump administration’s plans, however, seems premature and possibly unwise for two reasons. First, it is too early to state the impact of vague fiscal proposals without knowing what form they would take. Given Mr Trump’s lack of consistency and ad hoc approach to policymaking, there is much uncertainty about how his fiscal positions will turn out once he is in office.

Second, the OECD makes a dubious link between Mr Trump’s fiscal plans and their impact on inequality. It says the new administration’s “boost to spending on infrastructure and other investments will combat inequality and counter the steady decline in labour force participation rates”. As desirable as this would be, the assumptions for this statement are unclear.

This is especially true when looking at Mr Trump’s fiscal stance in the context of his wider economic agenda — which includes imposing import tariffs and tax cuts. The OECD rightly admits that disruption to world trade would hurt growth. But the damage from Mr Trump’s broader economic plans could easily outweigh any positives that may arise from a fiscal stimulus.

The kindest interpretation of the OECD’s enthusiasm would be that it has used this forecast to convince sceptical politicians of the benefits of using fiscal policy: spend more, generate more growth and everyone benefits. The revised forecast for the world’s largest economy could make its job convincing others in the rich countries’ club a little easier.

A more cynical view would suggest that the OECD, too, is confused. In the past it has consistently, and rightly, invoked fears over economic protectionism. But its latest forecast makes one wonder if it is trying to soothe the future Trump administration’s angst over earlier scepticism of its plans from the economic elites.

The OECD is right to call for the greater use of fiscal policy to boost growth in sluggish economies. But it is one thing to factor in real policy changes and something very different to adjust the world’s economic outlook on the basis of grandiose promises from Mr Trump’s campaign.


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