The Trump factor was waiting to happen
THE political shocks of 2016 are a manifestation of rising public discontent about prevailing economic and social conditions. Sandy McGregor provides some perspective. The victory of Donald Trump is a vote for change
The victory of Donald Trump in the US presidential election took the market by surprise. Market behaviour suggests that while Trump’s victory was unexpected by investors, it was not unwelcome, as US share prices and the dollar appreciated.
Trump won despite having insulted at one time or another almost every constituency in the US. Perhaps he won because Hillary Clinton offered nothing more than another four or even eight years of the same policies, which many judge to have failed. Trump offered change.
A common characteristic of any ruling political elite is an inability to contemplate, let alone implement, radical change. If you want change you must replace the entire incumbent leadership.
This is what happened in the UK and the US between 1979 and 1981 when Margaret Thatcher and Ronald Reagan came to power, espousing an economic philosophy totally different from the then-prevailing consensus. More dramatically, in 1989 communist regimes in Eastern Europe were overthrown by a popular uprising and replaced by market economies.
The election of Trump is following a trend we are seeing in other democracies. There is increasing pressure for change. Secular stagnation
In developed economies the root cause of contemporary popular discontent is “secular stagnation”. These countries have ageing populations and face rising costs of pensions and healthcare. Many countries have made commitments to pay retirement benefits which they cannot afford.
Economic growth requires increasing productivity. The dilemma faced by a redistributive state is that it needs strong economic growth to be able to afford to make welfare payments but, because of them, it is not going to achieve the growth it requires.
The legacy of the 2008 crisis was a burden of excessive debt. The response to the crisis of 2008
There was a three-pronged response in developed countries to the crisis of 2008 and subsequent secular stagnation: 1. Fiscal discipline is positive
Fiscal prudence has delivered positive results. The poster children of fiscal discipline are the Baltic States and Ireland, all of which aggressively balanced their budgets despite the severe contraction their economies suffered as a consequence. They accepted short-term hardship as a price for sustainable longer-term growth. Their economies rapidly adjusted.
The Conservative government in the UK cut its budget deficit aggressively, against the advice of the International Monetary Fund, and now is one of the better economic performers in Europe. Germany never had big deficits and its economy was only slightly damaged by the financial crisis. The countries which imposed fiscal discipline have been rewarded with better growth. 2. Monetary policy fails
In contrast to fiscal discipline, the great monetary experiment of zero interest rates and printing money has been a total failure. It has not created growth, because one cannot reverse the consequences of adverse demographics by manipulating interest rates.
Rather it has had adverse consequences on the way people save and invest, creating asset price bubbles and a misallocation of resources. 3. Increased regulation stifles growth
Greater regulation has also had a negative impact on growth.
In the US, Obamacare and the Dodd Frank Act – which regulates the financial sector – are administrative nightmares, imposing incredible complexity on business. The Basel accords to control international banking are an attempt to solve the 2008 crisis in retrospect. The consequences of regulation are higher costs to the consumer. Trump promises deregulation
The Obama administration was a major proponent of increasing regulation of business. Trump promises to reverse this trend.