the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Dr. Michael Sakbani is a professor of economics and Finance at the Geneva campus of Webster-Europe. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook,then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and UNCTAD`s Special Programs. Published over 100 professional papers.

Monday, November 14, 2016

Trump, the President that Was Not To Be: Analysis of the likely Economic, Political and Foreign Policy Consequences


Dr. Michael Sakbani is a professor of economics and Finance at the Geneva campus of Webster-Europe. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook, then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and UNCTAD`s Special Programs. Published over 120 professional papers.

Saturday, September 24, 2016
Free Trade in the Age of Economic Discontent;     Comparative Advantage under Globalization
                           By
             Dr. Michael Sakbani

The populist rhetoric on free trade
In the 2016 Presidential campaign of the US there seems to be a quasi trans- partisan rejection of the Free trade agreements such as the Atlantic and Pacific treaties under negotiations as well as NAFTA. The Republican candidate, Mr. Trump, has been railing against trade agreements which he claims benefit China and other exporters and cause job losses in the US [1]. This is hardly in line with the traditional free trade views of the Party and its establishment. Similarly, the Democratic candidate Hillary Clinton is distancing herself from her previous views on free trade and these agreements proper, as she comes under the combined pressure of the Trade Unions and the observed populous rejection of such deals, especially in the Mid-West, which is now labeled the Rustbelt of the country. Indeed, the US economy has witnessed a hollowing out of industrial jobs in many localities and drift of wages towards lower-paying service jobs[2].
 Empirical surveys by trade economists contest these impressions and show a net job increase over the past two decades [3].  Moreover, most trade economists have documented empirical evidence on the positive impact of trade in the US on productivity. This is ascertained by an 18% increase in labor productivity, which accounts for about a quarter of total factor productivity[4], There is plausible evidence that trade helps the spread of technical progress [5],and enhances consumer welfare on account of the increased variety and availability of goods and their lower prices[6]. There is also evidence of increased investment driven by inflows of Foreign Direct Investment through strategic positioning of international firms [7]. And last, but not least, the taming of inflation in our times on account of the lower prices of imports.
Why is it then, that there is a populist rejection of free trade and a questioning of its benefits?

 The Classical Setting of the law of Comparative Advantage
Economists since David Ricardo`s work in 1817 have adhered to the law of Comparative Advantage and its growth complement through investments in industries with new jobs higher on the technical ladder than the ones they replace. This implies four things: one, new advanced technology is accessible to all firms, two, dismissed workers can take on higher -skill jobs created by the new technology, three, factors of production are largely immobile and fourth, firms are likely to choose to invest where jobs were lost. In our world today, these assumptions are rather ambiguous.
To throw into sharp relief these ambiguities, it is appropriate to place the world-economy in the context of globalization and the observed behavior of global firms since 1990.
Technical progress has since the late 1980`s been capital and knowledge-intensive. Robotics have replaced man and rendered many manual jobs obsolete. Thus, labor-saving has been an important characteristic of recent technology. The new technology requires, however, education and informatics skills beyond the previously acquired education of many workers. We are consequently witnessing an increased marginalization of lower-skilled workers in the global economy. This is reinforced by the increased importance of services in international trade and even its more exigent demands for skills. Trade in services has rendered services quite mobile, a fact that classical economists did not reckon with. In addition, the global firm has itself become mobile and non-beholding to any specific state. Its preferred location is where its costs, especially labor costs are less.
To be sure, there has been a net increase in jobs. But the evidence on net job growth cannot be taken on face value. Created jobs are the result of the trend growth in the internal economy as well as international trade. None of the econometric studies has successfully disentangled this confluence and identified the causal independence in a satisfactory way

Technology in the global economy is not necessarily available to all firms as the theory implies. It is the giant global firms that usually develop or own the technology. These firms having perfect mobility, will not necessarily locate the new jobs in the same locations as the replaced jobs. It is observed that global firms seek a maximum increase in their equity capital by decreasing their costs anyway they can. 
When Jack Walsh left General Electric, he had an enviable record in increasing GE equity value and was hailed as one of the great captains of industry. His $421 million packages upon leaving were testimony to the behavior of global firms and their ethos. Mr. Walsh accomplishment was in cutting tens of thousands of jobs and gutting middle management as well as reducing expenditure on R &D to develop new products. His policies were viewed by investors looking at the profit rate of GE  as great. He quadrupled twice the value of GE stock during his reign. His successor came into a weakened firm with few new products in the line and a lot of business in various places outside the core- competence of GE.

In the competitive global economy, discharged laborers are not all employable because of their prior educational and skill profiles. On the other hand, training older discharged workers and endowing them with new skills is not always feasible and is costly; often it is cheaper to go elsewhere. In addition, since the new capital and information-intensive technologies are labor-saving, the demand for labor is cut down and it is likely that discharged laborers will face structural unemployment. We see evidence of that in the decline of men`s participation in the labor- force. In other words, the closure of global firms of US facilities has often inflicted structural unemployment on those marginalized by globalization. Adding to that the empirical observation that global big firms create relatively fewer jobs than small and medium-size firms[8], the conclusion that employment has not improved in the last decade has become obvious. Moreover, the increased importance of global firms with their entrenched ethos and practices is making unemployment the great economic problem of our times.

At the time of Ricardo in the early 19th century, the world did not have great differences in the standards of environmental protection and social labor norms among industrial countries. Today, these standards are quite heterogeneous. Thus, there is a bias in favor of poorer, cheaper countries with lower standards, something that comparative advantage does not fully account for. The search for cost advantages usually results in choosing new locations, leaving behind pockets of industrial desolation in many countries with higher labor and environmental standards.   

 These phenomena observed under globalization necessitate extending social safety network by the governments at the same time that their fiscal base is eroded by the emigration of firms. Recently, it was reported that some major firms, Apple, Starbuck and IKEA for example, have found tax-havens in Ireland and other places via special tax-deals escaping paying taxes where their sales were. That means when jobs are lost to comparative advantage, it makes a difference which country lost jobs and which one gained jobs and what are the circumstances therein. Countries with high social safety standards will fare better than those with limited public aid and therefore the degree of public discontent will be lower. The public expenditure on retraining and retooling discharged labor is only .01 percent of the GDP in the US, but it is 6 times higher in Germany.

 Under globalization, these propositions render firms non -neutral with respect to job locations. This breaks the link between new technology and new investment in respect to geographic location, a cardinal implication of the classical trade theory.

Towards a critical evaluation of received wisdom
The global firms, especially US firms, are the great gainers from free trade, their profits and the bonuses of their executives are staggering [9]. These gains are contemporaneous with losses in many areas for many social segments. This dichotomy is generating populous resentment and angst among wide segments of society. The popularity of political figures like Mr. Trump in the US, Madame Le Penand her“ Fronte Nationale” in France, the rise of extreme rightists in Germany and Austria together with the Brit-exit in the UK, are all manifestations of economic and political marginalization of populist classes. Many feel left out of the game. The result is to facilitate the rise in democracies of demagogic nationalistic populism, thereby jeopardizing the gains from trade and finance openness. To protect the economic gains of freer trade, the benefits must be spread more widely and global firms must meet some standards of social obligations.

There is a need for the economic profession, the international institutions of economic cooperation and business to revise the received trade theory, the prevailing practices of global firms and the dispensed economic advice in the light of these facts and to look carefully into the violations of the prerequisites of free trade.
Several things can be done.
With interest rates at a historical low and inflation under control, fiscal policies in many affected countries should embark on public investment and on encouraging parallel private investment, in infrastructure and clean green technology. The macroeconomic climate has profound implications on the labor markets and on arresting the observed decline in the participation rates of male workers in the labor force especially, in the US. One of the disturbing factors in the slow recovery from the 2008 crisis has been the simultaneous deflationary fiscal policies adopted by so many developed countries who are trade partners. With monetary policies reaching their limits, the global pattern of fiscal policies needs attention, it is an economic truth that nobody will fare well if trade partners are all deflating at the same time.
Another fiscal measure would be to invest in expenditure on rehabilitating the skills of discharged workers at higher standards than is currently practices, especially in the US and the UK.
Globalization has resulted in increasing the dominance of big oligopolistic firms all across: big banks, big service firms, big electronic firms, big informatics firms and so on. The cash coffers of these firms are enormous and their impact is unprecedented. Competition laws should breakup such concentration and increase competition and this needs international cooperation under globalization.
Globalization requires liberalization. The liberalization of financial markets and the unfettered movement of capital and labor are an integral part of the globalization scene. This liberalization has increased hot money movements and portfolio short term capital movements. In 1997, we saw in the Asian crisis the example of countries following the right macro policies tipping into crisis as a result of the disruption and sudden outflows of such short term finance. These countries were destabilized and went into a balance of payments and a currency crisis. International cooperation to taxing such movements would be appropriate in order to give a breathing space for the affected economies.
Finally, there should be international cooperation on taxing transnationals in accordance with the share of each country in total firm`s profits so that globalization, which imposes fiscal burdens on states, does not become an enabler of tax- evasion.
 Such measures would go a long way towards protecting openness and gains from trade under globalization.

Geneva, 23/9/2016


[1] Donald Trump has made international trade in general and that with China in particular an essential part of his platform. For quotes and speeches, see On The Issues, 2016.

[1] For an excellent summary of the empirical evidence on US trade, see Office of the PresidentPresi9dent of the USA, The Economic Benefits of US Trade, Washington DC, 2015.On job losses see The Economist, April 2, 2016.

2] The Economist,   April 2, 2016.  SeeSeea also Frankel & Romer, “Income Growth and Openness”, NBER, 1999. See also Office of the PresidentOp. Cit. (2015) p. 23.

[3] Idem, Office of the President, (2015),  p.3.

[4] Idem, p. 4. See also, Bernard, A. Bradford, J. “Exporting and Productivity in the US” Oxford Review of Economic Policy, 2004.

[5] Atkins, Khandwal and Osman, Exportin and the Performance of the Firm, NBER, 2008, paper no. 20690. Broda, Christian Weinestien, “The Gains from Variety”, The Quarterly Journal of Economics, 121no. 2, pp. 541-585.

[6] Office of the President, Op. Cit.., (2015).

[7] Various empirical studies.

[8] Markus Gehring, “Why the EU is coming after Apple”, CIGI, September,


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Trump, the President that Was Not To Be; Analysis of the Economic, Political and Foreign Policy Consequences                                                   By
                    Dr. Michael Sakbani
Donald J. Trump, the real estate billionaire of equal fame and disrepute, will be the 45 the President of the USA, an event very few expected and only one poll in twenty-five predicted. His election was a surprise to his campaign and a stunning disappointment to more than half of the American voters. How did this unabashed populist who ran a racist, xenophobic, angry and often prevaricated campaign win over sixteen rivals in the Republican primaries and defeat an experienced, extremely well- prepared and widely known Democratic candidates in the general elections?
Many answers can be put forward, but the overriding arch explanation is the frustration of the American voter with the politicians and their rejection of the establishment gridlock in the Washington scene and the collapse of the American dream. In 2016, there could have been no truer personification of the establishment than Hillary Clinton and no more an outsider than the demagogic cheerleader Donald trump. The angst and dissatisfaction of the American voter is also born out of the disappearance of the American mid class notion that their children will have a better future than they had. .

The anatomy of failure and alienation

A.   Income and Wealth distribution
In the past three decades, income and wealth distribution, have dramatically become skewed in favor of the upper-income classes. This reverses a previous trend that started at the New Deal and continued until the 1980`s. There are many factors behind this phenomenon. Economists traditionally have not interested themselves in this question, because they held that income distribution is determined by the marginal productivity theory. Indeed, the econometric evidence garnered up by, inter alia, Robert Solow as well as the statistical income studies of Simon Kuznets and the NBER have demonstrated the rough validity of the theory[1]. The neoclassical homogeneous production function of degree one implicit in this work, showed a stable distribution of income shares from 1920`s to the 1980`s. This was affirmed by most of the empirical work using the US and other country data up to the1980`s. However, as of that decade, the statistical evidence shows an upward inflection in this trend favoring the capital claimants. In the last two decades, the decades of Globalization, income and wealth distribution have even skewed further in favor of upper- income groups.
It is evident that if the marginal productivity theory no longer holds, then trickle-down economics does not work and there must be institutional and other factors involved. Economic researchers over the last two decades have identified institutional factors and oligopolistic –monopolistic practices which give rise to economic rent, i.e. unearned income[2] For example, there is strong evidence that corporate executive compensations have become totally unrelated to profits. The financial industry shows an important differential between its executive salaries and those of comparable jobs in other industries without any reason of value-added or profits (Babchuk, et al, 2013)[3]. The average multiple between CEO compensation and workers was 20 to 1 in 1965 but went up to 364 to 1 in 2015 (Stiglitz, 2015) [4].
 Another phenomenon giving rise to rent is the institutionalized lobbyists who push in Washington and state capitals, laws and regulations favoring the rich. One can also count the decreased importance of labor unions as another institutional factor. Thomas Piketty, has shown that when the average rate of profits i.e. return on capital, exceeds the rate of GDP growth, wealth and income concentration will result. He showed that to be the case in most OECD countries (Piketty, 2014)[5]. In the US, an egregious excess is the exaggerated compensation of corporate executives comparably found nowhere else. Since the 1980^s we witness a march towards oligarchic economies. These phenomena along with rent are precisely what the data show.
These phenomena help explain important factors behind the widening income and wealth distribution in the USA.

                                               Table 1

           Size of income for the various percentiles of US population
Wealth or income class
Mean household income
Mean household net worth
Mean household financial (non-home) wealth
Top 1 percent
$1,318,200
$16,439,400
$15,171,600
Top 20 percent
$226,200
$2,061,600
$1,719,800
60th-80th percentile
$72,000
$216,900
$100,700
40th-60th percentile
$41,700
$61,000
$12,200
Bottom 40 percent
$17,300
-$10,600
-$14,800
Source: G. William Domhoff, Who Rules America; Power Politics and Social Change, University of California, Santa Cruz, 2015. 


                                                     Table 2



                                    


                                   
 In 2015, 10 % 0f Americans captured 40 % of income and accounted for 90 % of wealth[6]. Furthermore, the upper 1 % earned 21.2 % of National Income and owned 20 % of the wealth in 2015[7]. More striking, is that the top 0.1 percent income went up over the last 30 years by 230 % from $ 1575,900 to $ 5,279,695[8]. At the same time, the lower 40 % of the population, according to Pew Research, earned only 0 .006  % of income and owned only .10 % of net wealth (Domhoff, 2015)[9].
It is rather astonishing that, according to Joseph Stiglitz ‘research, since the crisis of 2009, the 1% upper-income group has captured 91% of the growth of the US economy[10]. To give face and name to these statistics, J. Harkinson reports that, the wealth of the six heirs of the Walton family, who own Walmart, is $ 145 billion, a figure that exceeds the combined wealth of more than 178 million Americans (Harkinson, 2015)[11].
The increased inequality of income and wealth beyond its ramifications of social injustice has profound and important effects on economic growth and stability. It is beyond the scope of this paper to go into that, but the work of Piketty, Saez and Stiglitz are landmarks.
This shift in favor of the upper-income group would no doubt mean that other classes are affected. The size of the middle class, defined as those whose income ranges from $ 45,000 to $125.000 has declined from majority to only half of the population. In 1971, 61 % of house-hold was classified as middle class. In 21015, only 50% of hous-ehold was middle class (Pew Research, 2015)[12]  In spite of the considerable increase in the participation of women in the labor- force thereby increasing the number of families with double income, the middle class has lost on all grounds (Stiglitz, 2015)[13].
B.   Other middle-class ills
The erosion of the middle class in numbers, income and wealth-positions, is also accompanied by several other adversary factors affecting their well-being. Heading the list is the high cost of medical insurance, which is underscored by the rising cost of health care. According to Government statistics, US health care spending grew by 5.3 % in 20114 reaching $ 3 trillion, or $9,523 per person. This spending now accounts for 17.5 % of the GDP expenditure (US Gov.2016)[14]. The Obama Affordable Care Act was supposed to correct some of the health issues, but in reality, it has not succeeded in limiting the costs and has been resisted by many Republican state Governors, thereby limiting the number of participants, a matter that affects its economic and cost viability.

Medical bills are not the only problem facing the US middle-income families. The cost of college education has become non- affordable. From 1960 to 2015, college tuition has risen 8 folds in real terms. This has put college charges beyond the reach of most middle- class families. For example, the full time (10 courses per year) cost of New York University in 1962 was $ 1655, plus some $ 100 in fees. In 2016, the Times-Shanghai ranking of universities places that cost at $ 55,445, i.e., 31 times the nominal old figure or 7.8 times in real terms (Times` World University ranking,2016)[15]. As a result, education has now to be financed by student debt. Today, a massive $ 1.2 trillion student debt faces graduating youngsters (Berman, 2016)[16].
  
C.   Globalization and technological change

In the last two decades. Globalization has also affected the middle class. Globalization and its corollary, freer international trade as provided in NAFTA, the Pacific and Atlantic proposed agreements, do not yield uniform benefits across all income levels. There are those who have greatly benefited from globalization and those who were marginalized by it. While the benefits of free international trade are undoubted, their incidence is not symmetrical. Tens of thousands of jobs were lost by the working class. That means that many of the assumptions which underscore, the theory of Comparative Advantages which animates trade agreements need revisiting (Sakbani, 2016)[17].

Economists since David Ricardo`s work in 1817 have adhered to the law of Comparative Advantage and its growth complement: investments in industries with new jobs higher on the technical ladder than the ones they replace. This implies four things: one, the new advanced technology is accessible to all firms;  two, dismissed workers can take on higher-skill jobs created by the new technology; three, factors of production are largely immobile and fourth, firms are thus likely to choose to invest where jobs were lost. In our world today, these assumptions are rather ambiguous.

To throw into sharp relief these ambiguities, it is appropriate to place the world economy in the context of globalization and the observed institutional behavior of global firms since 1990.

Technical progress has since the late 1980`s been capital and knowledge-intensive. Robotics has replaced man and rendered many manual jobs obsolete. Thus, labor- saving has been an important characteristic of recent technology. The new technology requires, however, education and informatics skills beyond the previously acquired education of many workers. We are consequently witnessing an increased marginalization of lower-skilled workers in the global economy. This is reinforced by the increased importance of services in international trade and its more exigent demands for skills. Trade-in-services is also quite mobile, a fact that classical economists did not reckon with. In addition, the global firm and its know-how have become mobile and non-beholding to any specific state. Its preferred location is where its costs, especially labor costs are less.

Technology in the global economy is not necessarily available to all firms as the theory implies. It is the giant global firms that usually develop or own the technology. These firms having perfect mobility, will not necessarily locate the new jobs in the same locations as the replaced jobs. It is observed that global firms seek a maximum increase in their equity capital by decreasing their costs any way they can.. In the competitive global economy, discharged laborers are not all employable because of their prior educational and skill profiles. On the other-hand, training older discharged workers and endowing them with new skills is not always feasible and is costly; often it is cheaper to go elsewhere. Since the new capital and information-intensive technologies are labor- saving, the demand for labor has shifted down parametrically. We see evidence of that in the decline of men`s participation in the labor- force. In the US, data show that white-male rate of participation in the labor force has declined by 15% from its level 15 years ago (Office of the President, 2016)[18]. In other words, the closure of US`factories of the global firms inflicts structural unemployment upon those marginalized by globalization and leads to hollowing out of Jobs.

The increased importance of global firms together with their above-discussed behavior, has changed the setting of doing business. Since big firms create relatively fewer jobs than small and mid-size firms, this development brings no relief for the discharged workers (Berio et al, 2013)[19]. These changes in ethos and practices have made unemployment the great economic problem of the working class of our times. Over the past 33 years, the bottom 20% of wage earners increased their work hours by 22 % but their median earnings went up by only 5 % (Stiglitz, 2015)[20].


17.
D.  Social and Cultural anxieties
The USA is undergoing great demographic and cultural changes. Immigration is rapidly changing the demographic balance in the US. At current rates of change, the US population in 2050 will be majority non-European whites. This is displacing for culture and national identity. Other changes have also been buffering social values. The tolerance of gays and lesbians and permissibility of their marriage flies in the face of entrenched religious believes and old social norms. While educated Americans largely revel and accept social and cultural diversity, the majority of blue collars and lower-income with less than collage-education, find that bewildering and a threat to their identity and received beliefs. When this comes coupled with terrorist fears from sources such as ISIS, insecurity becomes a personal concern for all. These anxieties and insecurities can be activated by events like the terrorist attack in San Bernadino thereby transforming the less educated and less well-off Americans into supporters of authoritarianism (Taub, 2016)[21].  Researchers in political science and sociology have recently affirmed this phenomenon among these groups (Hetherington et al.)[22]. They posit that the activation of such fears and anxieties makes such electorates search for and support candidates who promise law and order and muscular unconventional measures of protection, as did Mr. Trump advocacy of law and order even involving torture during his campaign[23].

Reaping the Sown Bad Seeds

The two party establishments largely ignored the above-discussed problems or, at best, did not grant them due importance in the 2016 campaign. Mr. Trump candidacy and that of Mr. Sanders were dismissed by the establishment. The 16 Republican primary candidates thought that Trump is a TV personality with no serious following. Similarly, the Democrats thought that Bernie Sanders was a protest candidates with no chance to win national elections. However, while the two-Party establishments dismissed both, their respective campaigns attracted enthusiastic supporters. The media jumped on the scene and covered both campaigns. Because Sanders was less provocative and more restrained than the unprecedented Trump, his coverage was less wide than Trump`s. With his outrageous announcements, politically incorrect rhetoric xenophobic utterances and fabrications, Mr. Trump became a Live TV show. The media allegedly gave him $ two billion worth free TV coverage (Confessor et al, 2016)[24]. The free media ride was devoid of examination of facts and serious investigative sifting. It was a TV show and was covered as such. Only late in the campaign, did the media take Trump seriously and started to check his facts.
Both Trump and Sanders saw the anger of the public and its distrust of the establishment. Sanders attracted milliner voters, a swath of the working-class and  many educated voters and liberals, but Trump aimed at the dissatisfied working poor, the unemployed blue collars who have traditionally voted Democratic and the conservative right. He stirred their fears and stoked their anger. Despite 67 % unfavorable rating and a majority thinking that he is not prepared to be President, exit polls show that 25 % of such voters supported him (CNN, 2016)[25].

Hillary Clinton had spent 20 years preparing to be President, but missed completely what was the mood of the public. Her campaign was short on effectively bringing up economic and social issues which were Trump`s weakest points. Instead, she kept hammering the theme of “strong together”, vaunted off her past services and attacked Trump`s fitness for the Presidency, all of which fell on deaf ears.  At the outset of the campaign it was said that her biggest asset was Trump. It wounded up that she was his biggest asset at the end. Her campaign was ineffectively run and on election- day, despite the millions spent, failed to bring to the ballot boxes sufficient Democratic voters (CNN)[26]. She lost by some 75,000 .(less than 1% of the combined total) votes her blue wall in Pennsylvania, Wisconsin and Michigan as two hundred counties that voted always Democratic flipped into Republican [27]. Amazingly, she, the first woman candidate for President, did not do that well among women; she only got 53% plurality, lost white women votes by 3% and did a poor job among the young (Lubby, 2016)[28].
It was an election with a comparable turnout to 2012 culminating an ugly, accusatory, mud-slinging campaign in which both candidates were mistrusted by the majority of voters. The voters’absolute tallies for the President-elect fell millions short of a majority. (CNN politics)[29].






The Probable Consequences
A.    The macroeconomic consequences
There is difficulty with evaluating the Macroeconomic consequences of Mr. Trump proposals, because of their sketchy nature. Moody used its own Moody Analytic Model to simulate the impacts through 2026. This model is similar to the Federal Reserve Model and the US Congressional Office model and the results are fairly similar (Mark Zandi et al, 2016.)[30]. Some assumptions had to be posited in the forecasts. Specifically, we do not know whether Congress will modify or not his proposals. So a base-line scenario of Moody assumed modifications. On the other hand, his trade policies and their impact on foreign direct investment as well as the impact on the transfers and profits of US global firms have to deploy assumptions. Moody also simulated another scenario postulating no modifications of his proposals and another one with no change in present laws (Ibid)[31]
The Proposals in the scenario:
Personal Taxes:
» Replacing the current seven personal income tax brackets with three and reducing the top marginal rate from 39.6% to 25%.
» Increasing the standard deduction to $25,000 for single filers and $50,000 for joint filers, and indexing to inflation thereafter.
» Taxing capital gains and dividends at a 20% maximum rate. » Eliminating federal estate and gift taxes.
 » Eliminating the tax on investment income of high-income households to help pay for the Affordable Care Act.
» Taxing carried interest as ordinary business income.
» Limiting the value of itemized deductions, except for charitable contributions.
On the corporate side:
» Reducing the corporate tax rate to 15% from its current 35%.
» Pass-through businesses such as Corporations and partnerships also only pay no more than 15%.
- » One-time repatriation tax of 10% of corporate profits held overseas.
  » Foreign subsidiaries of U.S. companies pay taxes on profits in the year they are earned.
 » Repealing most tax breaks for businesses and the corporate minimum tax.
On the expenditure side:
Increasing veteran’s benefits
-          Increasing the military budget
-          Increases in Health care
-          No changes in Medicaid and social security spending
. Building the wall, Reforms of deductions and loopholes
These proposasls would increase the Federal budget by $ 9.5 trillion over 10 years  as a percentage of the GDP, taxes will be the lowest since WWII. The tax code under Mr. Trump’s plan will be much less progressive than the current tax code. More than one-third of the proposed tax cuts on personal income will go to the top 1% of income earners, with the average taxpayer in this group receiving a reduction in their tax bill of $275,000. Taxpayers in the bottom 99% of income earners will receive a tax cut of less than $2,500(ibid)[32].
   Table 3
                     The Economy under the Current Law
                                          Average annual growth rates                                         



























































Employment*(mil)
144.4

146.9
149.3
151.0
151.6
152.3


153.4
154.6
155.5
156.4
157.4
1.2
0.9
Percent*change
1.8

1.7
1.6
1.1
0.5
0.4


0.7
0.7
0.6
0.6
0.6
2016

2017
2018
2019
2020
2021


2022
2023
2024
2025
2026
2016-2020
2016-2026
Unemployment*rate*(%)
5.0

4.7
4.6
4.7
5.0
5.1


5.1
5.0
5.0
4.9
4.9
Consumer*price*index*(1980-82=100)
240.3

246.9
253.8
260.9
267.3
273.4


279.6
285.8
292.1
298.3
304.8
2.7
2.4
Percent*change
1.4

2.7
2.8
2.8
2.4
2.3


2.3
2.2
2.2
2.1
2.2
S&P*500*Stock*Index
1966.5

1992.5
2000.2
2012.6
2183.3
2398.3


2567.5
2720.6
2873.4
3057.4
3272.6
2.6
5.2
Percent*change
-4.6

1.3
0.4
0.6
8.5
9.8


7.1
6.0
5.6
6.4
7.0
FHFA*House*Price*Index
371.9

383.9
392.5
401.9
415.0
431.0


449.4
469.2
489.2
508.4
526.0
2.8
3.5
Percent*change
3.4

3.2
2.2
2.4
3.3
3.8


4.3
4.4
4.3
3.9
3.5
Federal*fund*rate*(%)
0.6

2.0
3.6
3.7
3.6
3.6


3.7
3.8
3.7
3.7
3.7
10-yr*Treasury*yield*(%)
2.4

3.6
4.0
4.0
4.0
4.0


4.1
4.1
4.2
4.2
4.2
Federal*government*debt*($bil)
14060.6

14952.0
15928.0
16646.6
17508.9
18448.3


19464.5
20559.7
21666.2
22633.5
23789.8
Debt-to-GDP*ratio*(%)
75.9

76.7
77.6
77.6
78.7
79.8


80.8
82.0
83.2
83.8
84.8
Federal*budget*deficit*($bil)
-640.2

-748.2
-818.7
-903.8
-941.5
-986.0


-1038.5
-1090.8
-1157.0
-1223.7
-1289.0
Deficit-to-GDP*ratio*(%)
-3.5

-3.8
-4.0
-4.2
-4.2
-4.3


-4.3
-4.4
-4.4
-4.5
-4.6
Government*interest*payments-



federal*($bil)
494.3

630.6
806.1
936.6
970.5
1003.5


1047.7
1090.8
1136.4
1182.8
1230.2
Interest-to-GDP*ratio*(%)
2.7

3.2
3.9
4.4
4.4
4.3


4.4
4.4
4.4
4.4
4.4

The simulation of Moody shows that U.S. economy will weaken significantly if Mr. Trump’s economic policies are fully implemented as he has proposed. The economy will suffer a recession that begins in early 2019 and extends into 2020 (see Table 3). During this downturn, real GDP will decline from peak to trough by close to 2.4%. This would be an unusually lengthy recession—even longer than the Great Recession—although the severity of the decline in economic activity would be more consistent with a typical recession suffered since World War II. Employment will continue to decline and unemployment will rise into the next presidential term, with the unemployment rate peaking at 7.4% in summer 2021. For the typical American family, Mr. Trump’s policies will mean that their standard of living will effectively go nowhere, at least during his term in office. Real income per capita will be near $45,000 when he is sworn in, and it will be about the same when his term ends.

  The simulation does not take into account some psychological and behavioral factors. Nor does it account for the political biases of the republican-controlled Congress and the right-wing inclinations of the President when it comes to assessing the impact of future tax cuts. Specifically,  stock market prices will be ignited by optimism about his promised deregulation and promises of tax cuts. But once the euphoria is over, Mr. Trump has to start delivering a health care bill, tax reduction and some investment in the infrastructure. All of that needs legislative action and presidential leadership, that Mr. Trump has never shown to poses. Given that he received an economy with 4.7 unemployment, his capacity to ignite growth largely depends on job creation for the white low skilled workers which require an annual real growth above 3 percent. Nobody expects now such growth. The best that might happen is a drop in unemployment to 4 percent and that will not be of great effect on growth. Otherwise, stock prices will get hammered after the first year of his presidency against a sluggish wage- rise and higher interest rates. And those two will make their effect felt at the end of his term. Consequently, one will be about where one was were when he took office. 
House prices will follow roughly the same path. It will be a difficult four years for the typical American family. The economic damage created by Mr. Trump’s policies is also stark when considering how the economy would perform if there were no significant changes to policy. That is, current law regarding tax and spending policy, immigration and trade policies, and all other fiscal policies remain in place. In this current law scenario, employment is expected to increase by 6 million jobs during Mr. Trump’s presidency (see Table 3). This compares with a decline of 3.4 million jobs over the same period if the candidates’ policies are fully implemented. Bigger deficits, higher debt
 Mr. Trump’s economic policies hurt the economy due in part to the large budget deficits and heavy debt load that result from his tax and spending policies. Even on a static basis, the deficit in 2020, the last year of his term, will be more than $1 trillion greater than if there were no changes to tax and spending law. By 2026, the end of the budget horizon, the deficit will be almost $1.6 trillion greater. The large tax cuts and bigger deficits however, support stronger consumer spending and economic growth, particularly early in Mr. Trump’s term, before the negative impacts of the higher interest rates caused by the large deficits take hold. Since the economy is operating at full employment when the tax cuts take effect, the so-called crowding-out effects from the larger deficits appear quickly. That is, the increased government borrowing causes interest rates to increase, crowding out private sector activities such as business investment, housing, and consumer spending on vehicles and other durables and taxes the labor market.
The expansionary effects of the tax cuts and the increased deficit will be mitigated in the longer-run by the fact that most of the cuts will likely accrue to high-income consumers. Well-to-do consumers spending will be a significantly smaller proportion of any reduction in their taxes than do lower- and middle-income consumers. It is assumed that the marginal propensity to consume of the -tax income for those in the bottom quintile of the income distribution is 0.86. and, the marginal propensity to consume for those in the top quintile is only 0.49 (see Appendix of Moody`s paper)
. There are some long-term economic benefits from the lower marginal personal and corporate tax rates in Mr. Trump’s proposals. Most notably, they would significantly reduce the marginal effective tax rate on investment by nearly 10 percentage points. All else being equal, this would incentify more savings and investment. The proposals would also have the desirable effect of reducing the cost of equity financing of investment over debt financing, which would reduce leverage in the economy. However, these benefits are overwhelmed by the mounting deficits and debt and the resulting higher interest-rate. The nation’s debt load rises from 75% of GDP currently to over 100% by the end of Mr. Trump’s first term and more than 130% a decade from now. Finally, Mr. Trump claims that his economic proposals will result in an increase of employment of 25 million jobs. For this to happen, the rate of growth must be in the range of 3.5 to 4.0 percent, an overestimation on all counts unless we witness a jump in productivity.
In sum, Mr. Trump proposals are on balance, a mixed wish list. The Issues they raise should have been front and center in Mrs. Clinton`s campaign. Instead, she chose to run on personal issues.
Moody`s base scenario is less harmful (Ibid, see tables 2 and 3)[33]. The problem is that making assumptions about what Congress will or will not accept robs the scenario of reliability. Still, this scenario shows the deficit and the budget in big red figures.  It should be noted that the expenditures proposed by Mr. Trump are not in areas with big economic benefits such as infrastructure or clean technology.  

A.   US domestic political consequences
The Democratic Party went into this election with an old establishment candidate and another old protest candidate. Aging leadership is true of all the prominent Democratic leadership: Governors, the minority Senate and House leaders. It is thus time to move to a younger generation, especially in Governor’s races and state elections. This is of particular importance, because, due to gerrymandering, the Democrats have been losing state races despite their plurality of votes. State Governorships can put a stop to this gerrymandering. When Obama came to power in 2008, the Democrats had 32 Governorships. After this election, they have 18. Their current standing in state legislatures, which was good a decade ago, is even worse.
The coalition which supports the Democratic Party is now composed of minorities: Latinos and blacks, and some, but not all, Asians, educated professional suburbanites and liberals. Added to that their appeal to educated women and the young. Their hold on the white blue-collars has, however, become doubtful.
 Without winning back some of the white male voters, their chances in the next elections do not look promising. Nevertheless, this author expects Mr. Trump to disappoint the employment aspirations of the blue collars and to cause fiscal problems, especially in social entitlements. Thus all is not lost, especially in view of the evolving demography
But for the party to go anywhere, they have to cement their base in Pennsylvania, Michigan, Wisconsin and Minnesota. And that means dealing with the perceptions, anxieties and issues of the white and blue collars. Unlike the Republicans, their coalition is not contradictory and can be held together. It is of capital importance to note that Clinton won the majority of the popular vote by more than 2..9  million. Thus, despite her unappealing candidacy, there is a voter reserve for the Party.

The Republican Party came out of this election with a coalition of traditional conservatives, business, fundamentalist Christians, Southern whites and now blue-collar whites. This coalition is not sustainable.  It has built-in tensions among its various components. Given the evolving demography, if the Republicans move to acquire Latino support, they will alienate some of their constituents.
The election showed a general dissatisfaction with the choice of candidates especially among those who did not vote (43%) or voted holding their noses. Thus, the two Party system is really placed into question. Why is it that parties have to be all things to all people? Other democracies have multiple parties and they do not suffer political instability.

 Along with that, there is a question about the Electoral College; it is rather senseless to continue to declare minority winners as elected officials. This will raise the question of the Democratic representation of big states as opposed to the overrepresented small ones. However, changing the Electoral College system requires constitutional amendments that are now politically impossible. States, however, can change to some form of Condorcet majority system which would eliminate the problems of the first-past-the-post system now in effect. And this is technologically possible and politically feasible. Hillary Clinton will be the candidate who lost the elections while winning 2.9 million-majority of votes, the biggest since the establishment of the US in the eighteenth century.


Mr. Trump election with a Senate Republican majority is going to place the balance of the Supreme Court in question perhaps for a generation to come. There is a potential for Mr. Trump to fill three seats on the court. The list of choice he put forward before the elections follows the jurisprudence lineage of the late Justice Antony Scalia without necessarily coming up with candidates of his intellectual distinction. Mr. Justice Scalia with his juridical philosophy of the intention of the founders is true to the letter of the Constitution but is utterly deaf to change and oblivious to the pragmatic consequences of the Court decisions. Aside from the Supreme Court, Mr. Obama left numerous federal judiciary vacancies, because of Republican congressional opposition. Trump can fill tens of such vacancies with conservative right-wing nominees.


Immigration and deportations were principal planks in Trump`s early platform. Aside from the insults heaped on Mexicans as rapists and criminals and Muslims as terrorists, Mr. Trump`s proposals on the wall and deportation will face numerous obstacles and he is likely to be able to only use executive powers for some actions not needing Congressional expenditure authorization.  Almost one-third of the US border with Mexico has some physical barriers.  What Trump will be able to do is to seal the border and enforce its security. Mexico will never pay for the wall and Congress is not likely to authorize the requisite expenditure ranging upwards of $20 billion.
Mr. Trump will not be in a position to deport the 12 million illegals, six million of whom are Mexicans. The cost of such an operation and its political, human and sociological displacements are incalculable and beyond his political reach. He is likely to succeed in deporting some of the 2 million with criminal records. As for Muslims, banning 1.7 billion, a quarter of humanity, of entering the US rests as a silly and ignominious idea which will be thrown out by the Courts. There is also the potential problem of the so-called DACA, children who entered the US illegally with their family but grew up in the US. Mr. Obama has kept the lid on this problem by executive-decree which is contrary to US`Constitution. If Trump nullifies that, which is highly likely, the DACA problem will hunt next elections.

Finally, Mr. Trump made big hay about draining up the Washington swamp and cutting off the lobbyists. That would be admirable if he can do it; he owes hardly anything to big money and their lobbies. But looking at the people surrounding him in the transition and some of his appointments, lobbyists are in great evidence.

B.   Foreign policy probable results
Mr. Trump foreign policy according to his campaign rhetoric might be impossible or downright harmful to the US interests. There might be another Mr. Trump as a President. But given his revealed character, a pivot would be a dramatic turn of events.

I. Policy on NATO and international cooperation
The international cooperation system as we know it is, to a large extent, the creation of the US and the UK. The US has supported and used the system to protect its interests by co-opting members of the international community to its proposals and stands. We do not know where Mr. Trump stands on this system. But a disposition towards unilateralism which he is inclined to, would do more damage to the US interests than some of the hard-liners around Mr. Trump thinks. US leadership is critical to the UN system just as much as the system is critical to the US.
A major pillar of US defense and foreign policy postures has been NATO. Mr. Trump, like many others, has questioned the relevance of NATO after the collapse of the Soviet-Union. NATO however has become a US policy tool for projecting US policy. In his campaign, Mr. Trump voiced the opinion that he would not implement the collective security of article 5, unless a country under attack has paid its dues. Placing article 5 in question mortally undermines NATO and the whole Western Alliance.
Other dangerous statements by the candidate Trump is asking, Japan, South Korea and Saudi Arabia to pay for US protection or have their own nuclear deterrence. This places the nuclear Non Proliferation stand of the US in question.

ii. Russia and Putin
Mr. Trump expressed warm regards for Mr. Putin and described him as a strong statesman with whom he can deal. Mr. Putin has returned the complements by hacking the computers of candidate Trump political opponents and interfering in US domestic politics and elections, a breach of US inviolability.
Good relationship with Russia is a common good if Russia were to behave as a lawful member of the international cooperation system. But Mr. Putin`s Russia has been an aggressive military threat to many countries. Mr. Trump does not seem to distinguish between a commercial deal and a foreign policy deal. A commercial deal is a one -time transaction for mutual gain. In foreign policy, a deal is a part of a repetitive act that must follow a line, a policy stand. On this account, one has to ask where Mr. Putin stands with respect to US policy posture. His policies in absorbing Crimea is, from the US vantage point, a clear breach of the UN charter. His policies in Ukraine have ignited a civil war, which he keeps stocking. His policies on Syria are an attack on civilians and a violation of the Protection of People principle of the UN. He has unleashed bombardments on civilian targets, including hospitals and schools, killing thousands of innocent non-combatants. His claim that he is there fighting ISIS is false since, according to all Western intelligence agencies, 85 % of his raids are on moderate Syrian opposition positions and civilian infrastructure.
Putin has tried to undermine the European Union by supporting overtly populist right-wing movements opposed to the Union everywhere. In sum, given the US stands, he is a US adversary and an opponent to its foreign policy goals.  
   
iii. The Iran Nuclear Deal
The nuclear deal with Iran is a multilateral deal sanctioned by the UN Security Council. Mr. Trump wants to withdraw from this deal and re-impose sanctions on Iran. He certainly can do that by breaking the US`engagemnt. But unilateral action by the US cannot end this agreement, because Russia, China and most likely Europe, will not go along.
 US sanctions without Europe are of little effect on Iran and except for banking and financial sanctions, would amount to little.  Therefore, gutting this Agreement is neither easy nor unambiguously in the interest of the US. Analysts of the deal, even in Israel, now conclude that the US is better off with the deal than without it.
 In political terms, Iran poses three separate challenges. The first is the nuclear matter. The second, which is regionally more important, is the enhanced capacity of Iran after lifting the sanction to interfere in the domestic affairs of its neighbors in order to destabilize them. A prime example is its military intervention in Syria and its political machination in Iraq. On this question, questioning the deal might enable Mr. Trump to pressure Iran to stop its aggression against its neighbors. However, past Iranian behavior does not bode well in this regard. Finally the third is the development of delivery capacity through the Iranian missile program. The nuclear deal does not have anything on the second and third challenges.
If Mr. Trump withdraws from the nuclear deal and imposes sanctions on companies and entities dealing with Iran, the extra-territoriality of the US law will force the Europeans to choose between dealing with Iran or the US. In this, there will be no choice and the deal would be dead. the real commercial beneficiaries will be Russia and China..

Iv. The Climate Convention
The Paris Accord and the recent Marrakesh agreement are the results of two decades of efforts to put a limit to man`s damages to climate and nature. Climate change is supported by massive scientific evidence and is neither a Chinese hoax as Mr. Trump has said, nor something one can wait upon. It is now and it is real and the role of man and industry is beyond doubt.
Mr. Trump can kill US action on climate change, but that would be damaging to US reputation and position and the welfare of its people and future generations. Besides, it would not stop the accord until after his first term. It is certain that negative moves will be resisted by US non-Governmental organizations, state governments and will face an unfavorable public opinion. Besides, state and local governments, which are in the majority Pro convention, might mitigate the Federal governement negative stand.

v. NAFTA and other trade deals
Agreements such as NAFTA have not produced unqualified gains to US labor but benefited global US firms.  The US can and should ask for modifications and protections clauses but the problem is not as simple as Mr. Trump thinks. For example, a US plant built in Mexico might benefit from favorable custom treatment between Mexico and a third country that are not available to a US located plant. So, trade agreements should be examined on a case by case basis. Liberal International trade has great technological and consumer benefits and should not be rejected on whole-sale basis. Protectionism has very few rational defenders.

VI. Syria and ISIS
Mr. Trump`s plan on ISIS is rather straight forward. It consists of banning Muslim refugees and immigrants, bombing ISIS with US full force, and capturing and torturing their fighter’s families. In these planks, one can see nothing new except the torture of families. President Obama has bombed ISIS with full US force, has vetted all suspected refugees and built a coalition of 56 countries in his bombing campaign. The thing that he has not done is to put boots on the ground. Mr. Trump has the same reservation about that. Nobody knows why he should succeed where Obama has not. In any event, by the time Trump becomes President next January, ISIS might be finished in Iraq and on its way to defeat in Syria.
Syria is a big part of ISIS and the other fundamentalists raison d`etre. There was no ISIS in 2013; it is the vacuum created by Assad that gave its birth. As long as the Syrian civil war continues, there will be fundamentalists doing Jihad in Syria. Mr. Trump views on Syria ignore this connection and even advocate cooperation with Bashar Assad, the man who created the problem and killed half a million of his own people. These views are simplistic, they lack a strategic vision and are bound to fail. But as always with Mr. Trump, these views are changeable and subject to the expected rivalries among his aids. The generals among those aides are hawkish on Iran, but the nationalist ideologues, like Steve Bannan and Steve Miller, are essentially isolationists with a different agenda. 
Donald Trump will be unlike any other President in US history. He is inexperienced and not willing to listen to expert-advise and knows very little about most issues. His character lacks civil virtues and the norms he will introduce will be vastly different from the usually accepted norms.




Geneva, November 2016)





·         [i1 The literature of stylized cases was spun off by Simon Kuznets and Nicolas Kaldor and was subsequently, backed by the findings of Robert Solow. See S. Kuznets, “Economic Growth and Income Inequality”, American Economic Review, 45(1) pp. 1-28.  See also, Robert Solow, ""A contribution to the theory of Economic Growth"Quartely Journal of Economics, Oxford, 1956  pp. 65-94. Also,Robert Solow, "Technical Change and the Aggregate Production Function" , The review of Economics and Statistics", the MIT Press,39,,1957, pp.312-320.

[2] Ravi Kanpur and Joseph Stiglitz, Wealth and Income Distribution; New theories for New Era, Vex Portal, august, 2015; also Joseph Stiglitz, New Theoretical Perspective on the Distribution Income and Wealth Among Individuals, NBER working papers 21189 and 21192.

[3] Benchuk, Freid and Grinstein,

[4] Stiglitz, Op. Cit,  

[5] Thomas Piety, Capital in the Twenty First Century“, (20/4), Cambridge, Massachusetts, 2014.

[6] Joseph Stiglitz, Inequality and Economic Growth, Semantic scholar, No. 15, 2014.

[7] Ibid

[8i] Ibid.

[9] G. William Domhoff, Who Rules America; Power, Politics and Social Chanbe, University of California, Santa Cruz, 2015.

[10] The Atlantic, “Interview with Joseph Stiglitz”; 2015.

[11 J. Harkinson, Mother Jones, October3, 2015.

[12] Pew Research Center, The American Economy Is Losing Its Middle Class, 2015.

[13] Stiglitz, Op.Cit,

[14] US government statistics, 2016.

[15] World University Ranking,2015-2015,  Timeshighereducation.com,2016.


[16] Jillian Berman, America`s Growing Student Debt Crisis, market watch, January, 2016.

17. Michael Sakbani, International Trade in Time of Economic Discontent; Comparative Advantages under Globalization, in michaelsakbani.blogspot.com, September, 2016.

[18i] Office of the President, The Long Term Decline in Prim-Age male Labor Participation, 2016.

[19] Mario Berio and Markus pilgrim, Is Small Still Beautiful?, ILO, Small enterprise units, 2013.

[20] Joseph Stiglitz, Op. Cit., 2014.

[21i] Amanda Taub, The rise of American authoritarianism, www.Vox.com.com, 2016.

[22i] See the works of Hetherington and Weiller,  Stanley Feldman and Kyle Droppy

[23v] Nicolas Confessor and Karen Yourish,, “ $ 2 billion of Free Media for Donald Trump”,  the Upshot, 2016.

[24] Exit Polls by CNN.

[25i] Tamy Lubby,  How did Hillary Clinton lose ,CNN poltics,2016

[26i] As a matter of fact, Clinton lost Pennsylvania by about 40,000 votes, Michigan by about 10,000   and Wisconsin by 26,000          .

[27i] CNN Politics, November, 2016.

[x28] Ibid.

[30] See, Mark Zandi, Chris Lefakis, David White and Adam Ozimek, the Macroeconomic Consequences of Mr. Trump `s Economic proposals, Moody, New York 2016.

[31i] IBID

[xx32] IBID