It won’t work.
That would be a reasonable summary of what Benjamin Tal, the deputy chief economist at CIBC, thinks of Donald Trump’s economic strategy.
In a client note issued Friday, Tal predicted Trump’s plans for tax cuts, import tariffs and stimulus spending will cause his administration to run into some uncomfortable “alternative facts.”
“President Trump has been signing executive orders at light speed because he is currently dealing with low hanging fruit,” Tal wrote — but that won’t last.
Like some others, Tal argues that Trump’s stimulus is coming at the wrong time in the economic cycle.
The U.S. economy has been expanding for eight years. The unemployment rate has fallen from over 10 per cent after the Great Recession to 4.7 per cent today. Jobless claims are near a 43-year low. The Dow Jones just hit 20,000 for the first time ever.
In times like this, many economists argue, government spending can only have a muted effect.
“Ditto for the impact of the personal tax cuts as no less than 80 per cent of that cut will go to the top 10 per cent,” Tal wrote.
He notes that giving a tax break to high earners won’t do much to spur consumption, as wealthy people are basically already buying everything they want or need.
Tal cited research showing that Trump’s stimulus spending will create 50,000 new jobs per year.
“In an economy that generates 150,000 to 200,000 jobs a month, that contribution is nothing more than a rounding error,” he wrote.
"Congress will wake up and Trump will get his fight."
— CIBC deputy chief economist Benjamin Tal
The jobs lost to technological change “will not come back,” Tal said, but if the Trump administration slaps tariffs on foreign goods, they “will act as a de-facto tax hike, mostly on the lowest 20 per cent (those who will hardly benefit from the tax cuts).”
That’s because tariffs will hit lower-income people hardest, as they would raise the price of clothing, household goods, imported foods and other things.
After Mexican President Enrique Pena Nieto rejected the idea that his government would pay for the border wall Trump is planning, the White House said this week it could recoup the costs by instituting a tariff on imports from Mexico — before walking back the idea.
Many economists argue a tariff like this would backfire. It would cause currency traders to dump the Mexican peso and push up the value of the U.S. dollar. That would make Mexican goods cheaper and U.S. goods costlier in the global market, wiping out the effect of the tariff.
“As those alternative facts become more evident and the economy fails to achieve the performance needed to prevent a rapid rise in the debt-to-GDP ratio, Congress will wake up and Trump will get his fight,” Tal predicted.