Jim Power: Bigger homegrown threats than any Donald Trump tax reform
Just over a week has passed since the historical election of Donald Trump and not surprisingly the reaction has been quite dramatic.
All over the world, his victory has been greeted with shock and amazement. As far as we can tell, only Vladimir Putin appears to be genuinely happy with the result.
From a personal perspective, I am shocked and aghast at the victory but not totally surprised. In early September, I filed my weekly column for this newspaper from liberal San Francisco.
I wrote at the time of my surprise at just how much many liberal Democratic voters of my acquaintance hated Hillary Clinton and everything that she stands for.
Bernie Sanders was their Democratic Party candidate of choice and they were, to a person, loathe to lend their electoral support to Ms Clinton.
While it was, and is, obvious that Mr Trump tapped into the deep concerns of many Americans, his victory was also heavily driven by the Clinton factor.
The only satisfaction I get from the result is the manner in which the illiberal liberals in this country and elsewhere have been cast into despair. It is also interesting to note the manner in which many are not prepared to accept the democratic will of the people as expressed in the Electoral College system.
Ahead of the election, I heard a number of US commentators predict that in the event of a Trump victory, US financial markets would crash and that the economy would quickly descend into recession.
While it is still way too early to predict the economic impact of a Trump presidency, the market reaction to date has been interesting and relaxed. US equity markets have moved ahead; the dollar has strengthened; and US bond yields have increased.
This reaction is basically the markets’ interpretation of what ‘Trumponomics’ might look like. This interpretation is obviously based on what Mr Trump promised during the election campaign, and as we have seen in the days since his victory, the promises may well bear no relationship to what he actually does in office.
His basic stated approach towards economic management involves a reflation of the economy in order to create jobs and “make America great again”.
The approach he promised included a cut in income taxes; a cut in the corporation tax rate from 35% to 15%; and a €1 trillion investment in physical infrastructure — such as roads — over the coming years.
Given that the US is running significant budget deficits and has a very high level of sovereign debt, this fiscal expansion stance will have to be funded through bond issuance, and hence bond yields have increased.
In addition, this approach would boost economic activity; would eventually threaten inflation; and could force the Federal Reserve to pursue a more aggressive interest rate policy than might otherwise be the case.
All of these developments would logically be damaging to bond markets, but would be supportive of the dollar. The approach to corporation tax and stronger growth would help corporate profitability and would be good news for equity markets.
From an Irish perspective, there has been concern about the impact that the proposed cut in the corporation tax rate might have on US multinational investment in Ireland.
Ironically, if Mr Trump delivers on his protectionist trade agenda, this would actually increase the necessity for US companies to have a strong presence in the markets that they serve, such as Europe and Asia.
I suspect if Ireland does suffer an FDI (foreign direct investment) shock, it would have more to do with other issues such as competitiveness, rather than US corporate tax policy. The increasingly ‘bolshie’ Irish trade unions should take note.
