Two of Donald Trump’s less extreme policy ideas involve a massive increase in defence spending (which, as in Australia now, means defence manufacturing spending) and infrastructure investment. Both of these will put enormous pressure on the US budget deficit, which under President Barack Obama has come down from nearly 10% of GDP in the bailout year of 2009 to a forecast 3.2% this year, having reached a nadir of just over 2% last year.
Now Trump is, in effect, promising to undo the big cuts in defence spending imposed by Republicans themselves in response to the “fiscal cliff”, and restart investment in infrastructure that Republicans at both the federal and state level have slashed for years, leaving the US with a serious infrastructure deficit. Trump will also have a GOP-controlled Congress, making it more likely these policies will receive support or, at least, a sympathetic hearing.
Except, the GOP, especially in its feral modern incarnation, hates spending, hates deficits and hates government. Four times since 2008 the US moved to the brink of financial implosion as Republican lawmakers voted to oppose or deny major rescue deals for US banks, or lift the country’s debt ceiling to allow the country to continue functioning. Right-wing low-tax advocates and “starve the beast” anti-government advocates backed the GOP to the hilt. They strongly opposed Obama’s US$787 billion stimulus plan of 2009, which did more to stabilise the slide in US growth and employment than the emergency rate cuts of the Fed (which chopped its rate in December 2008 to the range of 0% to 0.25% and left it there until December 2015). And in 2011, such brinkmanship from Republicans caused America to lose its cherished AAA credit rating when S&P cut it to AA+ with a negative outlook (since upgraded to AA+ stable).
So what will Congress do?
Look to Australia for a hint. Like the Republicans who sought to block Obama’s stimulus response to the financial crisis, the Coalition tried to block the Rudd government’s stimulus spending — backed, as ever, by The Australian and other News Corp newspapers. That urge to block morphed into a ceaseless attack on “debt and deficits” even as the economy avoided the recession that plagued most of the rest of the developed world — and all these years later still plagues some countries. But “Labor’s budget emergency” vanished once conservatives were elected, even though the deficit got worse and now shows no evidence of ending for years. Indeed, the Coalition has significantly increased spending as a proportion of GDP on the levels it inherited from Labor.
Ironically, it will be ambassador Joe Hockey — one of the most rabid promoters of the “debt and deficits” line here — who will witness first-hand what is likely to be the same conservative “do as we say, not as we do” backflip in Washington. Of course, if Hillary Clinton had won and had a similar policy, you can bet the Republicans would already be engaged in debt and deficit scaremongering about wasteful Democrats.
A significant increase in deficit spending — at a time when US unemployment is already below 5%, however inconvenient that might be for the “it’s the fault of neoliberalism” argument — will, all things being equal, eventually feed through into inflation in the US, accelerating the rise in US interest rates (the Fed will now almost certainly raise rates next month for a second December, given the positive reaction from Wall Street, or most of it — not the Nasdaq, where a host of China-sensitive stocks are located).
That will end any talk of lower interest rates in Australia — though offsetting that will be the boost to commodity prices from any substantial US spending plan, which will benefit Australia and the budget. That’s assuming the Chinese don’t throw a spanner in the works: Beijing has already started undermining commodity prices, especially coal, and may prick the current commodity rise sooner than a lot of local Trumpians think. They have already made a concerted attack on the coal price boom, and copper and iron ore will follow, judging by what is happening on Chinese futures markets.
A Trump spending plan will provide a fascinating challenge for sections of the conservative commentariat that are already trying to normalise a racist, misogynist, economic illiterate as somehow not so bad. But then his massive corporate tax cut policies will sweeten the bitter pill of Keynesianism for the likes of The Wall Street Journal and other Murdoch outlets that have led the charge against government spending and deficits across the world for so long.