Back to 1980: Could Trump put Humpty Dumpty back together again?
The challenge that awaits Donald Trump, if elected, is immense. In many ways the problems that currently face the American economy are far deeper than those that were staring at Ronald Reagan after he won the 1980 election. The good news is that Trump is tapping into Reagan's key economic team, especially the likes of Arthur Laffer, Larry Kudlow, and Stephen Moore.
On everyone's mind is whether the U.S. can go home again to the Reagan years, or whether the nation has been sufficiently disrupted via those infamous "transformational" changes wrought upon it not only by Barack Obama -- but also all other presidents after Reagan -- that what worked in the Gipper's first term won't get the job done this time.
If Trump wins the general election, the implementation of Reaganomics 2.0 will test just how sensitive these solid macroeconomic policies are to the specific socio-economic situation they are applied to. In other words, Reaganomics worked well for the USA that faced Reagan in the run-up to the 1980 election, but can it be applied to the USA that faces Trump in 2016?
A selection of indicator statistics that compares the United States of 1980 with that of 2016 follows, which will help illustrate the challenges ahead for a potential President Trump:
-- Gross domestic product, share of world total: 1980, 22% [1988, 23%]; current, 15.7%
-- Federal debt: Total public debt (% of GDP): 1980, 31%; current, 102%
-- Federal debt held by foreign and international investors (% of GDP): 1980, 4.3% [1988, 6.6%]; current, 34.3%
-- Trade (% of GDP): 1980, 20% [1988, 19%]; current, 30%
-- Merchandise trade (% of GDP): 1980, 17% [1988, 15%]; current, 23%
-- Imports of goods and services (% of GDP): 1980, 10% [1988, 10%]; current, 16%
-- Exports of goods and services (% of GDP): 1980, 10% [1988, 8%]; current, 13%
-- Foreign direct investment, net outflows (% of GDP): 1980, 0.7% [1988, 0.4%]; current, 2.1%
-- Gross savings (% of GDP): 1980, 22%; current, 18%
-- Gross domestic savings (% of GDP): 1980, 23%; current, 17%
-- Household final consumption expenditure (% of GDP): 1980, 61%; current 69%
-- Current account balance (% of GDP): 1980, +0.1%; current, -2.2%
-- Personal remittances, paid (current US$): 1980, $1.4 billion; current, $56 billion
-- Stocks traded, total value (% of GDP): 1980, 14% [1988, 37%]; current, 224%
-- International migrant stock (% of population): 1980, 7%; current, 14%
-- Employment in services, male (% of male employment): 1980, 55%; current, 72%
-- Employment in industry, male (% of male employment): 1980, 40%; current, 26%
-- Self-employed, male (% of males employed): 1980, 11.4%; current, 7.5%
Reagan is the only president in recent memory to actually increase the USA's share of the global economy. Replicating that, given the still-rapid growth rates coming out of Asia, will be a monumental challenge. If it can't be done, then technically America will remain in relative decline.
On the debt front, Reagan was fortunate in that he had a bit of room to move -- despite high interest rates -- in terms of running deficits, given that the debt-to-GDP ratio was quite modest when he took office. Trump gets no such breaks. At over 100% of GDP already, even with interest rates low, a careful hand needs to be applied to avoid turning the U.S. into another Japan, saddled under truly unsustainable levels of debt. The moment interest rates creep back up to more historically normal levels, Japan is bankrupt in an instant and down goes the world's fourth largest economy overnight. That is not a path the U.S. wants to follow.
Far more of the current federal debt is held by foreign and international investors than was the case in 1980, only increasing the risks from additional debt.
Savings rates are down, the current account balance is negative, net outflows of foreign direct investment are much higher, the economy is tilted too much towards the services sector, self-employment is way down, housing is less affordable, huge amounts of money are fleeing the nation via remittances, and the economy is far more dependent on trade.
Reagan started with a far more nationalist economy, and -- despite his pro-free trade rhetoric -- kept it that way. Relative to the size of the economy, America became less of a trading nation under Reagan, not more. A nationalistic economy is much easier to influence and guide back on-track via domestic policy making than one tied into globalization, putting Trump in a more difficult situation than Reagan.
The large demographic changes that have take place since 1980 will also strain the ability of implementing a coherent economic policy. The dominant fraction of these, now much larger, ethnic groups simply do not see the world in the same way as old-stock Americans.
In many ways, Trump has the right team and ideology forming up behind him, but let's hope the problem is not insurmountable.