Chris Johns: Our prosperity has much to fear from the goon squad

UK and US are engaged in a kind of cold civil war: that’s a recipe for economic stagnation

If Trump merely cuts taxes and boosts spending he risks enraging his base and clearing a path for an even worse goon

If Trump merely cuts taxes and boosts spending he risks enraging his base and clearing a path for an even worse goon

 

Any attempt to try and figure out what a Trump presidency will mean for the world economy immediately runs into the first rule of forecasting: don’t bother.

Financial markets are always and everywhere faced with a fundamental paradox: we can’t forecast the future, it’s futile to even try. But all markets need to have some kind of crystal ball – otherwise they wouldn’t be able to function at all.

The main reason why bonds, stocks and currencies gyrate in the way they do is that guesses about the future are inherently unstable.

Our obsession with the future means that we often neglect the past. A cursory acquaintance with economic history teaches something that always surprises those that come up against a few basic facts for the first time: prosperity is astonishingly recent and extremely fragile.

Growth

Economic growth, at least measured in terms of real income per world citizen, was non-existent from the first emergence of homo sapiens until the sudden explosion of the industrial revolution.

That’s right, for most of human history, economic growth is noticeable only by its absence. Yes, there were some pockets of prosperity but they were shortlived and usually snuffed out completely by conflict and population growth. On average, people in the middle of the 18th century were as well off as the cave dwellers of prehistory.

Not too long ago, countries like the US and Argentina were as wealthy as each other. What happened over the next century or so is instructive: prosperity is destroyed by the absence of certain key requirements.

Features of poor countries and countries that go from rich to poor are: weakness of the rule of law, property rights are haphazardly applied, contracts may or may not be enforced, where goons – from the government especially – can take all that you have in the wink of an eye.

Financial markets, in their infinite wisdom, moved from an instantaneous judgment that president Trump will bring an economic apocalypse to thinking that it may not be too bad after all.

A kind of Bush 3.0 and a dash of Reaganomics: lots of tax cuts, spending on bridges and roads alongside a bonfire of business-destroying red tape. All that other stuff about trade wars is simply too awful a vista to be contemplated, so markets chose to focus on the upside.

Populist

The speed and extent to which markets changed their minds is instructive: at the very least, we should expect it to happen again and again.

Future historians will look back and wonder how a populist president was elected on a platform of sticking it to the elites and how bank share prices subsequently soared.

No one group epitomises the hated 1 per cent more than the bankers. The promised dismantling of post-crisis regulations was greeted with a big party in bank boardrooms everywhere. The high earnings of the financial sector look to be guaranteed – and taxed at significantly lower rates.

Ironically, share prices of tech stocks have been hammered. I’d like to think that this is because people have realised that Trump would never have got within a million miles of the White House – or Brexit voted for – if it wasn’t for social media. But it’s got more to do with Trump’s stated antipathy for the tech moguls.

If markets are prepared, at the moment at least, to disregard the threats to world trade, small open economies should not: at the very least, we should hope, like equity markets, for the best – but we should also prepare for the worst. A tariff war will impoverish everyone, including – perhaps particularly – those people who voted for one.

Delusion

So-called rust belt states swung it for Trump. Disenchanted workers who once would have earned good money employed in the coal, steel, auto and other manufacturing industries have decided they want those jobs back. And the way to do that is to abandon free trade. All of this is simply mass delusion, one that also helped to frame the Brexit debate.

In the UK, car production is back, after decades of decline, to the peak last achieved in the early 1970s. The same number of cars are built, but with a roughly a quarter of the previously employed workforce.

Those are jobs not lost to China, Mexico or immigrants – the Trump-Brexit narrative – but to automation. A relative of mine has just retired from working on the assembly line of a General Motors auto factory in North America.

It produces a lot more cars than it did when he first started, 30 years ago, but the numbers employed have fallen from 16,000 to 1,000. The idea that tariffs are going to restore these jobs is pure fantasy.

I fear that we are in for trouble whether or not Trump attempts to deliver on his campaign promises. If he does, then we risk massive problems from the resulting collapse in world trade.

If he merely cuts taxes and boosts spending he risks enraging his base and clearing a path for an even worse goon next time around. The only time to become truly optimistic is not when equities soar but when we observe the political tide changing, when we can see reasons to believe populism has peaked.

Stagnation

History teaches us that countries that are run by demagogues who fail to respect the rule of law and the rest of the necessary supporting infrastructure of economic activity go into decline.

The UK and US are countries engaged in a kind of cold civil war. That’s a recipe for economic stagnation. It’s happened before, many times.

As is often the case, the only financial asset looking at all of this in a cool and dispassionate way is the bond market. And the prices of US bonds are collapsing.

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