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Trump must fulfil campaign promises if he wants to last more than one term 


DONALD TRUMP’S victory in the US presidential election this month clearly resembles the outcome of Brexit in June. Both defied the predictions of many polls. 

 

Post-US election analysis indicates that most polls failed to foresee the Trump victory because they underestimated the power of white underprivileged voters who had never bothered to cast a vote before but got behind Trump this time. His main supporters are people who have only low levels of education and have earned average but stagnating incomes for the past two decades. 
Trump’s campaign promised to bring back their jobs and dignity through the slogan of “Make America Great Again”. The interesting part is that his supporters were not turned off by his other campaign policy of cutting taxes for the rich. 
Robert Shiller, the 2013 Nobel laureate in economics, explained that these people, who consider themselves at least middle class, do not like government policies that look like handouts. They don’t want a more progressive tax system that would give money to them. They just want their economic power back. 
If Trump plans to be re-elected for a second term, he will need to fulfil his campaign promises: reducing the inequality gap without raising taxes, negotiating new trade deals, imposing higher tariffs on imports, building a wall along the Mexican border, and deporting illegal immigrants charged with criminal offences. 
He aims to create more domestic jobs through the expansion of traditional heavy industries and through coal mining, but at the cost of higher production inefficiency and lower environmental standards. 
Fiscal policy is also seen as a feasible method that President-elect Trump can employ to stimulate economic growth. So expect more investments in infrastructure as well as upgrading of existing infrastructure.
 The question is this: Will the Trump administration be able to finance its rising expenditures while at the same time cutting tax revenues? Higher public debt is unavoidable in such a situation. 
 Trump’s administration can finance its new bonds by borrowing either from the private sector and households or from the central bank. Borrowing more from the private sector and households would mean that long-term market interest rates would have to be adjusted higher to attract more bondholders. 
However, higher long-term interest rates could deter economic growth and as a result, lower employment. To avoid high long-term interest rates, the government may borrow from the central bank directly. Laura Tyson, a professor at the University of California at Berkeley, has pointed out that in very special situations, the central bank may purchase government bonds and roll them over in perpetuity when they mature. In this way, the government will be able to increase spending without having to increase taxes now or in the future, and still be able to maintain low interest rates.
The problem with this approach is that it would not only increase the risk of volatile inflation but would also destroy the confidence in the financial integrity of the central bank. On this last point, any policy changes away from the norm would be a big challenge to overcome. 
 
Professor Arayah Preechametta is a lecturer at the faculty of economics, Thammasat University.
 

Published : November 27, 2016

By : ARAYAH PREECHAMETTA SPECIAL TO THE NATION

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