What the Lib Dems can learn about economics from Donald Trump

https://www.flickr.com/photos/wwarby/4860335535/in/photolist-8puuqx-nH9KhK-x5gkW-a2Yx4D-8putCp-a32qpS-a2YbjP-9kJJvt-7b8177-8puprR-6SKbQG-6SKbZG-oKCWvp-dkaUyr-v2EDLi-r1tFvY-r1tFHm-9kNUaq-4Mph7K-ChcB23-8puqfH-8pxBCE-8pxDRo-9kJHqK-aWwhx4-9VBBzN-5WEQZB-a2Ybz8-9kJLQR-9kP8co-4icUAV-9kMMvL-9kMSBb-9kMNwd-bYafLo-8purhr-9kKZfe-nzKQ2n-yNYtG-8pup2p-8purRn-hKv96Z-8pupSi-8pust2-bZPiEm-9kP7hq-a32p7J-8upwDg-5MSyss-9kMKy9Not least among my irritating habits is that I often take the opposite side of the argument to whatever the consensus is at any one time, not because I necessarily believe it, but rather to test my knowledge of my own point of view.

But there are times when even my ability to agitate for an unpopular cause runs aground. Donald Trump’s presidency is one where the well of mischief runs dry.

But there is a lesson for liberals in Mr Trump’s economic policies, as his actions reveal the failings of trickle-down economics and show how the Liberal Democrats, in coalition and out, have always fought against such economic nonsense.

The US economy has been growing at a rate of 3%. The low inflation that accompanied such growth was a bonus for stock markets as it meant interest rates stayed low, and assets prices could move higher, with unemployment lower.

Into this “Goldilocks” environment trampled Mr Trump with his tax cuts, the theory behind them being that the wealth handed to the biggest companies will find its way into the wallets of workers, who will spend it and boost economic growth further.

This doesn’t work for where the US economy is right now, because as the great economic liberal JM Keynes taught us, economic activity increases when the ‘animal spirits’ of the population, that is, their level of confidence in their own economic circumstances, are high.

Given the low levels of unemployment in the US, animal spirits should already be high, rendering the tax cut useless. In such a climate, companies should already be feeling pretty confident about their future, so a tax break is unlikely to boost their animal spirits enough to generate extra economic activity.

The Liberal Democrats showed their scorn for trickle-down economics during the coalition years, when we delivered tax cuts for the poorest workers, at a time when economic uncertainty was rife and animal spirits needed boosting.

If Mr Trump’s tax policies were merely pointless, that would be much less than the damage typically caused when right-wingers hold power unchecked.

The problem is the policy will do untold damage.

This is because the tax cuts pump money into an economy growing at close to capacity. Lord Keynes called this “pro-cyclical economics”, but he preferred counter-cyclical policies, that is, the state broadly moving in the opposite direction to the private sector. Private sector expanding? Less need for state action.

Adopting a pro-cyclical economic policy simply creates extra inflation and financial instability over the medium term, as demonstrated by the recent volatility of the US stock market.

The Liberal Democrats in government did precisely as Keynes intended.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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