The new President was elected by voters who feel that he is on their side. They are probably right: he will put America back to work
The outcome of America’s presidential election is perhaps less surprising in light of one salient fact: in 2015 less than 57 per cent of adult Americans turned up on the Labor Department’s payroll survey, against 78 per cent in 1969, and 66 per cent in 1939, at the end of the Great Depression. Less than half of adult Americans have full-time jobs. A sixth of adult American men are idle, living on disability or other government support, sponging off family, or eking out a bare living in the informal economy. In light of the economic facts, the nature of Donald Trump’s campaign as well as the response it received from American voters both seem rational, in contrast to the portrayal of both by the establishment punditklatura.
Something very big is wrong with the United States. Americans do not know exactly what it is. Illegal immigration and job loss due to imports are emotional issues in themselves, but they also stand in for a range of concerns: the federal debt, unsustainable retirement and medical benefits, and growing dependency. America decided on November 8 that the problem requires a dramatic solution of some kind, and chose the candidate who promised to do big things, even if he is not yet sure just what these things should be.
Donald Trump’s slogan “Make America Great Again” recalls Ronald Reagan and “Morning in America,” but his message is more redolent of Franklin Roosevelt. Not since Roosevelt has such a large proportion of the American population found itself on the economic sidelines, and not since Roosevelt has economic malaise proven so resistant to conventional therapy. In fact, Trump gave a nod to Roosevelt’s appeal to “the forgotten man”, promising in his acceptance speech to stand by “the forgotten men and women of our country”.
Broadly speaking, these are the same people whom Hillary Clinton called the “deplorables”: un-hip, and un-urban, and unsocialised through America’s overwhelmingly left-wing university system. The Democratic message to the “deplorables” resonated in 2012 when memory of the 2008 crash was still fresh. Vice President Joe Biden summed it up well in that year’s vice-presidential debate: the Democrats would not rest until “they have peace of mind and can turn to their kid and say with a degree of confidence, ‘Honey, it’s going to be OK. It’s going to be OK’.”
In 2012 the “deplorables” voted for the party that pledged to subsidise them, and the Democrats were as good as their word. In 2012 the economist Nicholas Eberstadt estimated that in a third of American households at least one member received means-tested government assistance of some kind. The number of Americans receiving food assistance (“food stamps”) rose from 27 million in 2008 to 47 million in 2012. Government transfer payments rose from 14 per cent of total personal income in 2009 to 18 per cent in 2012. The most important lesson to be drawn from Trump’s victory is that Americans do not want to be a nation of layabouts. “Make America great again” means earn a living rather than draw a subsidy.
The “Black Lives Matter” protest movement began over a demonstrably false account of the justifiable police shooting of a violent felon in Ferguson, Missouri, and continued to provoke civil disturbances over police actions later shown to be blameless. President Obama expressed sympathy for Black Lives Matter when most Americans were repelled.
Obama and Mrs Clinton won few points with voters, moreover, by insisting that Islam had nothing at all to do with terrorism. A November 2015 Brookings Institution poll showed that Americans held an unfavourable view of Islam by a margin of 61-37, although their views of individual Muslims were considerably more benign. The Democrats denounced expressions of unease about Islam as “Islamophobia”, allowing Trump to make the opposite case forcefully.
The administration surely overreached, moreover, when it threatened in May 2015 to cut federal funding for schools that failed to comply with its guidelines for bathroom use by transgender students. The perception that the Democratic party had become giddy with the prospect of imposing a dodgy social agenda motivated many Americans to abandon it.
In effect, Trump reversed the characteristic roles of Republicans and Democrats. He succeeded in portraying the Democrats as the party of elite fat-cats and himself as a man of the people — just what Roosevelt did to the hapless Herbert Hoover in 1932, and to a succession of Republican challengers until his fourth election victory in 1944.
Trump’s critics accuse him of vagueness and inconsistency in his economic proposals. He seemed to want to spend $1 trillion on infrastructure, cut corporate taxes and reduce the deficit all at the same time. The voters, though, required a well-considered economic plan of Trump as little as they did of Franklin Roosevelt.
As Amity Schlaes reported in her 2007 book The Forgotten Man, Roosevelt’s erratic economic programme was a failure by and large:
Ms Schlaes’ account has the sole defect of failing to explain why FDR was twice returned to the White House in peacetime and why the narrative she wants to debunk remains fixed in popular memory. The man was beloved not because he succeeded but because he tried. A strong argument can be made (and has been made by Conrad Black among others) that Roosevelt saved the social fabric of America at a moment of great danger. Americans believed that the President was doing all within his power to alleviate their suffering.
Republicans, to be sure, refer to Ronald Reagan’s presidency as their benchmark for success. One should not expect Reagan-like economic performance under a Trump presidency. When Reagan took office in 1981, the top marginal tax rate stood at 70 per cent, and the impact of a reduction to 40 per cent was enormous. Public debt was just 30 per cent of GDP, compared to 110 per cent today. America had a monopoly on capital for startup businesses. Ambitious Asians came to Silicon Valley to raise money, for there was nowhere else to go. Today it is easier to raise money in Shenzhen. China in 1980 had just emerged from the Cultural Revolution with its universities in ruins; today China grants twice as many science and mathematics PhDs as the United States. Some are of dubious quality, but most are not.
Most importantly, America’s R&D infrastructure was unrivalled in the world, and a cornucopia of new technologies was available for commercialisation: inexpensive semiconductors, personal computers, optical communications, and other inventions that transformed daily life. Federal R&D spending was 0.7 per cent of GDP compared to 0.4 per cent today, and several major corporations — the Bell System, RCA, IBM and General Electric — maintained their own major research laboratories. All these are gone.
That leaves America today with many workers consigned to low-productivity, low-wage jobs, but growing shortages in key areas of skills. Machine operators in modern factories require at least basic programming knowledge, and the greatest risk to manufacturing industry is the absence of qualified workers. With long-term idleness comes degradation of skills. American workers are not only excluded from the benefits of the modern economy, but to an increasing extent are unqualified for the modern economy. It is into this thicket that the new president must wade. Trump has said that he wants to spend $1 trillion on infrastructure, which is in urgent need of upgrades. The stock market takes him at his word, and the stock of construction equipment manufacturers has soared since his election. Here Trump is magnificently right, as Keynes said of Roosevelt in another context. Repairing ageing infrastructure is a basic economic requirement, but it also allows many less-skilled workers to re-enter the labour force after a long and unwanted furlough. More threatening to America’s long-term economic prospects than deteriorating capital stock is the extended idleness of a large proportion of her working-age men.
The Obama recovery of 2009-2016 was the weakest on record; had the recovery achieved the same growth rates as in past recoveries, America’s economy would be about 10 per cent larger than it is today. Not only the pace of growth but its composition gives cause for concern. In America’s dynamic economy of the past, start-ups contributed more than 100 per cent of employment, which is to say that established businesses shed jobs while new businesses more than replaced them. After 2008, though, the contribution of start-ups to employment growth has been close to zero (the reported increase in employment of the largest 1,500 American companies by stock market capitalisation is roughly equal to total employment growth from 2009 to 2015).
The American economy lost its entrepreneurial character under the Obama administration. The academics will take some years to chew over the data, but a reasonable conjecture is that more restrictive credit standards after 2008 and a much higher regulatory burden dampened the animal spirits of American entrepreneurs. The Affordable Care Act, moreover, imposed substantial costs on businesses with more than 55 employees, which may explain why many businesses failed to grow. Large companies employ small armies of lawyers and lobbyists to handle regulatory issues which may prove overwhelming to start-ups. The clubby collaboration between corporate giants and the Obama administration stood in sad contrast to the paralysis of the entrepreneurial sector. Trump’s claim that the system was “rigged” was an exaggeration, but the system was skewed to the advantage of entrenched companies to an extent not seen since the 1960s.
Regulatory relief and a corporate tax cut, combined with aggressive federal spending on national infrastructure, are likely to raise both the US growth and inflation rates — as the markets appear to think. That much can be expected from a Trump administration. Everything else is uncertain. The president-elect told a television interviewer on November 13 that he would deport 2 to 3 million illegal aliens immediately after his inauguration, although it is unlikely that an operation of such magnitude could be mounted in a short period time under any circumstances.
Of all Trump’s campaign pronouncements, the claim that illegal immigration had worsened economic life for ordinary Americans had the least foundation in economic fact and the strongest resonance among the voters. The actual count of illegal aliens in the United State appears to have fallen somewhat since 2008, if polling organisations like the Pew Institute are correct. But Americans who have difficulty diagnosing the economic problems that bedevil them see the impact of illegal immigration daily. Many voters made immigration a decisive issue, not because they believe that deportations will set the economy right, but because they saw it as a litmus test of whether candidates cared about them. Evidently Trump will make good on his promise, but its impact will be minor.
Few believe that Trump will start a trade war with China. Indeed, China’s stock market is one of the very few emerging equity markets to have risen since the election. Beijing evidently views the president-elect as a pragmatic businessman who drives a hard bargain, but whose object is to make a bargain at the end of the day.
Throughout the campaign, Trump was attacked as insufficiently vigilant about the Russians, or even (as former CIA Director General Michael Hayden alleged) “a useful fool” for the Kremlin. That can be dismissed as campaign Billingsgate. Trump’s closest adviser on national security, the retired chief of the Defense Intelligence Agency General Michael Flynn, published a campaign book with a very harsh view of Russia’s enmity towards Western democracy. The trouble that Trump will have dealing with the Russians (or the Chinese) is precisely the same as the trouble President Obama has had. The technological balance between America’s military on one hand and Russia and China on the other is no longer unambiguously in America’s favour. In Syria, for example, Russia has deployed advanced air defence systems which may be able to target and destroy American stealth aircraft. Because America has never engaged the new Russian system, the Pentagon does not know with certainty what it can do, but senior Air Force commanders do not wish to find out the hard way. Ironically, there is the no-fly zone in Syria that Mrs Clinton talked about during the second presidential debate, except that it is maintained by the Russians, not by the United States.
The sad fact is that America spent perhaps $5 trillion in Iraq and Afghanistan and has little to show for it, while its principal competitors, Russia and China, invested a minuscule fraction of that amount in advanced weapons technology and leapfrogged American technology. That places inherent constraints on American strategic action. Washington may object to Russian bombing in Aleppo, for example, but is in no position to force the Russians to stop. By the same token Washington may object to China’s acquisitiveness in the South China Sea but can do nothing to counter it (as the Philippines noticed before declaring that they wanted to change sides and stick with China, the evident winner).
There is no short-term fix to such problems. There have been many calls for Nato to stand up to the Russians, but little explanation as to just what that might entail, once the deployment of stealth fighters to Syria is ruled out for compelling technological reasons. Under the best of circumstances, Nato would require some years to develop effective countermeasures to the present generation of Russian and Chinese military technology. Trump has promised to rebuild America’s military, and his election occasioned a leap in the share prices of the major American defence contractors, as well as British Aerospace.
A large and sustained increase in American defence spending would be of economic benefit to Britain, whose defence industry is closely integrated with America’s. It is noteworthy that of all the major currencies, sterling was the only one to rise after Trump’s election victory. Markets evidently believe that a post-Brexit UK and a Republican-led America will have a great deal to do together, and that the UK’s economy may benefit from the Special Relationship. It does not seem likely that Donald Trump and Theresa May will rekindle the natural sympathy of Ronald Reagan to Margaret Thatcher, but there is considerable room for the Special Relationship to evolve to both countries’ benefit.