In a blog post last Friday I provided evidence that the extent
to which a US president is “pro-business” has very little to do with the
stock market’s performance during that president’s term in office. Regardless
of whether the associated policies are good or bad for the economy, the key
to the stock market’s performance over the course of a presidency is the
market’s position in its long-term valuation cycle. On this basis there’s a
high probability that the stock market’s return over the course of Trump’s
first — and likely only — 4-year term will be dismal, no matter what Trump
does. However, the policies of a president can have a big effect on the
performance of the economy.
It’s obviously early days for the Trump Administration, but the initial
signs are not positive. The main reason is that “regime uncertainty” is on
the rise.
“Regime uncertainty” is the name given to the tendency of private
investors to pull back from making long-term financial commitments due to
uncertainty about what the government will do next. According to an essay
by Robert Higgs, it was one of the factors that prolonged the Great
Depression of the 1930s. Government intervention is generally bad for the
economy, but it tends to be even worse when it happens in an ad hoc way.
As discussed in a Bloomberg article last month, the economically-depressing
effect of government by ad-hoc command was also addressed by Friedrich Hayek
in “The Road to Serfdom”. The problem, in a nutshell, is that if the
government’s actions are predictable then people are able to plan, but if
officials are regularly issuing commands it will become much harder for
people to have the kind of security that is a precondition for economic
development and growth.
The signs were not good when Trump started singling-out individual
companies for special treatment even before he took the oath of office and
got worse when Trump started talking about imposing a 20% tax on Mexican
imports as a way of forcing Mexico to pay for a wall between the two
countries. Does he really believe that forcing US consumers to pay 20% more
for products made in Mexico amounts to making Mexico pay for the wall?
And the signs recently became more worrisome due to the sudden imposition
of immigration and refugee bans. The effects of these bans on the US economy
will not be significant, but the concern is what they imply about the
decision-maker’s level of understanding and willingness to ‘shoot from the
hip’.
The immigration ban imposed on seven Muslim-majority countries is a
particular concern because of its blatant irrationality. Making America safe
from terrorism is the official justification for the action, but over at
least the past 40 years there has not been a single fatal terrorist attack
perpetrated on US soil by anyone from any of the banned countries. On the
other hand, Saudi Arabia is not covered by the ban despite having supplied 15
of the 19 terrorists directly involved in the 9/11 attacks and being well
known as a state sponsor of terrorist organisations. I am not suggesting that
the ban should be expanded to include other countries, I am questioning the
knowledge and logicalness of a political leader who would decide to do what
has just been done.
To top it all off, late last week Trump began threatening Iran for no good
reason via his preferred medium for conducting international diplomacy:
Twitter. What will he do next?
Taking a wider angle view, the protectionist agenda that the Trump
Administration seems determined to implement will have numerous adverse
consequences, most of which aren’t quantifiable at this time because it isn’t
known exactly what measures will be taken and how other governments will
react. All we know for sure is that Trump wrongly believes that international
trade is a win-lose scenario and that trade deficits are problems for
governments to actively reckon with.
Perhaps the initial warning signs are not indicative of what’s to come and
Team Trump will settle into a more logical, impartial and cool-headed
approach, but right now it looks like Donald Trump is going to make
uncertainty great again. If so, private investment will decline.
