THE BLOG

Can President Trump's Plan Revive U.S. And Canadian Economies?

01/24/2017 12:42 EST | Updated 01/24/2017 12:43 EST
andykatz via Getty Images
New York City - NY - USA - August 17 2015: front-running Republican presidential candidate ascends steps at 60 Centre Street to report for jury duty

To understand U.S. President Donald Trump's new administration, it's useful to view it in the context of the financial crisis that hit right around the time his predecessor Barack Obama took office. Despite the slow, steady recovery that stretched almost the entire length of the former president's eight years in office, American voters responded favourably to a largely populist message built around a better economic deal for the U.S.

Yes, president Trump's election was a surprise. But it makes sense when you consider how badly Americans were displaced by the crisis and how frustrating the slow recovery has been. Britain's vote to exit the European currency union last year can be seen in a similar light.

Looking forward, the Trump administration is positioned to settle an argument economists have been waging since the crisis took hold.

The primary reason we won't see a full rebound in the short term is that the American population is so much older.

On one side, you have those who believe the U.S. will soon recover and return to pre-crisis levels of economic growth. This in turn will contribute to growth around the world.

On the other side are economists who believe that the U.S. economy will fail to regain 2006-type growth for decades. These folks believe we are living in a "new normal." The primary reason we won't see a full rebound in the short term is that the American population is so much older now than it was in the 1980s, 1990s and 2000s.

Put simply, young adults spend a lot more than old adults do. When baby boomers were in their peak spending years -- during those three decades -- the U.S. economy reflected that spending power. As baby boomers enter retirement, they are becoming more frugal. That will cut into U.S. economic growth for decades.

globe

(Photo: Christian Zachariasen)

The man with a plan

This is where president Trump comes in.

Assuming he makes good on his promise to spend big on infrastructure projects as a means of boosting the U.S. economy, two possible outcomes exist. Which of those happens -- or more likely, what mix of the two -- depends on a fundamental question. Is the U.S economy operating at or near full capacity?

If the "new normal" advocates are right and the Americans are maxing out their economic potential, then pouring huge dollars into bridge maintenance and the like could trigger inflation. The simple rules of supply and demand drive prices higher if there is too much work and too few available workers. Labour costs rise, prompting sellers to charge more.

We're in for a fascinating year.

But if the U.S. economy is not running at full capacity, then president Trump's spending plan will be more easily absorbed. It could be that little or no inflation results. This would prove the new normal crowd wrong, at least as far as the Americans are concerned.

All of this has major implications for both the U.S. and Canadian economies because they are so tightly connected. Inflation affects more than just consumer spending power. It drives stock and bond prices lower, and it pushes interest rates higher. Higher interest rates are hard on debtors, even as they benefit savers.

Assuming Washington is able to implement the fiscal stimulus plan president Trump campaigned on, we're in for a fascinating year.

Kevin Press is assistant vice-president, market insights at Sun Life Financial.

Follow HuffPost Canada Blogs on Facebook

Also on HuffPost:

Obama /Trump Inauguration Crowds