11th November 2016
Donald Trump is going to the White House for the next four years. We don’t have a clue about what to expect from a man, who has no experience of government, and a reputation for a volatile and vengeful temper. His campaign slogan, to ‘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’s rhetoric looks backwards, seeks to blame stupid leaders for policy disasters, and others for misfortune. He had his supporters chanting ‘lock her up’ and 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. On this basis the omens for a Trump presidency are not good at all.
Global security concerns
I am somewhat less worried about the consequences of Mr. Trump for the US economy than I am for the structure of the global system we all live in, and that’s why the outcome of this election outcome is most likely different from most other change-overs. Trump insisted he was creating a movement and an uprising, and so it has proven to be. Here in the UK, we had a specific event, the Brexit referendum, that changed the world and our likely place in it as we knew it. In the case of the US, though, a scheduled election has thrown US politics out of kilter and created uncertainty on a vastly more significant scale. Yes, it has major consequences for the US economy, on which we all still depend, but also 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Trump’s rhetoric speaks to a more isolationist and withdrawn America, in which other authoritarian leaders, such as Vladimir Putin and Xi Jinping will be encouraged to take advantage and press their own nationalist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 UN, the IMF and 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. He has, after all, threatened to rip up or amend NAFTA, which binds the US with its large northern and southern neighbours, and slap tariffs on China and Mexico.
The threat extends to 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. It hasn’t been slow to seize the moment to press its own Regional Comprehensive Economic Partnership, its own TPP version. 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.
How far Trump will go with his anti trade tirade we can’t judge. He has a Republican Congress with which to work, but many Republicans are free traders, and may balk at the prospect of American trade policy aggression.
The consequences of a Trump presidency for the economy will be no less serious, and portend the biggest shift in policy regime since the financial crisis, or even since the 1980s.
The immediate reaction in financial markets to the election outcome was catastrophic, with large falls in equity and bond markets, and increases in the price of gold as investors sought ‘safety’. Yet, markets did one of the fastest ‘about turns’ on record. Trump’s economic policies are vague, and little about his presidency can be termed predictable. The markets though have latched on to some ‘certainties’, namely that there’s going to be a significant shift in the policy regime. Tax cuts and and a $500 billion infrastructure programme, plus a similar military build-up mean that we will finally get the fiscal experiment, long urged by Democrats and most left-leaning political parties in Europe. The role of monetary policy will be left to take a back seat, and many would say, not before time.
Expectations that the Fed would raise interest rates at its December meeting have dropped. The Fed doesn’t like volatile markets that have lost their anchor, and if little changed in the next few weeks, the Fed would 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. But with the US economy in reasonable shape, the likelihood of fiscal expansion and markets in buoyant mood, we should not be surprised at all if the Fed did raise rates. Bond markets have already moved as if to expect so.
We will 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 by one of Trump’s last campaign advertisements. Her term runs until 2018, but the new broom in Washington might look for a more supportive, politically compliant central bank chief. This wouldn’t encourage confidence in US markets or the economy, but that at least is probably some time away, if at all.
It’s been 8 years since the US economy went into recession, and one was due some time in the next 3-4 years, but until today there were no obvious reasons why the current moderate expansion shouldn’t have continued. Will Trump’s policies bring one on? What we know about Trump’s policies is vague, but they are a hybrid of both pro-growth tax and infrastructure measures and the inflationary consequences centred around a hostility to trade and immigration.
His tax proposals lean heavily towards redistribution to the rich. His apparent determination to repeal Obamacare, and make deep cuts into non-discretionary Federal spending speak to the same ends.
On the other hand, the case for more infrastructure spending is sound, if well handled. We don’t know how anti-trade Trump will actually be, but the effects are inflationary and designed, at least, to favour local producers and labour. An interesting and unknown policy area is anti-trust, or competition. America badly needs more competition, having allowed many sectors to become oligopolistic over the last 20 years with a handful of firms accounting for a growing share of revenues and profits. Start-ups, outside the digital space, have dropped away. The country needs more competition in markets, and in the labour market as firms bid for labour. If, in addition to cutting corporate taxes and getting firms to bring home cash piles held overseas, Trump can bring more competition into play, the effects could be quite positive.
Trump’s growth narrative though – to boost economic growth to 4 per cent – would only work briefly, if at all, because anemic growth is 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. Nothing I have sense far in Trump’s policies would address this.
In any event, Trump’s policies will almost certainly entail 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 might be both eaten up easily at a time of structurally rising social security and health spending, and generate significant economic costs as 22 million Americans lost healthcare insurance. We might not care about too much about this in 2017, but in a couple of years, the implications might become more worrisome for the US, and the rest of the world.
Is this all too gloomy a take on a Trump presidency? We have to hope so, and as stated above the only thing we know is that we dot know what to expect. WE can take everything he said at face value, and at the same time nothing.
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 sound economic and foreign policy advisers. 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 has come to be by uncorking populism, poorly thought out economic ideas, and a tendency to an illiberal international relations policy was not in most people’s script and leads us potentially down a dark path. We can only hope for better.