The upside of Trump

S&P 500 futures indexed to 100 on the day of the election.

S&P 500 futures indexed to 100 on the day of the election.

Before the American election, the Brookings Institution predicted that a Trump victory would wipe 10-15% off the value of the S&P 500 share index. This turned out to be wrong: in fact, share prices rose strongly, reversing an initial 5% crash to finish the day at an all-time high. And note that, unlike the FTSE rise after Brexit, this is not being driven by a collapsing currency.

What’s going on here? I, like Brookings and most other people, did not expect this. In fact I expected economic apocalypse if Trump won – akin at the very least to the Brexit crash, if not on a par with the bubble crash. Trump made economic and labour protectionism the central theme of his campaign, both of which we would normally expect to hurt the economy and hence the price of company shares.

As Jonathan Portes writes, in these two areas the President has a lot of power. If he does impose punitive tariffs on China and Mexico (leaving NAFTA) the impact could be two years of lost growth. A crackdown on illegal immigration, let alone deportations, would also be very economically costly. I recommend all of Jonathan's piece, which makes for sober reading.

But despite all this, people with skin in the game seem almost relieved about the result. One reason might be that, because the Republicans now control both houses of Congress and the presidency, and look likely to be able to choose another two Supreme Court justices during the next four years, policies that are normally off the table might actually now happen. The net effect of these, in economic terms, might be reasonably positive:

  1. Tax cuts on capital. At 35%, corporate tax rates in the US are very high by the standards of some countries – the UK’s rate is 20% and Ireland’s is just 12.5%. Trump has said he’d like to cut this to 15%; the tax plan favoured by Congressional Republicans would cut it to 20%. On top of this, a one-time tax rate of 10% on “offshored” profits might be on the cards – US firms are keeping over $2 trillion in cash overseas in expectation of a future tax cut, and the Republicans will be keen to bring that money on-shore for investment and profit returns to shareholders. Altogether, the GOP’s tax plan, according to the Tax Foundation, could boost GDP by 9.1% over the longer term. 
  2. Repealing Obamacare. Obamacare is enormously unpopular among Republicans, and according to economist Casey Mulligan acts as a tax on full-time work and earnings. Mulligan argues that these effects are likely to have reduced weekly employment per person by 3%, incentivising many employers and employees to shift to 29-hour weekly work schedules to avoid the rules affecting workers on at least 30 hours a week. In total he claims that this has led to a 2% fall in GDP. If the GOP repeals most or all of Obamacare, a growth boost seems likely. The US healthcare system would still be a mess, though.
  3. Deregulating finance. I imagine that at this point the average reader is about to faint, but there’s more. Trump has proposed a moratorium on effectively all new financial regulation and the dismantling of Dodd-Frank, the 22,000-page financial regulation bill passed after the 2008 crisis. That would include getting rid of the Financial Stability Oversight Council, whose job was to monitor and individually regulate the actions of systemically important banks. The post-2008 regulations have been enormously costly to banks (perhaps imposing $36 billion in costs), including smaller community banks, and if Matt Yglesias is right that Trump’s policies mean a return to 2006 levels of regulation then that’s good news for them. It’s probably not as bad news for everyone else as it sounds – bad regulation seems like the best explanation of why the financial crisis happened and adding more instead of reforming the existing rules may just compound the problem. 
  4. Privately-funded infrastructure spending. Trump has repeatedly promised ‘huge’ infrastructure investment. One problem (of many) with huge spending on infrastructure is that the US government already has a lot of debt. A senior advisor to Trump, Peter Navarro, has proposed using private financing to fund new infrastructure like roads and new oil pipelines, from which they could then draw revenues by charging user fees. This isn’t as free market as it sounds, though, since a large tax credit is being proposed to help firms finance these projects. But a step towards private infrastructure would be very welcome, and this may be a way of going ahead with the infrastructure projects that there is a business case for.
  5. Monetary easing. Unusually, substantial infrastructure spending may happen without being offset with tighter money by the Fed as we would normally expect, says Lars Christensen, because Janet Yellen appears to agree that fiscal stimulus is desirable right now. This would only be a good thing if it turns out that the Fed has kept money too tight over recent years, and is still a very bad way of easing monetary conditions compared to straightforward monetary policy, but markets may judge it to be better than nothing. (Lars stresses that New Keynesians do not favour this kind of 'massive infrastructure spending' policy, and it would be a mistake to tar them with that brush.)

To be clear, I am very disappointed that Trump won. His victory probably is, to some extent, a rejection of free trade and immigration, and anyone who believes in these things should be horrified. Trump himself is a horrible man: an erratic, racist misogynist who has courted and won the support of straight-up neo-Nazis. And his pro-Russian foreign policy is extremely worrying if Putin continues to aggress against the Baltic states. Perversely, these things may have been great strengths for him – proof that he was not part of the politically correct establishment.

But markets are suggesting that his victory may not be quite as bad as we had feared. It's possible that our hatred of Trump on a personal level led us to overestimate the long-term costs he'd impose on the world. Maybe the markets are wrong, maybe as we learn more they'll change their mind, but right now I feel much calmer about four years of Trump than I'd expected.