Paul Krugman: Is there a Trump slump coming?
His administration may do the right thing for the wrong reasons
Job seekers in the US. Will Trump cause an economic slump?
Let’s be clear: Installing Donald Trump in the White House is an epic mistake. In the long run, its consequences may well be apocalyptic, if only because we have probably lost our last, best chance to rein in runaway climate change.
But will the extent of the disaster become apparent right away? It’s natural and, one must admit, tempting to predict a quick comeuppance – and I myself gave in to that temptation, briefly, on that horrible election night, suggesting that a global recession was imminent. But I quickly retracted that call. Trumpism will have dire effects, but they will take time to become manifest.
In fact, don’t be surprised if economic growth actually accelerates for a couple of years. Why am I, on reflection, relatively sanguine about the short-term effects of putting such a terrible man, with such a terrible team, in power?
Failure to take action on climateThe answer is a mix of general principles and the specifics of our current economic situation.
First, the general principles: There is always a disconnect between what is good for society, or even the economy, in the long run, and what is good for economic performance over the next few quarters. Failure to take action on climate may doom civilisation, but it’s not clear why it should depress next year’s consumer spending.
Or take the signature Trump issue of trade policy. A return to protectionism and trade wars would make the world economy poorer over time, and would in particular cripple poorer nations that desperately need open markets for their products. But predictions that Trumpist tariffs will cause a recession never made sense: Yes, we’ll export less, but we’ll also import less, and the overall effect on jobs will be more or less a wash.
Brexit will make Britain poorerWe’ve already had a sort of dress rehearsal for this disconnect in the case of Brexit, Britain’s vote to leave the European Union. Brexit will make Britain poorer in the long run; but widespread predictions that it would cause a recession were, as some of us pointed out at the time, not really based on careful economic thinking. And sure enough, the Brexit recession doesn’t seem to be happening.
Beyond these general principles, the specifics of our economic situation mean that for a time, at least, a Trump administration might actually end up doing the right thing for the wrong reasons.
Eight years ago, as the world was plunging into financial crisis, I argued that we’d entered an economic realm in which “virtue is vice, caution is risky, and prudence is folly”. More deficit spending
Specifically, we’d stumbled into a situation in which bigger deficits and higher inflation were good things, not bad. And we’re still in that situation – not as strongly as we were, but we could still very much use more deficit spending.
Many economists have known this all along. But they have been ignored, partly because much of the political establishment has been obsessed with the evils of debt, partly because Republicans have been against anything the Obama administration proposes.
Now, however, power has fallen into the hands of a man who definitely doesn’t suffer from an excess of either virtue or prudence. Trump isn’t proposing huge, budget-busting tax cuts for the wealthy and corporations because he understands macroeconomics. But those tax cuts would add $4.5 trillion to US debt over the next decade – about five times as much as the stimulus of the early Obama years.
True, handing out windfalls to rich people and companies that will probably sit on a lot of the money is a bad, low-bang-for-the-buck way to boost the economy, and I have my doubts about whether the promised surge in infrastructure spending will really happen. But an accidental, badly designed stimulus would still, in the short run, be better than no stimulus at all.
Trumpism will be a very badIn short, don’t expect an immediate Trump slump. Now, in the longer run Trumpism will be a very bad thing for the economy, in a couple of ways. For one thing, even if we don’t face a recession right now, stuff happens, and a lot depends on the effectiveness of the policy response.
Yet we’re about to see a major degradation in both the quality and the independence of public servants. If we face a new economic crisis – perhaps as a result of the dismantling of financial reform – it’s hard to think of people less prepared to deal with it.
And Trumpist policies will, in particular, hurt, not help, the American working class; eventually, promises to bring back the good old days – yes, to make America great again – will be revealed as the cruel joke they are. More on that in future columns.
But all of this will probably take time; the consequences of the new regime’s awfulness won’t be apparent right away. Opponents of that regime need to be prepared for the real possibility that good things will happen to bad people, at least for a while.