How will 'Trumponomics' play out in the US?

Broadly, in the words of the 30th US President Calvin Coolidge, “The chief business of the American people is business.” Silent Cal, as he was called because of his taciturnity, was right on the money there, as it were.

However, more specifically, Trump will probably introduce tax cuts to stimulate business activity, erect cast-iron tariffs to protect the United States industry and expel unauthorised immigrants. Well, at least that is what he told us he would do.

But how much of this economic agenda can he realistically pull off?

Tariffs: A Double-Edged Sword

On tariffs the president-elect has promised, hand on heart, to impose a 10 percent tariff on all imports and a 60 percent tariff on those from China.

This will lead to a dip in imports as tariff revenues approximate a plus sign and the country’s trade deficit will decrease, on paper.

To this end, Mr. Trump will be smiling all the way to Bretton Woods. But what will he do when there’s tariff retaliation by China or Europe?

Many experts believe that as US aggregate demand shifts from foreign to domestic goods, from consumer goods to producer goods; the economy will smile along with Mr. Trump as there shall be higher demand for domestic goods and the means to produce them more locally.

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File image of US President-elect Donald Trump File image of US President-elect Donald Trump Pulse Live Kenya

This will put money in the pockets of Americans leading to price rises to meet increased demand, due to there being more disposable income. This might force The Fed, or the Federal Reserve System, which is the central bank of the United States, to floor the brakes on inflation. That way, it is kept under control.

Then, thanks to higher rates and an improved trade balance, the US dollar will strengthen to the extent that you would never mistake it for a Zimbabwean dollar. Levity aside, this is the inverse of what Trump wants.

That’s because US exports will suffer, being made more expensive to purchase as the balance of payments pony up just enough to keep the trade deficit going strong, like Mr. Trump’s unfortunate comb-over.

US exporters will suffer the most if there is Chinese and European tariff retaliation. The trade balance will tilt towards lower imports and exports and a concomitant fall in economic activity.

The Trump administration won’t be left with a proverbial pot to pee in or window to throw it out, thanks to a tariff increase.

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Immigration: A Tightrope for Economic Balance

On immigration, Mr. Trump aims to deport unauthorised immigrants. They are estimated to number about 11 million. He wants to deport 1 million a year. There are about 160 million employees in America if you will. So, if he deported 1 million immigrants a year, employment would fall by 0.5 per cent a year.

The ratio of job vacancies to unemployed workers will be lopsided enough to bring about inflation. The Fed might raise interest rates, causing exchange rate appreciation or the value of investments to decrease over time.

Employers, especially in the service industry, will demand that a leash be thrown at the pace of deportation.

This will lead Trump to deport tens or hundreds of thousands rather than millions of people.

Whatever Mr. Trump does end up doing, he certainly has his work cut for him. And it will spell success or failure for “Trumponomics.”