Those who naively thought that the 2008 financial crisis with its disastrous consequences would have led US governments to cut the claws of aggressive finance, the typical trait of the new capitalism, must think again.
Not only have the lords of finance benefited from the monetary flood that followed, with the stock market at its highest and the real economy at its lowest, but now the world of Wall Street has taken on a decidedly important role.
Trump Chosen US Secretary of Treasury
Trump has announced that he has chosen as secretary of the treasury a manager from the marshy swamp of hedge funds, the speculative funds par excellence. Scott Bessent is also one of the many billionaires at the prince’s court, because it is now known that in the US to rise to the top even in the world of politics you have to demonstrate that you are ultra-rich.
The man of finance takes the place of an esteemed economist, already the first woman president of the Fed, also married to George Akerlof, Nobel Prize winner for economics in 2001.We are facing an epochal passage, a cultural transition from the world of the Keynesian real economy represented by Professor Yellen to the world of international speculative finance, the Atlas Castle of wealth that quickly forms and vanishes.
There are two most relevant points on the new minister’s agenda. One old and one brand new. The first, the traditional one, consists of the eternal promise of a tax cut. The Laffer curve has been abandoned like an old relic, there is no longer any theoretical justification but only political-electoral.
US Tax Reform
This is a scenario we have already seen. Trump reduced taxes in 2017 with the Tax Cuts. His tax reform, like all those of the conservative right starting from the first one by Reagan in 1981, has reduced the tax burden especially on the richest segments of the population. Those at the bottom of the scale saved a few dollars a month, those at the top hundreds of thousands of dollars according to the results of the Tax Policy Center. In particular, in 2017 the corporate income tax rate was reduced from 35% to 21%, a truly gigantic reduction.
This has led to the formation of an unexpected volume of extra profits that have not gone to increase investment spending, as the conservatives claimed. Big business has instead used the liquidity taken from the public budget to buy its own shares.
The reduction in corporate taxes has ended up in the pockets of shareholders. The collateral damage, let’s use this term, has been an explosion of public debt without precedent. It is now certain that Bessent will not be able to be as generous with finance as the first Trump.
In any case, the new reduction will once again go into the pockets of Americans who own stocks, with all due respect to the naive American farmer or worker pro-Trump who voted for the billionaire in the hope that the price of eggs would go back years.
While the effect of taxes is clear, the consequences of protectionist trade policies, the second strong point of the new Trump administration, are less clear.
The Economic Theory
Economic theory has considered generalized customs tariffs a blunt instrument in international economic relations for at least two centuries. They are a drastic measure to be used with caution and in very specific circumstances because, while they may solve industrial problems in the short term, they aggravate them in the long term. In other words, duties are a sign of economic weakness and not of strength. That the US economy hides behind heavy generalized tariffs is the symptom of a decline that is being poorly countered.
It is no coincidence then that in the declaration of support for Kamala Harris by several Nobel Prize winners we find a large group of economists. Even the Nobel Prize winners for economics, together with all the other 82 signatories, have taken a distant run-up by inviting American voters to reject Trump for his anti-scientific attitude.
The American extremist right has a public enemy, science, and the place where it is produced, the university. In the economic field, the anti-scientific attitude gives rise to truly bizarre theories that would lead, for example, a quiet professor to fail a student who claimed that generalized tariffs can increase the economic well-being of a country. Tariffs do not improve the economy, because they are a tax that is formally paid by foreign companies but in substance by consumers.
It is not clear what Trump will do with his rhetoric on tariffs. Maybe it was just an electoral bluster, he has said a lot, and then he will backtrack in the name of a newfound sense. If instead he follows through with his proposal to introduce generalized tariffs on all goods entering the US it will be an interesting case of economic witchcraft. It is not the first time.https://youtu.be/wKh6TAFieko?si=gOVX397xVMXpNwUe
Economic Proposals
In his time it was Bush’s turn to give Reagan’s economic proposals the name of voodoo-economics. At the time the magic formula was that by cutting taxes everything would be fixed; instead the abyss of American debt began to be created, now at 120% of GDP. Now the new magic formula, complete with a propitiatory dance, is: let’s introduce customs duties. The consequence is a war, for now only commercial, already begun on the front of raw materials for technology.
Will the billionaire Bessent, a financial wizard, be able to overturn centuries of good economic theory? We will see if he will be able to sell the new economic voodoo of tariffs à gogo to the economy as well as to politics.
In the meantime, since tariffs are the panacea of the economyfor the right, one could start by placing them on international capital transactions following the Tobin tax scheme. This would be a good start, but I don’t think it will happen.