A market upswing signals the president-elect may be good for the economy after all — but mostly for the already wealthy.
- By David FrancisDavid Francis is a senior reporter for Foreign Policy, where he covers international finance. An award-winning journalist, David has reported from all over Europe, Nigeria, Kenya, Mexico, and Afghanistan on terrorism, national security, the geopolitics of energy, global economics, and the European financial crisis. His work has been published in outlets including the Christian Science Monitor, the Financial Times Deutschland, Slate, and SportsIllustrated.com.
Before the U.S. presidential election, economists warned Donald Trump’s White House could, like his businesses, be a financial train wreck. Research firm Oxford Economics said a Trump administration could cost the U.S. economy as much as $1 trillion over the next five years. Yet on Monday, the Dow Jones industrial average, the S&P 500, and the NASDAQ all hit record highs, as Wall Street cheers his incoming presidency.
Navigating the gap between apocalyptic fears and a giddy early reception will be one of the biggest responsibilities of Trump’s treasury secretary, who could be announced as early as this week. Right now, the main contender for the job is Steven Mnuchin, a former Goldman Sachs official who served as the businessman’s finance chief during the 2016 campaign.
Familiarity with Wall Street, for whomever he eventually taps, will at least make it easier to stick the landing. Since Trump’s Nov. 8 election upset against Democrat Hillary Clinton, markets have blithely ignored the risks a Trump administration might bring, such as economic uncertainty, chaos in the presidential transition, and vows to throw up protectionist trade barriers.
And that will be cause for concern down the road for many of Trump’s white working-class voters. If enacted, Trump’s policies could spark tit-for-tat trade wars, raise prices for consumers, shrink markets for U.S. exports, and make his long-promised manufacturing recovery a chimera. Marcus Noland of the Peterson Institute for International Economics figures Trumponomics could cost the economy 4.8 million mostly low-paying jobs by 2019.
Labor unions like the AFL-CIO have long warned of the dangers of a Trump presidency to its working-class members; it endorsed Clinton. So did the American Federation of State, County, and Municipal Employees; the Service Employees International Union; and the National Education Association.
But many union voters ignored their national chapters, particularly in the Rust Belt. Election data show that Trump had the best showing among union workers for a Republican since Ronald Reagan in 1984.
Despite Trump’s threat to working Americans, Wall Street remains dazzled by the allure of business-friendly policies like tax cuts and deregulation that have long been at the top of the Republican wish list — and that now seem closer to realization than they have in years.
That’s partly because most capital cares more about making healthy returns on its investment than winning merit badges. Big oil companies invest in Russia and Nigeria, despite widespread corruption and political risk in both countries. Apple still makes its products in China, despite rampant human rights abuses there. A smidgen of controversial politics in Trump’s America, or a dash of nepotism, is not likely to daunt that sort of globe-trotter.
“Foreign firms are very likely to value return on equity and return on investment above shared political values,” Peter Kenny, a senior market strategist at Global Markets Advisory Group, told Foreign Policy.
Wall Street’s enthusiasm isn’t entirely displaced. America is already the world’s top destination for foreign investment. And with China’s economy slowing down, dragging many emerging markets with it, and with Europe tearing itself to pieces between Brexit and populism, there are dwindling alternative places for companies to invest.
And for many companies — especially in finance, energy, and health care — Republican control of the White House and Congress promises to deliver long-proposed tax cuts and deregulation. Trump has pledged to shelve Dodd-Frank regulations, which were meant to corral some financial sector abuses in the wreckage of the 2008-2009 fiscal crisis. Trump wants to nix consumer protections, cut taxes on the rich, and roll back environmental protections and health insurance reforms.
Compared with Europe, said Mujtaba Rahman, the head of Eurasia Group’s European practice, “the United States may actually look like a more attractive investment destination, at least in relative terms.”
That’s in part because those aren’t just Trump policy proposals. They are shared, in many cases, by the Republican House and especially Speaker Paul Ryan (R-Wis.), who has long dreamed of cutting taxes, privatizing Medicaid, eliminating Obamacare, boosting infrastructure, and increasing defense spending.
International companies with U.S. operations are especially jazzed. The GOP embrace of deregulation and tax reform would likely jump-start even greater foreign investment, says Nancy McLernon, the president of the Organization for International Investment, which represents the U.S. subsidiaries of global companies like Alibaba Group and Volkswagen. JPMorgan Chase, an investment bank, dryly told its clients two days after the election that Trump’s win and the Republican sweep of Congress are “pro-growth for equities.”
What’s much less likely is that the sweep will be pro-growth for the working-class supporters who fueled Trump’s rise to the presidency. Trump’s plans to raise tariffs and scrap trade deals, from the two-decade-old North American Free Trade Agreement to the now moribund Trans-Pacific Partnership (TPP), could spark a global trade war. Last week, Chinese state-run media warned that Trump’s threat to slap 45 percent tariffs on Chinese goods would trigger immediate “countermeasures” and a “tit-for-tat approach.” That would act as an effective pay cut for every American worker.
Ripping up the free-trade agenda underlying globalization could make it harder to protect the U.S. jobs that Trump vowed to save. NAFTA, for instance, currently gives U.S. exporters privileged access to huge markets in South America, not just Mexico, notes Kurt Bauer, the head of Wisconsin Manufacturers and Commerce. Tearing up TPP will make it that much harder for U.S. manufacturers to sell goods in the world’s fastest-growing economic area.
And resuscitating other blue-collar jobs that Trump promised to conjure up will be no easier. Trump won huge in “coal country” — West Virginia, Pennsylvania, southwestern Virginia — on a pledge to roll back President Barack Obama’s so-called “war on coal.” But market forces, especially cheap natural gas and renewable energy, are killing coal, not regulations from Washington. And Trump has vowed to throw his support behind U.S. oil and gas drillers, which will only make life harder for beleaguered coal companies. China’s slowdown has also lowered demand for premium U.S. coal exports, further slamming Appalachia.
Likewise, steel jobs in western Pennsylvania — a key state that Trump won in a dramatic upset thanks to working-class support — are not coming back anytime soon regardless of who is in the White House. It’s cheaper to produce overseas, especially in China, where there is about 300 million tonnes of excess capacity.
Yet Trump’s anti-trade, anti-globalization message resonated with the working class, even if his policies could hurt them down the line.
“When you look at the white working-class vote, a lot of people are voting in terms of social capital, not actual capital,” said Tim Francisco, a professor and the director of the Center for Working-Class Studies at Youngstown State University in Ohio. “There’s a sense the white working class has been disenfranchised.”
Trump’s presidency will be “a damaging one for jobless and low-wage American voters,” wrote Bill Gross, one of the biggest names in finance and portfolio manager at Janus Capital Group, in his monthly note to clients last week.
“I write in amazed, almost amused bewilderment at what American voters have done to themselves.”
Photo credit: DREW ANGERER/Getty Images