The Budget of Fear and Individualism

An overview

Trump’s first budget proposal is out, one of the most expected budgets ever in american history that symbolizes Trump’s campaign motto: “Make America Great Again”. In case people doubt about it he made sure people would really see that on this budget by labeling it as “America First: A budget blueprint to make America great again”. As promised during his whole campaign he will do everything in his capabilities to shift priorities in Washington to make the American society safer, stronger and prosper while making other nations fear his administration. Does this budget represents this?

Yes, the most absorbing fact of this budget proposal is the fact that there will be a $54Bn. increase in the defense department with the goal to buy more jets, warships, and boost the military activity against ISIS. That will also be of the like of the Defense Industry that has ties to the Republican party. To balance the budget this massive increase in defense and military will be offset by a huge decrease across all others departments

Captura de ecrã 2017-03-18, às 15.20.22

(US Gov Departments expenditure, source: Washington post)

As we can clearly, Trump’s administration represents an inversion in what has been American policies in the last 8 years during Obama presidency. Cuts for almost every department except the Defense, the Homeland Security and Veteran Affairs departments. This ultra conservative and anti government intervention is clearly emphasized in this budget, specially when looking at the EPA department that will be the most affected one (in %) according to this administration hardline stance on global warming. Another way to look at this is seeing the decrease of nearly $10.1 Billion at the State Department which goes along the isolationist mindset that is reshaping american politics.

Proposals and a new paradigm in American policy

As we can see in the table above, Trump administration will do several large cuts in some key departments like the State, Labour and Education departments.

Among the major program cuts implemented by Donald Trump we have:

-The elimination of the USDA Water and Wastewater loan and grant program, a reduction of $498 million.

-The reduction or elimination of 20 programs within the Department of Education including Striving Readers, Teacher Quality Partnership and Impact Aid support payment for federal property and international education programs.

-Cuts FEMA state and local grant funding by $667 million, including the Pre-disaster Mitigation Grant Program and Homeland Security Grant Program.

-Eliminates funds for Section 4 Capacity Building for Community Development and Affordable Housing.

-Ceases payments to the United Nations’ climate change programs for the Green Climate Fund and other funds.

-Scales back funding for the World Bank and other international development banks by $650 million over three years.

-Shrinks the Treasury Workforce by an unspecified amount

-Stops funding for the Clean Power Plan.

These measures like the elimination of funds for affordable houses and education show that Trump will do major cuts in several traditional welfare sectors contradicting his electoral promises of giving better living conditions to the American people being not so different of many traditional Republican proposals that refuse the government intervention in these key sectors. Another sector in which this can be seen is in health with the removal of the Patient Protection and Affordable Care Act, known as Obamacare, which will mean that many Americans will become unable to pay health insurance meaning they cannot be assisted if they have an emergency health problem and will also become unable to pay treatment for oncological and chronic illnesses. Despite Trump’s promises that Obamacare will be replaced by something better until now, no concrete proposal was made.

Less surprising is the decrease in funds for Climate, Development and Migration issues. On these subjects Trump presents a populist evolution of the Republican stances by ignoring or in some cases, even denying the existence of some of World’s major problems, in a contrast with a more internationalist and interventionist position taken by the Obama administration.

As it is typical in a nationalist budget proposal this also marks a shift is the balance of the United States policy that will give now less importance to Global Affairs and more importance to Internal Affairs following the concern of many Americans that worry about their living conditions and jobs but not about a war in some Middle East country or a big natural disaster in Asia.

In the limit this could mark the return of an isolationist America. This can appear surprising if we consider the United States policy after the Second World War but in fact if the US was quite isolationist and protectionist during the XIX century and most of the first half of the XX century. However unlike in the XIX century this position is now much more irresponsible because some problems like the Climate Change, Islamic terrorism and the Migration crisis are global and require agreements between the World’s most powerful nations, among which is included the United States, in order to overcome them. There is also a moral imperative because the United States has responsibilities in some of this problems specially in Climate Change and in the instability in the Middle East.

Economic prospect

Above we’ve seen how the budget might be for the next year, but numbers alone don’t mean anything, however if we take into consideration its implications for the american economy now that’s something even more interesting to think and look at.

One of the most famous economists ever, that is still a reference in our days, John Maynard Keynes said that Aggregate demand, in other words, a country GDP is represented by the below equation:

Y= C+G+I+Nx, where Y is the country output (we refer it as GDP most of the times), C is private consumption, G government spending, I is Investment and Nx is Net Exports ( Exports – Imports).

Taking into consideration the proposed budget G will decrease in 2018 due to government slashing some expenditure on social programs, as a consequence many poor families will lose their subsidies which will make them poorer, and since Investment is divided between private and public, we see that it might have a negative variation (seeing for example the Transport Department projected expenditure variation). With this in mind we could already see that, all things remaining constant, American 2018 GDP might degrow a bit, however there is still one thing to take into consideration, which is Net Exports, for that we need to take into consideration the effect of the Interest Rate and Exchange Rate.

Last week, we saw an announcement by FED’s president Janet Yellen stating that FED interest rate will rise from 0,75% to 1%, which has its economic consequences.

fig32

(Exchange Rate, Rate of Return, source:University of Colorado Boulder)

Represented in the image above, we have the vertical line which is the domestic interest rate, the horizontal line the foreign interest rate, the vertical Axis the Exchange Rate level and the horizontal Axis the expected rate of return. We see that an increase in the american interest rate (From left to right) will mean an higher expected rate of return of american investments. This means that the dollar will be more desirable and demanded which will trigger it’s value, that is to say, it’s exchange rate goes up, a dollar now is worth more Euros, Kwanzas, etc.

This interest rate hike and consequently Dollar appreciation might deteriorate American Net Exports, since the dollar is now more expensive and so are the american products.

This combination of raising interest rate while cutting government expenditure can lead to a deceleration of the american economy in 2018.

In the end, we should bear in mind that this is just a budget proposal and needs congress approval to become a reality. Even though it is creating some divisions among republicans this proposal seems a plausible budget and it seems likely to be approved by a congress in which Republicans have the majority of the seats. This is a budget proposal that represents fear, individualism and isolationism focusing on military activity, instead of supporting social, education and healthcare programs that can be a social uplift for many poor families and improve the living conditions of many americans. Sectors like the environment are also ignored by this budget proposal. These measures will not only be negative for the economy because it lacks enough of a stimulus, but will have the likely result of dividing and polarising even more the American society which can create more social unrest special among the poor and minorities.

 

Luís Carvalho, economics student and proud 2015 graduate of democracy

Pedro Diogo, economics graduate

Disclaimer: This Post reflects solely the author’s opinion it does not represent the whole platform

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