LONDON – For those of us who were wrong about the United States’ presidential election, it is worth suppressing emotional reactions, at least for a month or two, and attempting a dispassionate judgment about what Donald Trump’s administration may mean for the world. So here are ten likely consequences of the Trump presidency, divided equally between the good and the bad.
The good news starts with US growth, which will almost surely accelerate well above the 2.2% average annual rate during President Barack Obama’s second term. This is because the Republican aversion to public spending and debt applies only when a Democrat like Obama occupies the White House. With a Republican president, the party has always been glad to boost public spending and relax debt limits, as it was under Presidents Ronald Reagan and George W. Bush. Thus, Trump will be able to implement the Keynesian fiscal stimulus that Obama often proposed but was unable to deliver.
The resulting deficits may be described as “supply-side economics,” rather than Keynesian stimulus, but the effect will be the same: growth and inflation will both increase. As the US economy runs into the limits of full employment, additional growth will push inflation higher, but that bad news can wait until 2018 and beyond.
Second, sensible tax reforms, such as an amnesty for multinational companies that repatriate foreign profits, will finally become law. The Republicans’ hegemony will enable easy agreement on tax cuts financed mainly by higher public borrowing, rather than by facing down special-interest lobbies’ resistance to the elimination of exemptions and loopholes. These tax reforms will create even bigger budget deficits, which in turn will stimulate more growth and inflation.
A third boost to economic growth will come from deregulation. While battles over energy and environmental laws may dominate the headlines, the biggest economic impact will come from reversing bank regulations. As banks are encouraged to loosen lending standards, especially for middle-income households, an upswing in residential construction and debt-financed consumption should add further growth impetus. Excessive deregulation could cause a re-run of the 2007 financial crisis, but that, too, is a risk for 2018 and beyond.
Fourth, Trump could be good for geopolitical stability, at least in the short term. Trump’s preference for transactional realpolitik over Obama’s liberal interventionism should stabilize relations with Russia and China as the world is divided into spheres of influence. Trump could give Russia freer rein in Ukraine and Syria in exchange for restraint in Central Europe and the Baltics. China’s inevitable dominance in Asia could be accepted, provided it avoids outright wars with Japan, Taiwan, and other countries whose security is, in theory, guaranteed by treaties with the US. The Middle East is bound to remain a cauldron of geopolitical unrest; but, even here, Trump’s preference for local strongmen over “democracy promotion” could restore a degree of stability (at the cost of human rights).
Finally, Trump’s election could force Americans to recognize flaws in their own democracy, even as they abandon global “democracy promotion.” The fact that Trump lost the popular vote by more than two million could re-energize efforts to reform the Electoral College – efforts that already have resulted in the necessary legislation in states representing 61% of the required votes. And the overwhelming opposition to Trump in trend-setting states such as California and New York could encourage their voters to elect legislatures to counteract federal conservatism with progressive state laws on issues ranging from air quality and health care to abortion, treatment of immigrants, and gun control.
Now for the bad news. For the first time since the 1930s, the US has a president who views trade as a zero-sum game. Trump’s protectionist campaign rhetoric may not have been meant literally, but if he fails to deliver any of the trade curbs that he promised, Republicans will suffer a backlash from what is now their core voter constituency, voters in declining industries and regions.
US global leadership is therefore bound to shift away from free trade, globalization, and open markets. Nobody can predict the full effects of the biggest regime change in global economic management since the 1980s; but they will surely be negative for emerging economies and multinational companies, whose development models and business strategies have assumed free trade and open capital flows.
A second, more immediate, threat stems from enacting large tax cuts and boosting public spending in an economy already nearing full employment, which implies accelerating inflation, higher interest rates, or probably some combination of the two. Given the likelihood of additional trade protectionism and measures to remove immigrant workers, the increase in inflation and long-term interest rates could be quite dramatic. The impact on financial markets will be disruptive, regardless of whether the Fed aggressively tightens monetary policy to pre-empt rising prices or lets the economy “run hot” for a year or two, allowing inflation to accelerate.
With the US economy growing faster than expected and long-term interest rates rising, excessive strengthening of the dollar is a third major risk. Even though the dollar is already overvalued, it could move into a self-reinforcing upward spiral, as it did in the early 1980s and late 1990s, owing to dollar debts accumulated in emerging markets by governments and companies tempted by near-zero interest rates.
Fourth, the combination of a dollar squeeze and protectionism spells big trouble for developing countries, with the possible exception of some relatively closed economies such as Brazil, Russia, and India, whose development strategies are less reliant on free trade and foreign financing.
Finally, the most dangerous consequence of Trump’s victory may be its contagion effect on Europe. Just as Britain’s referendum proved uncannily predictive of Trump’s win, Trump looks like a leading indicator of populist upheavals in Europe, which could trigger another euro crisis and threaten the breakup of the European Union. The next anti-establishment victories, according to opinion polls, will be in Italy’s constitutional referendum and Austria’s presidential election. Globalists can only hope that the polls again turn out to be wrong – but in the opposite direction.