Davos Warms to Trumponomics

(Bloomberg View) -- Have criticisms of Donald Trump's economic policy gone too far? Whisper it quietly, but 12 months after the beginning of the Trump presidency, several economists and business leaders appear willing to give Trump and his tax reform a chance.

It may be down to the stock market highs, or perhaps to the announcements by companies like Apple and Wal-Mart that they are willing to invest in the U.S. and pay workers higher wages. Still, the apocalyptic fears that accompanied Trump's arrival at the White House could not seem farther away.

The danger, however, is that this early revisionism will go too far. The U.S. economy has the winds of the global recovery in its sail. The tax reform has clearly encouraged talk of investment and a pickup in growth, but it is far too early to quantify the effects. Yet the dangers are all too clear: The U.S. is boosting demand at a time when the recovery is mature. The risk is that such a sugar rush will push up the deficit, public debt and inflation, while having only a modest impact on growth.

The rising optimism on the U.S. economy was visible in the latest set of forecasts from the International Monetary Fund, which were presented at the World Economic Forum in Davos on Monday. The Fund revised up its growth projections for the U.S., saying that in 2020 national income would be 1.2 percent higher than it would have been in the absence of the tax plan. Of course, there would be some payback later on, with growth slowing down for a few years from 2022 onward. The IMF isn't the only one seeing the bright side. The 2018 PwC survey of CEOs found the highest-ever jump in optimism, with the biggest increases in optimism toward North America. 

The Davos elite seem more open-minded about the president than when I was here just a year ago. Of course, Trump's protectionist instincts are not popular among a crowd that remains firmly committed to free trade. But at a high-level panel discussion on Tuesday morning headed “Global Markets in a Fractured World,” several executives found it hard to hide their enthusiasm for the tax changes.

Stephen Schwarzman, the CEO of Blackstone who led the president's Strategic and Policy Council before it was dismantled last summer, said there would be “a lot” of financial inflows into the U.S. “There are companies from all around the world who are looking at the U.S. and saying this is the place to be,” he added. Adena Friedman, CEO of Nasdaq, was also supportive, saying the tax cut could initiate a virtuous circle of investment, employment and a greater willingness to train workers.

Of course, there were some who expressed reservations over the sustainability of the tax measures. Frank Appel, CEO of Deutsche Post DHL Group, expressed a typically German concern for the state of public finances. “If a tax reform leads to a higher budget deficit, it will be good for the next 12 months, then there is a bill to pay,” he warned. Others, however, were less concerned. Tidjane Thiam, CEO of Credit Suisse, noted that foreign investors would continue to be willing to fund U.S. deficits. “The way you think about economics, it's very different for the U.S.,” he said.

The enthusiasm of some business leaders appears convincing until you think about one fundamental problem. Even if you assume that the tax changes will somewhat trickle down to the real economy thanks to higher investment and wage growth (which is hardly certain), the timing of the fiscal stimulus remains awkward. The U.S. economy has now recovered for more than 100 months while the unemployment rate has fallen to nearly 4 percent. This is hardly the moment to provide fiscal stimulus, adding to the deficit in the hopes that growth will become faster still.

In his intervention at Davos, Brian Moynihan, CEO of Bank of America, touched on some of these problems when he said there was a risk that businesses may find skills shortages as they tried to hire more workers. Deutsche Post's Appel agreed: “The tax reform will be good short-term. But it doesn't fix the fundamental problem” which is about boosting productivity through training and infrastructure spending. Addressing these supply-side bottlenecks will require more than a tax cut.

When he lands in Switzerland, Trump will certainly find a more favorable ear than he would have just 12 months ago. But it's unclear whether the benign effects of Trumponomics will endure, or simply melt away, just like the Davos snow.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times. 

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.

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