For those of us who were wrong
about the US 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 10 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 above the 2.2% average annual rate during 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 stabilise 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 recognise flaws in
their own democracy, even as they abandon global “democracy promotion.”
The fact that Trump lost the popular vote by more than 2 million could re-energise 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, globalisation, 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.
Source: The Guardian
