School of Policy Studies

School of Policy Studies
School of Policy Studies

The Trump Bump and Wall Street Chumps

Euguene Lang, Adjunct Professor

National Newswatch - National Opinion Centre
March 7, 2017

The verdict is in.  Donald Trump is good for American business and the US economy.  That is the judgment of the stock market.

Since Trump’s election last November, the S&P 500 is up 6%, or US $3 trillion dollars.  This is known as the “Trump Bump”.

It’s hard to imagine the markets are impressed with the temperament, maturity, or habits of President Trump.  So it must be his economic and fiscal program that inspires confidence.  That agenda consists of three broad thrusts—a tax cut for corporations and relatively well-off Americans; a protectionist trade policy aimed at repatriating jobs and investment from foreign shores, especially manufacturing from China and Mexico; and big increases in defence and infrastructure spending to stimulate short-term growth.

This is the essence of Trumponomics.  It is a movie we have seen before.

When it was originally screened a generation ago the leading man was a seventy something Hollywood B movie actor named Ronald Reagan.  Reminiscent of today, there was a need to make America great again, owing to the “malaise” that President Jimmy Carter said afflicted the country.  The basic script was the same then as now—big tax cuts; trade protectionism; and a huge boost to military spending.  Collectively this was known as Reganonomics, and for a decade the Wall Street Journal was its chief propagandist, seeing in this program a route back to the economic promise land.

Reaganomics got off to a roaring start in 1981 with the largest tax cut in American history, most of the benefits of which accrued to corporations and relatively well-heeled Americans.  This was supplemented with another big tax cut five years later.  The idea here was that if corporations and the well-off got a large enough tax concession, the benefits would trickle down to the rest through increased corporate investment and personal consumption spending, leading ultimately to more jobs.

Then as now there were foreign economic enemies afoot.  The main villain at that time was Japan, which had emerged as a manufacturing powerhouse, challenging the US in key industries they had dominated.  For the Reagan administration the allegedly undervalued Yen was the culprit, conferring an unfair advantage on Japanese goods and thereby hollowing out American manufacturing.  Sound familiar?  The response was the 1985 Plaza Accords, a gratuitous act of mercantilism to depreciate the dollar relative to the Yen.  This was married to “Voluntary Export Restraints”, through which Washington coerced the Japanese into setting limits on the export of its automobiles, steel and semiconductors that were devastating American manufacturing.

The third pillar of Reaganomics–a big increase in military spending–was delivered with gusto.  At its peak during the Reagan years defence spending accounted for 6.5% of US GDP (it is under 4% today), by some estimates 40% higher than during the peak of the Vietnam War.

What was the economic and fiscal result of Reaganomics?

The combination of big tax cuts and huge increases in military spending drove the US fiscal deficit as a percentage of GDP from under 4% in 1982 to 6% in 1983, falling to just under 3% as Reagan departed the White House in 1989.  This great conservative president, that Wall Street so venerated, never came close to balancing Washington’s books, prompting Senator Daniel Patrick Moynihan to quip famously that the deficit had become “the first fact of national government”.  In the final fiscal analysis, by the end of Reagan’s presidency, the national debt grew from just under $1 trillion to nearly $3 trillion, permitting America, once the leading creditor nation, to claim the coveted world’s largest debtor crown.

GDP growth was also slower in the 1980s than in the previous three decades, and real growth per capita lagged behind Japan, France, West Germany, Canada and Sweden.  Net job growth was slower in the 1980s than in any decade since the Second World War.  And American household indebtedness increased from 160% of GDP in 1981 to 225% of GDP by the time Reagan left office.

Notwithstanding the attempts to shield domestic manufacturing from the depredations of the Japanese, the Rustbelt bled thousands of manufacturing plants and millions of unemployed workers.  Parenthetically, Reaganomics inflicted a recession on Japan’s export dependent economy, resulting in a lax monetary policy and an attendant asset price bubble that burst in the early 1990s, creating an economic malaise from which Japan has still not emerged.

That is quite a movie.

Nevertheless, thirty-five years after it first hit the theatres we are being treated to its sequel.  The septuagenarian B Movie Actor has been replaced in the lead role by a seventy something former reality TV star named Donald Trump.  And once again Wall Street and the markets are betting that this film will be a blockbuster.  But as we all know, the sequel is always worse than the original.


Eugene Lang is Adjunct Professor, School of Policy Studies, Queen’s University