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Can Trump’s fiscal stimulus package strengthens growth and lessen inequality?

Can Trump’s fiscal stimulus package strengthens growth and lessen inequality?

FRIDAY, February 10, 2017

STOCK MARKETS have so far responded positively to US President Donald Trump’s fiscal stimulus plans and his tax reforms regardless of the fact that they tend to favour big corporations and wealthy individuals.

Investors’ enthusiasm recently sent the Dow Jones to break 20,000 for the first time ever. However, the real challenge waiting for Trump to overcome is the task to turn this short-term market enthusiasm into many private investment plans that can boost labour productivity more equally so that the United States will become a more inclusive growth economy with less income inequality in the near future. 
This is much easier said than done, since Trump’s fiscal stimulus package is, as has been pointed out by some of his opponents, likely to push up fiscal deficits and raise long-term interest rates and strengthen the US dollar. 
A stronger dollar would destroy more blue-collar workers’ jobs and end up with worse inequality instead. In addition, fiscal stimulus could raise inflation given that the current state of the economy is already near full employment. Then the Federal Reserve itself would be forced to raise interest rates further to fight inflation and inevitably hurt long-term economic growth. 
On the other hand, Trump’s proponents argue that the proposed tax reform could have net favourable impacts. 
First, the proposed plans to lower corporate profit tax, introduce a territorial system that will not impose extra tax on US firms’ foreign subsidiaries, and implement a cash-flow corporate tax that allows companies to deduct all investments in equipment immediately, would raise domestic investments, productivity and real economic growth. 
Second, the proposed border tax adjustment plan to raise import taxes and reduce export taxes would lead to a stronger dollar and would boost US tax revenues enough to pay for two-thirds of the corporate-tax cut. However, that analysis fails to cover an inevitable future trade war, which could generate a huge dead-weight loss to global economic growth and increase global inequality as a result.
What are the policy lessons, if any, Thai officials can learn from this case for the implementation of the “Thailand 4.0” policy? Let me try to point out a few. 
First, there is no free lunch for a populist policy package of an unreasonable tax cut, which was pointed out a long time ago by the principle of “Ricardian equivalence”. 
Second, investments in advanced infrastructural networking systems alone would not reduce either national or regional inequality, if the central administration failed to give |its full support to a real inclusive growth policy. 
Last, market expectation |or self-fulfilling belief does matter. For instance, fiscal disparities can reinforce private investors’ self-fulfilling beliefs of investing more in urban zones than in rural areas, and hence worsening geographical inequality. (See more details in “Regional Inequality in Thailand”, published this year by Thammasat Printing House.)

Professor Arayah Preechametta is a lecturer at the faculty of economics, Thammasat University.