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Saturday, January 21, 2017

Economics in the Trump Administration

Assuming that Mr. Trump actually abrogates free trade agreements and the Paris Accords, while reducing taxes on the wealthy and reducing support for the indigent, I predict a recession combined with high inflation for the US in 2018. What are your thoughts?
Because the poor and lower middle class live paycheck to paycheck (no significant savings), they spend almost all of their money as soon as they receive it. This results in a multiplier effect, building the economy. Economists estimate that every dollar invested in the poor and middle class grows the economy by three dollars.
Because the rich hoard part of their income and spend part of it on imported luxury items, giving money to the rich (by tax cuts) supports the economy dollar for dollar (no multiplier). Historically, tax cuts during stable economic times lead to inflation and eventually to a recession.
The Paris Accords contain an anti-abrogation clause. That means any nation that pulls out of the treaty is subject to sanctions. These sanctions are likely to restrict both imports and exports. Sudden restriction on exports will lead to reduced sales for US firms and increased unemployment. Sudden restriction on imports will lead to temporary shortages and inflation. Sanctions can also be expected to lead to a weakened dollar, which leads to inflation.
Any sudden increases in tariffs will cause shortages and increased prices until US manufacturers can gear up to provide the desired products. For most companies, that process takes at least 6 months, longer with higher interest rates. Interest rates are already increasing in anticipation of such needs.

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Canoga Park, California, United States
Software Engineer with Ph.D. in Computer Science. I have a deep background in the sciences and in computer-human interaction. I was a college professor for 11 years, followed by over a decade of work in industry.