US President-elect Donald Trump has announced a big building programme of schools, roads and hospitals. How is he going to do that while cutting back on government spending, as promised?
You cannot look at Trump’s proposals as a coherent set of government proposals. They don’t add up. He said he’s going to increase spending on infrastructure, cut VAT of course, cut taxes and cut the deficit. Now, what he doesn’t understand is that over the last quarter of a century we’ve cut back on the size of the government bureaucracy – those grey bureaucrats that get so badly maligned – and we’ve become pretty efficient.
Actually, in the previous presidential election, Mitt Romney got into trouble because he started criticising government employees. But it turned out everybody loves their fireman, their policeman, the military, social security, Medicare. And then, when you start talking about their teachers, all the things they love, that’s government.
So, there just isn’t enough fat to cut. And the reality is Trump will break his promises. Which ones? We don’t know. But we know it will be impossible for him to keep all of them.
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Trump’s also said he’ll significantly cut corporation tax in the US. What effect would this have on ordinary people in America?
It is part of a broader reform in the tax system: ‘reform’ that Trump’s been advocating, which would lower taxes on the rich, and therefore increase inequality quite obviously. Now, the perverse thing in the United States is that the average tax rate at the top is lower than for those lower down.
So, the United States has the dubious distinction of being one of the few countries that does not have a progressive, nor a proportional, but a regressive tax system. Any philosophical framework says that’s unfair. It will be even worse if his proposals to eliminate the inheritance tax go through.
America is on its way to become an inherited plutocracy: just the opposite of the American Dream, the idea that everybody starts on a level footing and gets ahead through their own efforts. We all knew that there was a little bit of exaggeration in that kind of characterisation. But this [tax reform] would say: we’ve given up on that dream.
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But isn’t America’s high corporation tax encouraging multinationals such as Apple to establish bases abroad, where it’s cheaper?
No. For a start, taking into account the definition of the tax base, allowances and loopholes, American corporations do not pay higher taxes than in other countries. There is also no argument that lowering tax rates on corporations leads to more investment. I do think there would be benefits from simplifying our tax code and having every company pay the official rate, whether that’s 25%, 20%, 15%.
But it’s actually a global question, not just a national one. There is very corrosive tax competition going on around the world. That is to say, one jurisdiction tries to steal jobs from others by having slightly lower tax. It’s a race to the bottom. It’s what Ireland did.
First of all, Ireland has a 12.5% tax rate, whereas it’s higher in other parts of Europe. There needs to be harmonisation. But then Ireland cheated on its own tax system. And for Apple, the country gave them a special preferential tax of zero.
Now, if they had done that to everyone, it would have caused havoc in the European tax situation. Every American company, probably every multinational would have said, well, why don’t we just take all of our taxes we’re paying and move to Ireland? All we do is claim our money originates in Ireland, in this cyberspace enterprise, and then we don’t pay taxes. Voilà. And we can even claim to be good citizens. Well, I have always said the first element of corporate citizenship is paying your taxes.
The European Commission didn’t even know that Ireland had signed this secret agreement. They only discovered that as a result of activities of the US government. And that’s why we’ve been so strong against this secrecy.
Some analysts say inequality was behind Donald Trump’s election victory. A large part of the US population felt they had been left behind by globalisation. Do you agree?
Trump got elected in part because large numbers of Americans wanted a change. One, but only one, of the reasons for this is that large numbers of Americans have been left behind. The average income of the bottom 90% of Americans has changed little over the last third of a century. And an economy that doesn’t deliver for a majority of its citizens is a failed economy. The American economy is a failed economy.
Hillary Clinton represented the past. Represented continuity. Trump was the voice of change.
His diagnoses of what was going wrong with the economy, of course, were badly flawed. There were bad trade agreements, but they were only part of the story. And it wasn’t because our trade negotiators had negotiated badly. It was because, for the most part, our trade negotiators got what they wanted. They were representing corporate interest, and the corporate interest prevailed over the interest of workers.
And you saw that in the Trans-Pacific Partnership and TTIP, where corporate interests were at the table, but the ordinary citizens were not.
It was American pharmaceuticals that wanted the high drugs prices that Americans are concerned about. It was American corporate interest that wanted the investment agreements that restrict regulations on climate change, tobacco, and environmental issues of all variety.
So was it the threat of foreign competition that was worrying Trump supporters?
Globalisation is only part of what went wrong. We had advances in technology, but adapting to those is not easy. I come from Gary, Indiana, a big steel town. The truth is that we produce as much steel as we did in our heyday, but with one sixth of the workers.
But, here’s the rub. It was the Republicans that opposed helping workers adapt. The Democrats consistently argued for trade assistance, and consistently argued for programmes that would help people adapt to the changing economies. And it was the Republicans who consistently opposed these efforts to help those who were being left behind.
One of the most important things would have been, in the last few years, to have a greater fiscal stimulus. We needed more infrastructure and spending on R&D.
So, you might say one of the positive things that looks likely to come out of the Trump administration is a very badly designed stimulus package.
Even a badly designed stimulus package will help create jobs, and so help some of the people who’ve been left behind, in the short run. But of course it won’t help them retrain for the new economy of the 21st century.
It will provide more scope for private universities like Trump University to excel in exploiting poor Americans. Charging them huge fees, getting them greatly in debt, and providing them with absolutely no skills. So, what we can expect to see in a Trump administration is more exploitation of the very group that got him elected.
Moving on to the EU. It’s facing a hard decision post-Brexit on how to deal with the UK and the single market. What’s your view?
I think the best thing for both Britain and the EU is to devise the closest economic integration possible that is consistent with the vote of the British people.
[EU Commission President] Jean-Claude Juncker and others say unless we’re tough on the UK, other countries will leave. That’s absolutely the wrong stance.
It sends a negative message that the only reason countries are staying in the EU is out of fear of what will happen. If that is the best that the EU can offer, it’s a sad day for Europe.
I think the EU has a lot more to offer. It has a positive agenda, but it needs to sell itself better, especially to older people. Of course there are going to be countries that can’t go all the way along. Norway is one. Switzerland is another. Great Britain evidently is a third.
My reading of the Brexit vote is people don’t want free migration. But they could have a migration brake.
There can be a reaffirmation of the principle of subsidiarity with respect to regulations. Ice cream doesn’t have to be the same in every country. If the fraction of cream in British ice cream is different from that in European ice cream, I don’t think that’s going to end the world. But it’s important for people to know what they’re buying.
Interview by Eleanor Mears, first appeared in www.ipg-journal.de