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The Trump Effect: Is This Time Different?

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  • Michalis Nikiforos
  • Gennaro Zezza

Abstract

From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the "new normal" of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth--just 1.6 percent. The radical policy changes promoted by the new Trump administration dominated economic conditions in the closing quarter of the year and the first quarter of 2017. Markets have responded with exuberance since the November elections, on the expectation that the proposed policy measures would increase profitability by boosting growth and cutting personal and corporate taxes. However, an evaluation of the US economy’s structural characteristics reveals three key impediments to a robust, sustainable recovery: income inequality, fiscal conservatism, and weak net export demand. The new administration’s often conflicting policy proposals are unlikely to solve any of these fundamental problems--if anything, the situation will worsen. Our latest Strategic Analysis provides two medium-term scenarios for the US economy. The "business as usual" baseline scenario (built on CBO estimates) shows household debt and GDP growth roughly maintaining their moribund postcrisis trends. The second scenario assumes a sharp correction in the stock market beginning in 2017Q3, combined with another round of private sector deleveraging. The results: negative growth and a government deficit of 8.3 percent by 2020--essentially a repeat of the crisis of 2007-9.

Suggested Citation

  • Michalis Nikiforos & Gennaro Zezza, 2017. "The Trump Effect: Is This Time Different?," Economics Strategic Analysis Archive sa_apr_17, Levy Economics Institute.
  • Handle: RePEc:lev:levysa:sa_apr_17
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    References listed on IDEAS

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    1. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos, 2013. "Is the Link between Output and Jobs Broken?," Economics Strategic Analysis Archive sa_mar_13, Levy Economics Institute.
    2. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2015. "Fiscal Austerity, Dollar Appreciation, and Maldistribution Will Derail the US Economy," Economics Strategic Analysis Archive sa_may_15, Levy Economics Institute.
    3. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2013. "Rescuing the Recovery: Prospects and Policies for the United States," Economics Strategic Analysis Archive sa_oct_13, Levy Economics Institute.
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    Cited by:

    1. Michalis Nikiforos & Gennaro Zezza, 2018. "'America First,' Fiscal Policy, and Financial Stability," Economics Strategic Analysis Archive sa_apr_18, Levy Economics Institute.
    2. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.
    3. Jan Kregel, 2017. "The Concert of Interests in the Age of Trump," Economics Policy Note Archive 17-2, Levy Economics Institute.

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