
There has long been a debate about how a government can most usefully assist its economy. Is it about policy or is it about creating a sense of positivity?
The orthodox view is that what matters most is good policy. What constitutes good policy will, of course, be debated but there are areas where most economists will broadly agree – increase the opportunities to trade, provide businesses and investors with policy certainty and predictability, support strong institutions, including the rule of law, and ensure that the public finances are sustainable in the long run.
Others will argue that a successful economy is more about psychology than policy detail. Make people feel confident and optimistic and the economy will look after itself. Raise those animal spirits and businesses will invest, consumers will spend and growth will accelerate.
Of course, governments will normally try to pursue sensible policies and encourage optimism. The two aspects should be connected in that good policies should have good outcomes. But it is not always easy. Labour came to office with a very difficult fiscal situation and a determination to pin the blame on its predecessors. The consequence was that ministers sounded very pessimistic and the policies involved substantial increases in taxes. Both businesses and consumers were left downbeat and there is a plausible chance that the economy is now in recession.
This has, at least, stimulated a greater determination to pursue pro-growth policies. Barely a day has gone by in the last couple of weeks without an announcement of one supply-side reform or another, although there are still some areas of concern, such as the Employment Rights Bill. The tone has also changed, although neither Keir Starmer nor Rachel Reeves are natural purveyors of the message that happy days are here again.
A contrast can be drawn with Donald Trump. Here is a politician who – uncluttered by self-doubt, nuance or knowledge – can express with such certainty and simplicity that he is going to Make America Great Again, that he can convince a large part of the US public that he will succeed. In his first days in office, he has conveyed a brash energy that has gone down well with the electorate (his approval ratings have markedly improved) and (at least initially) the equity markets. His confidence in himself appears infectious.
Trump is helped by his strong economic inheritance, even if the American electorate was reluctant to believe it when voting last year. But the sense that the US is on the up is a strong one. If this optimism translates into sustained economic success, it will be a triumph for those who believe that vibes matter more than policy substance because many of Trump’s measures will only damage the economy.
The picture, of course, is complex. There are measures that Trump will pursue that are good for growth. Competitive corporate taxes – if fiscally sustainable – should encourage investment; cheap energy will not help tackle climate change but will increase GDP (decarbonisation comes at a cost, despite what some may claim); his deregulatory agenda comes with risks but should make the US an attractive place to do business.
All this, however, has to be set against measures that should cause alarm from an economic perspective. Most obviously, Trump’s tariffs will result in higher prices for US consumers and a reduction in trade, which ultimately results in lower productivity. Meanwhile, his immigration policies could result in the removal of a large part of the US workforce.
Optimists argue that, in reality, Trump will not proceed with an aggressive policy on tariffs or removing undocumented workers. In the former case, it is argued, he will use tariffs to threaten other countries and get his way – just as he successfully did with Colombia accepting two planes of returning illegal immigrants – but will rarely use them. As for deporting illegal immigrants, this will be an effective deterrent against future arrivals but not widely pursued against those already here and in employment.
We shall see, but it is not an altogether encouraging situation when the best hope is continued uncertainty. But, with a president as volatile and impulsive as Trump, businesses will have to operate in an unstable environment, not knowing what will happen with access to foreign markets and much of the workforce.
This uncertainty also applies to institutions. Trump is no respecter of the rule of law, or of the independence of institutions such as the Federal Reserve. A clash over interest rate policy is all too plausible, undermining confidence in the US’s economic institutions.
This particularly matters given Trump’s likely fiscal irresponsibility – cutting taxes and raising spending. If he genuinely hopes that Elon Musk is going to deliver substantial savings, he is in for a disappointment. As Kate Conger and Ryan Mac set out in their account of Musk’s takeover of Twitter, Character Limit, he sought savings there by an ill-planned and chaotic reduction in headcount that left the business unable to fulfil its functions and by refusing to pay rent to its landlords. That cannot be replicated at the federal government level without a very negative reaction.
For all the braggadocio of his first days in office, Trump’s self-belief cannot overcome the contradictions and absurdities of some of his policies. He is good at pulling off a confidence trick, but it is still a confidence trick nonetheless. Boosterism can only take you so far if your policies are wrong.