Donald Trump has won the presidency, despite losing the popular vote. The US has, as a result, chosen as its next president a man whose inexperience, character, temperament and knowledge appear to make him unsuited for this high office. The consequences of a Trump presidency will be many and various. But the economic ones will not be the least important. His administration might even reverse globalisation, destabilise the financial system, weaken US public finances and threaten trust in the dollar.
US-led globalisation is already fragile. Mr Trump seems likely to push it into its coffin. After his victory, the Trans- Pacific Partnership looks dead. That might leave an opening for a Beijing-led alternative: the Regional Comprehensive Economic Partnership. But TPP might be replaced by nothing. The proposed Transatlantic Trade and Investment Partnership was moribund and is now dead. Mr Trump has also suggested repeal or renegotiation of the North American Free Trade Agreement.
Above all, he has suggested imposition of high tariffs, especially on imports from China and Mexico, “to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the US tax-free”. They would almost certainly be contrary to World Trade Organisation rules. They would also create a risk of retaliation. The costs to the US, world trade and the credibility of the trading system might prove very high.
A second area of concern is financial regulation. Mr Trump has supported repeal of the 2010 Dodd-Frank Act, the regulatory response to the financial crisis. Many financial businesses hate it. Yet the question is whether it would be replaced by a more effective alternative or by a return to the pre-crisis free- for-all.
If the latter, the chances of another, possibly bigger, crisis would surely be enhanced. Yet on financial regulation, unlike on trade, Mr Trump’s populism might protect the US from the worst deregulatory instincts of congressional Republicans rather than the reverse.
Mr Trump also wants a big surge of spending on infrastructure and tax cuts. The former would be desirable, particularly if the projects were sensible. Indeed, it would be deeply ironic if Mr Trump carried out, with Republican support in Congress, precisely the sort of Keynesian fiscal stimulus congressional Republicans adamantly opposed when reasonably suggested by the administration of Barack Obama in 2009. Unfortunately, the timing would be far worse since the US economy of today is vastly closer to full employment than it was back then.
The tax proposals would shower huge benefits on already rich Americanssuch as Mr Trump.
According to the Tax Policy Center, his latest plan would raise the after-tax income of those in the middle fifth of the income distribution by $1,010 or 1.8 per cent. But the top 0.1 of the population would enjoy an average tax cut of nearly $1.1m, or more than 14 per cent of after-tax income. The cumulative increase in federal debt might be as much as 25 per cent of gross domestic product by 2026. Congressional Republicans might wish to offset the latter, at least partially, by slashing spending, including on social security and health. But Mr Trump opposes this.
Together, then, Mr Trump’s populism and the Republicans’ tax-cutting mania might open up large and permanent increases in fiscal deficits. This would then pose a big challenge for the US Federal Reserve. The obvious response would be to tighten monetary policy. Mr Trump has indicated he favours this. But he has also suggested the economy should grow at close to 4 per cent a year. That seems impossible given the slow growth of the labour force.
Yet when choosing a replacement for Janet Yellen, Fed chair, by 2018, Mr Trump might look for someone who would run monetary policy on the assumption that such growth was feasible. The result would be the classic populist blend of ultra-loose fiscal and monetary policies. The effects are likely to be rising inflation, higher long-term nominal interest rates and a weak dollar. That might mark a transformation in the global monetary regime. It could even generate the sort of environment seen in the 1970s, when President Richard Nixon and Arthur Burns, Fed chairman, were in charge.
What actually happens depends both on whether Mr Trump does as president what he stated as candidate, and on his interaction with Congress. Some suggest that wiser heads will contain his excesses. Little in his past behaviour suggests this is all that plausible. Make no mistake: Mr Trump’s triumph might destabilise the US and world economies.
