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Bracing for the economic impact of Donald Trump

Famed Harvard University economics professor Kenneth Rogoff's latest book, The Curse of Cash, makes a strong case for what he calls a "less cash" society. He advocates ditching all but the smallest banknotes to make it harder for tax evaders, corrupt officials, drug smugglers and other miscreants to operate.

It's an important subject. But in an e-mail exchange, the former IMF chief economist recognizes that we can't ignore the elephant that just barged into the room.

Donald Trump's protectionist rants - including his vow to rework or ditch NAFTA, the North American free-trade agreement - are a big concern in Canada. What are the risks?

It kind of depends on what he goes after. Big tariffs on Chinese goods, as he has threatened at times, are going to hit hard at lower- to middle-class consumers, who will see much higher prices. And Wal-Mart [a major importer of the Chinese products they buy]. Hitting at trade with Canada will hit higher-end consumers, but also U.S. firms that are deeply integrated with Canadian suppliers. Both [president-elect Donald] Trump and [Democratic Senator Bernie] Sanders seem to have the romantic notion that protectionism will bring back high-paid manufacturing jobs. In fact, it will just fuel the already strong impetus towards automation.

What are your main concerns about a Trump presidency?

Erratic, impulsive decisions.

What would keep you awake at night in the next four years?

Above all, I am worried we might see serious threats to the United States' system of checks and balances.

Although most of what Mr. Trump says about policies is pretty vague, where do you see fiscal policy realistically heading in the next couple of years?

On fiscal policy, it is pretty clear that he plans an increase in infrastructure, and a huge tax cut that includes a long-overdue rationalization of the corporate tax. Together with pushing back on regulation (where there have been excesses in some areas), it should constitute quite a powerful stimulus in the short run, though such policies won't help on the environment or inequality.

What about monetary policy?

There is a lot to be worried about. Some of the gurus of the Republican right want a return to the gold standard. This is a very dangerous idea, and about as sensible as having the U.S. adopt the euro. Going on the gold standard has the same flaws as adopting a fixed exchange rate. It works for a while, but then blows everything up. Even if we don't see that kind of dogmatic extreme, it is likely Mr. Trump will appoint hawkish central bankers who will try to sharply "normalize" interest rates - also a dangerous idea in a world where it is no longer clear what normal is.

Do you worry about interference with the U.S. Federal Reserve?

My main concern is that Congress will subject the Fed to all kinds of intrusive oversight that paralyzes its independence. The left is partly to blame for this by pushing all kinds of policies - such as helicopter money (whereby the Fed prints money and hands it out to people) that pull the Fed into territory that is the proper domain of the Treasury and the government.

Mr. Trump seems determined to open the spending taps while cutting taxes. Do you expect an austerity-minded Congress to go along?

The whole idea that Republicans want austerity is nonsense.

Much like the Democrats, they are perfectly happy to run massive deficits if they control who gets the money and what it is spent on.

When Mitt Romney was the Republican nominee in 2012, he ran on a platform that called for even bigger deficits than Mr. Trump. The Republicans have no objections to deficits if used for tax cuts and military spending. Up until the election, the hard left, sure that [Hillary] Clinton would win, pushed for giant deficits to finance huge transfers. ... Now, that deficit financing is going to fund rightwing priorities, the same commentators are up in arms about the risks to debt. Total hypocrisy.

Should we be concerned about a U.S. recession?

Goodness, no. In the near term, it is far more likely that the U.S. has a couple of years of outsize growth, even as high as 4 per cent to 5 per cent.

But that is assuming the Republican Congress prevents Mr. Trump's protectionist threats from being implemented any time soon. And of course measured growth ignores festering income inequality and environmental degradation, both of which are likely to get worse now.

You have said a Chinese slowdown is a key concern for the health of the global economy.

Will we see a trade war if Mr. Trump pushes ahead with high tariffs?

Maybe I am too optimistic, but it is hard to see how Mr. Trump will get Congress to support a trade war, and it is hardly in China's interest either.

Any practical advice for investors?

It is hard to improve on the usual advice of maintaining a diversified portfolio, and trying not to second-guess the professionals.

Any thoughts of moving to Canada?

I feel very lucky to be teaching at Harvard, and it would be a long commute.

This interview has been edited and condensed.

Associated Graphic

Kenneth Rogoff, professor of economics at Harvard University, says the potential impact of erratic, impulsive decision-making is what worries him most about a Trump presidency.


© The Globe and Mail

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