Yes, the markets are looking good (for now). But subsidized deal-making and tax cuts for the rich are the surest sign of a bubble.
- By Pedro Nicolaci da CostaPedro Nicolaci da Costa is editorial fellow at the Peterson Institute for International Economics. He spent over a decade covering the Federal Reserve, first at Reuters then The Wall Street Journal.
Judging from Wall Street’s recent record-breaking streak, America chose the right candidate. Since Donald Trump was elected president of the United States, the Dow Jones industrial average has set all-time highs 11 times.
This was not supposed to happen, for two key reasons. First off, markets like stability, and Trump — as the dark-horse candidate — was seen as unlikely to win the election, so a Hillary Clinton win was already priced in, by and large. So much for the pollsters. Second, because of this laggard candidate status, a potential Trump victory was seen as a potentially hugely upsetting event for global stocks due to the uncertainty his presidency would herald. So much for the stock pickers.
But, like most things Trump, this rally will prove a mirage — and sooner rather than later. Here’s why: Trump’s brash, radical, and quasi-dictatorial style is already unsettling global political and economic affairs in a way that will weigh on the recent market calm once it all registers more concretely in the economic data. Before even taking office, the president-elect has antagonized China on both security and trade, dragged the stocks of several major companies lower with off-the-cuff comments, and dismissed findings from the CIA indicating that Russian hackers actively favored Trump during the campaign. And he hasn’t even started imposing tariffs on U.S. companies manufacturing overseas.
Why have equity markets rallied so far? They seem to be focused on Trump’s promises while ignoring his threats, as Reuters’s James Saft aptly puts it. But Trump has also shown he’s not likely to back away from his anti-trade agenda, which carries a high risk of retaliation from major trading partners like China and Mexico, and could devolve into a damaging all-out trade war. He has so far appointed an economic team that also very much points in this direction.
Wall Street’s excitement over tax cuts is not tough to grasp — the rich stand to benefit overwhelmingly from his plans, if they are approved by the Republican-controlled Congress. However, salivation over the prospect of a broader fiscal stimulus impact from Trump’s policy measures is likely misguided. If anything, the last two decades of economic policy have reaffirmed the failure of the sort of trickle-down economics that Trump and his advisors are espousing.
Studies from both sides of the political spectrum have shown, in a manner logical to most dispassionate observers, that fiscal spending aimed at the poor is most likely to have a large short-run impact. That’s another way of saying the poor and middle class are more prone to spend newly available funds than the very rich, who have a greater propensity — and, these days, the luxury — to save.
With the U.S. economy facing pervasive issues like low labor force participation and high long-term unemployment, the kind of spending and tax cuts undertaken by the government matter now more than ever. So far, Trump’s outlined proposals sound more like private sector giveaways of the sort that underpinned his deal with air-conditioner manufacturer Carrier in Indiana than any deeper program able to address the steep job losses experienced in many parts of the country that helped Trump win the election.
According to Olivier Blanchard, the former chief economist at the International Monetary Fund, the kinds of public-private partnerships touted by the Trump program may not be the right approach. “By aiming at projects that can at least partly pay for themselves financially, they may generate the wrong kind of public investment,” says Blanchard. “Maintenance and the most useful public projects may have high social returns, but they are likely to have low financial returns.”
There is also plenty of ground for concern about the president-elect’s deal-making approach to politics, which may have served him well in negotiating casino contracts in Atlantic City but might not jive with Chinese notions of geopolitics. His deal with Carrier to supposedly keep some jobs from going to Mexico — no one is privy to the company’s internal decision-making — with a state government-funded $7 million tax cut was an example of just how poorly Trump’s microeconomic vision applies to macroeconomic scenarios. To most observers, his move simply invited more pleas for subsidies from other companies and commensurate threats about the possibility of offshoring jobs.
Then there’s the less tangible but potentially more important social impact of an ideology that contains strong elements of anti-immigrant, anti-Muslim, and anti-Semitic racism, which is not only anathema to American history but also widely seen as detrimental to economic growth. Social tensions in the United States are now arguably at their highest levels since the civil rights era, hardly the sort of environment in which consumer spending and business investment flourish.
True, corporate profits in select, protected sectors that benefit from Trump’s largesse, like oil and steel, may get goosed for a couple of quarters, which can help explain the short-run spike in stocks. An index of homebuilder sentiment surged in December as the industry figured a Trump presidency would, by definition, be good for real estate. Also true: Rich people will get tax cuts, and they own a lot of stock. So that’s good for the Dow, for now. But good luck to the investor trying to time the jump from that runaway train.
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