What Does President Donald Trump Mean for the US Economy?: As the moment Trump took office, it seemed as though Trump could have become any one of three figures.
We really did not know which.
We had very little real indication of what policies Trump will follow, or what kind of president he would be. The US press corps had done an extraordinarily poor job in making the issues at stake in this election clear and transparent—not just to the mass audiences, but even to the most sophisticated of audiences, those that are very interested in asset prices and how they're affected by government policies.
Those three were:
(1) He could have turned out to be a Ronald Reagan, a force of nature that has a commanding stage presence with strong though often contradictory policy intuitions.
Reagan wanted to balance the budget, but also to cut taxes and to greatly increase defense spending. He wanted to project US power abroad, win the Cold War, and get rid of nuclear weapons. Reagan also wanted strong economic growth, and to stop inflation. He wanted a gold standard. He also wanted low interest rates at the same time.
There may have been some 10 factions within the Reagan White House, all of whom thought--correctly--that they had Reagan's approval and baton for what they were trying to do.
And yet, of those 10 factions, at most five could have their policies actually carried out.
In retrospect, we see the Reagan 'revolution' as one integrated, coherent thing, but that's a narrative logic we imposed after the fact. The reality was much more random and incoherent, and had a number of destructive side-effects.
Reagan did not go into office thinking he would double the US debt-to-GDP ratio. He did not go into office wanting to cause a 70% appreciation of the dollar and the beginning of the destruction of Midwestern manufacturing. And yet, those two things were major consequences of the way Reagan's economic policies developed.
Trump might be like that, in which case we take everything that he said on the campaign trail and watch people try to implement it. People with his baton will try to and successfully implement a quarter. Which part? We don't know. We can't know. And even if it may be random, after the fact we'll impose some sort of coherent narrative.
That was not who Trump turned out to be. Nobody thinks Trump's administration will be like Ronald Reagan's.
(2) Trump could have turned out to be like Arnold Schwarzenegger, who got elected as governor of California in a similar kind of revolt against the establishment.
In the California Governor's Office, Schwarzenegger tried to make Hollywood-style deals, and failed comprehensively. The government went on automatic pilot. He hung out in his smoking tent, smoking cigars and trying to make deals. And it was, in Schwarzenegger's case, two terms of missed opportunity with very little happening.
Nobody thinks Trump will turn out to be like Arnold Schwarzenegger any more. He doesn't have the discipline to learn about issues and the diplomatic skills to (try to) cajole people into a broad coalition. (Of course while Schwarzenegger had the discipline, he didn't have the diplomatic skills either.)
(3) Trump could have turned out to be somebody like former Italian President Silvio Berlusconi. An awful lot of public money gets diverted to friends with random policy decisions. There were occasional bursts of technocracy when things get so bad that someone competent had to be put in charge for a while. But only short bursts. Italy lost a decade of economic growth--not all, but in large part due to Berlusconi.
The fact that pretty much all of the nineteen faces of Trump want to cut taxes and increase infrastructure spending means that we are likely to have bigger budget deficits. Would they do significant good for employment and production in the United States? That would depend on which form the fiscal stimulus program takes.
It could take the 'Berlusconi form', in which the government builds some infrastructure, but much less than you'd think because corruption gets into the process from the very beginning. And then at the end, the infrastructure is handed over to private friends who are then able to charge monopoly prices for what ought to be public services.
This looks like what we are going to get.
In that case, it would be a waste of money, but it won't have a depressing effect on the US economy. People will work, even at things that are largely useless. But it would be a wasted opportunity and another divergence in income distribution, as well as further erosion of confidence in the fairness of the system.
Thus the news looks bad. I believe that fiscal multipliers on upper-end tax cuts are very low. And that is what we are getting. I believe that multipliers on federal spending on goods and services are quite high--I would not be surprised to see 3 if the Federal Reserve holds interest rates constant. But I believe that the drag from increased government-sponsored economic rent creation is likely to be substantial. I see little increase in federal spending on goods and services. I see a lot of upper-end tax cuts. I see a lot of government-sponsored rent seeking. I would put the odds of any sort of durable "Trump boom" at less than 10%.
What will be the impact of the Trump administration on the rest of world? The world is very powerfully linked, through trade first of all, although for some reason Germany is not on Trump's list of potential currency manipulators. More importantly, they world is linked through asset prices and through general cultural linkages. Things that increase risks in the United States will have powerful effects on Europe and the rest of the world.
Trump's electoral-college victory and the Brexit vote were a strong indication that the tide of globalization and integration is not irresistible. they showed that a political force that wants to aggressively say "We are going to diminish our integration with the rest of the world" can easily win a significant victory.
And in every country there are politicians who, if they see a road to office, will follow it.
And there will be politicians in every European country looking at this and saying, "Hmm, maybe I should say we will leave the Euro if I get elected. Maybe that will be my road to power."
And there are bunches of countries, and bunches of politicians.
The fact that this door is open means that other people will try to walk through it, even if they wouldn't have tried that before.
Now Trump's voters are going to be disappointed--and soon. Bad trade deals are not the reason for the decline in American manufacturing. What does the threat mean to renegotiate NAFTA, or to withdraw from the World Trade Organization? It's completely unclear how this could be accomplished. Raising the prices of the goods that his core supporters pay at the big-box store supermarket will be a very easy road to disillusioning large chunks of the electorate.
Interest rates at current levels ar awfully indicative of secular stagnation. Markets are strongly betting that Trump will not be a force for good.