He believes—against all evidence—that trade is a zero sum gameby George Magnus / November 9, 2016 / Leave a comment
Donald Trump is going to the White House for the next four years. We don’t have a clue what to expect from a man who has no experience of government and a reputation for a volatile and vengeful temper. His campaign slogan, “Make America Great Again,” seems like Ronald Reagan’s “Morning in America,” but where the latter breathed optimism about the future and hope, the former looks backwards, seeks to blame stupid leaders for policy disasters, and others for misfortune. He had his supporters chanting “lock her up” as assured them Hilary Clinton was crooked and should be punished. He exploited, encouraged and represented a populism with strong ethnic and racial overtones, and which was supported by the Ku Klux Klan, and spread via Breitbart and other far-right organisations.
The outcome of this election is likely going to differ from most other change-overs. Trump insisted he was creating a movement and an uprising, and so it has proven to be. And so the inevitable tendency to look back for comparisons and make judgements about what happens next is as irrelevant as when we Brits do, trying to decipher the aftermath of the Brexit vote. In the case of the US, though, the uncertainty is on a vastly more significant scale with major consequences for the US economy, on which we all still depend, and for the stability and order of the global system, which has in any event been creaking since the financial crisis eight years ago.
Trump’s rhetoric speaks to a more isolationist and withdrawn America, as a result of which other authoritarian leaders, such as Vladimir Putin and Xi Jinping are encouraged to take advantage and press their own nationalist ambitions. At the same time, Trump has said he would increase military spending, and have no truck with US enemies, specifically citing Islamic State, and calling into question the new rapprochement with Iran. What is uncertain is how US foreign policy will evolve, and where and under what circumstances the US might become more engaged if pushed too far. What is certain is that the liberal global order, represented by institutions such as the United Nations, the International Monetary Fund, the World Bank and the World Trade Organisation, which have always depended on US leadership, now hangs in the balance. Further, it is probably in some considerable danger if America’s willingness to stand for and engage with an open system goes into retreat.
This goes especially for Europe and Asia. Trump’s public utterances about NATO and about allies paying their own way suggests that European countries will have to review and reconsider security and the terms of their alliances. The dormant TTIP trade deal will probably be left to wither. Trump doesn’t seem to have a very significant place for Europe in his Weltanschauung. Quite what the implications will be for Brexit Britain, seeking to cut itself loose from the EU but in the face of an America that is pulling in its horns, remains to be seen. But it isn’t comforting.
For all its flaws and problems, the US pivot to Asia, including the launch of the Trans Pacific Partnership, was a potent symbol of America’s crucial international relations role in the region. China clearly was not impressed as it sought to evolve its own bilateral and multilateral relationships in Asia. Now though, as we ponder what a Trump presidency portends and from whom Trump will take advice, Japan, South Korea, Taiwan and most of the rest of east and South Asia will have growing security concerns, and their own angst about their alliance systems.
The consequences of a Trump presidency for the economy will be no less serious. The immediate reaction in financial markets was catastrophic, with large falls in equity and bond markets, and increases in the price of gold as investors sought “safety.” Subsequent reactions were more sober and it’s hard to say how much is over-reaction and an abrupt shift in market positions, but it is quite possible that the longer-term outlook for “riskier” assets like equities has been tarnished. At the very least, the so-called risk premium in equities should be higher, not least since Trump’s economic policies are vague, and because little about this presidency can be termed predictable.
Expectations that the Fed would raise interest rates at its December meeting have dropped away sharply. The Fed doesn’t like volatile markets that have lost their anchor, and if little changes in the next few weeks, the Fed will almost certainly pass, deferring until 2017 the decision as to whether the economy, markets, inflation, and new economic policies warrant a return to the position it was in before the election. We will also now have to pay close attention to whether a Trump administration has designs on the Fed’s independence, and indeed on the Fed chair, Janet Yellen, who was one of a few figures in finance attacked in one of Trump’s last campaign advertisements. Her term runs until 2018, but the new broom in Washington might well look for a more supportive, politically compliant central bank chief. This wouldn’t encourage confidence in US markets or the economy either.
It’s been eight years since the US economy went into recession, and one was due sometime in the next three to four years, but until today there were no obvious reasons why the current moderate expansion shouldn’t have continued. Now there are. What we know about Trump’s policies is vague, but they are a hybrid of both pro-growth tax and infrastructure measures and anti-growth measures centred around a hostility to trade and immigration, and a determination to repeal Obamacare as a leading priority, and make deep cuts into non-discretionary Federal spending.
The case for more infrastructure spending is sound, but the rest of Trump’s growth narrative—to boost economic growth to 4 per cent—is irrelevant to the causes of anemic growth. These are almost wholly due to slowing population growth—notably of the 20-54 working age cohort—rising old age dependency, and to the slowdown in productivity growth. Trump wants big tax cuts for the better off 1 per cent of the income distribution, and for companies—the biggest of which already sit on large cash piles on their balance sheets, and which account for a rising proportion of revenues and profits in their own sectors. In other words, where there seemed to be a demand for greater income inequality, Trump’s policy would exacerbate it. And where there is a demand for more anti-trust measures and more competition, that would also push up wages and salaries, his policies would cement the privileges enjoyed by oligopolistic market structures. It is of course possible that the combination of tax cuts, deregulation of energy and other regulations, and higher military spending will give the economy a temporary lift, and the circumstances prevailing at the time would be crucial in making that judgement. But it would certainly be the wrong kind of lift, given the population and productivity causes of the underlying malaise.
In any event, the economic consequences of a Trump presidency will almost certainly be a substantially wider fiscal deficit and more rapid expansion of public debt. The bipartisan and independent Committee for a Responsible Federal Budget has calculated that Trump’s military plans would boost spending by $450 billion by 2026, with other plans—tax cuts and more spending on infrastructure and other programmes, costed at about $2-3 trillion, increasing the US ratio of debt to GDP from about 77 per cent to at least 105 per cent. Repealing Obamacare might free up about $200-250 billion, but this could be eaten up easily at a time of structurally rising social security and health spending, and could generate significant economic costs as 22 million Americans lost healthcare insurance.
None of these estimates take into account the economic damage that would be done by Trump’s belief that trade is a zero sum game, in total contrast with the empirical evidence about trade liberalisation and open borders. He has expressed opposition to the NAFTA agreement, and the TPP, threatened Mexico with trade restraints and a figurative or real wall to prevent migration, and singled out China where he would impose tariffs and charge currency manipulation. Even without actual measures in place, this kind of rhetoric would sour international relations and co-operation, and surely weaken the climate for trade and foreign investment, which is already under threat as the slowdown in globalisation becomes more pervasive.
Is this all too gloomy a take on a Trump presidency? We have to hope so, but this darker view is the logical point to which president-elect Trump’s campaign has brought us. Perhaps Donald Trump’s bark will prove bigger than his bite, even if his character is as we think. Perhaps a clean Republican sweep through both the executive branch of government and both legislative chambers will lead to the end of gridlock. Perhaps Trump will make a wise choice to fill the vacancy on the Supreme Court, and draw strength from sounder economic and foreign policy advisers than we have seen so far. Many of us will retain a belief in the capacity of the US to weather a turbulent time and reinvent itself, as it has often before. For now though, a Trump presidency that’s long on inexperience, uncorked populism, poorly thought out economic ideas, and a tendency to an illiberal international relations policy, is taking us into a potentially grave new world. “I have a feeling we’re not in Kansas anymore.”