Stock markets have reacted with glee to the news that Donald Trump will be America’s 47th president. Buoyed by hopes of deregulation and tax cuts, global investors pumped a record $149 billion into U.S. equity exchange-traded funds in November, undeterred by fears of policy instability and trade wars. Such euphoria has now pushed U.S. stocks to their highest level compared with global markets since records began over a century ago.
Many chief executives may be happy to trade the regulatory burden and antitrust policies of the Biden administration for the deregulatory plans of Mr. Trump and his sidekick, Elon Musk. But investors and business leaders should be cautious. Our research shows that while markets initially cheer the return of right-wing populists to office, such high hopes are almost never realized.
We find that when right-wing populists return to office, they consistently deliver subpar stock market performances and rising consumer prices. Such results echo those of other research, such as an American Economic Review study showing that populists like Mr. Trump leave countries with lower economic growth, greater national debt and inflation.
The first reason for this is simple. The short-term nature of economic gains under populists reflects the short-termism of their policies. Tariffs may benefit American manufacturers for a year or two by blocking foreign competition, but other countries have an incentive to respond in kind. The resulting damage comes at the expense of American consumers.
The same is true of unfunded tax cuts. They may boost consumer demand, jobs and profits for a while but can also create volatility, when investors start to react to a government’s ballooning deficits and wanton spending. In an ominous sign for the United States, Pimco, one of the world’s largest bond funds, has already said it will reduce its holdings of long-term U.S. government debt, even before Mr. Trump has taken office.
Beyond the shortsighted policies, the much bigger risk for America’s prosperity comes from the threat populists pose to institutions. As the Nobel Prize-winning economists Daron Acemoglu and James Robinson argue, ultimately it is good institutions more than any set of policies that form the basis of a country’s wealth. A populist may deliver pro-growth policies in the short term, as Prime Minister Viktor Orban did in Hungary with his flat tax and Prime Minister Narendra Modi did in India with deregulation. Yet once they undermine the systems that help businesses make long-term plans and ensure investor confidence — such as independent courts, central banks and regulators — these gains eventually peter out.
It is not hard to imagine how a second Trump term will have that result.
Markets are used to thinking in terms of more or less regulation. They should instead consider impersonal versus retributive regulation. Under President Biden, regulations may have been heavy, but the institutions were neutral. Peter Thiel, a Trump supporter, won a large contract with the U.S. Food and Drug Administration; Elon Musk, who then appeared to support Mr. Biden, failed to land a key SpaceX subsidy.
Populists, on the other hand, tend to use government powers to reward allies and punish political rivals, allowing poorly managed companies to survive at the expense of more dynamic, yet less-favored rivals. During his first term, for example, Mr. Trump reportedly tried to stop the AT&T-Time Warner merger out of his dislike for CNN, one of Time Warner’s properties. In a second term, he will also have the power to nominate a new Federal Reserve chair, giving him the ability to unsettle credit markets.
Are markets wrong to be enthusiastic about the prospects for U.S. businesses and the economy under a second Trump administration? The records of other “pro-business” populists — such as Silvio Berlusconi in Italy, Jair Bolsonaro in Brazil and Recep Tayyip Erdogan in Turkey — suggest as much. Each jettisoned his coterie of trusted economists and business advisers as soon as it was politically expedient. There is little reason to think Trump 2.0 will be any different.
That is simply the nature of populists. Even those who purport to love business have no inherent commitment to market reform. At their core is not an idea, but rather a governing strategy based upon polarizing society to consolidate the support of an intensely loyal base. Claiming that no institution should block the “will of the people,” they undermine checks and balances, and centralize power in themselves.
That style means that when populists make mistakes or the economy overheats because of misguided policies, they double down. First, they fire the civil servants and appointed officials who might raise the alarm. They also politicize agencies that collect and distribute official government data, so that the public does not hear inconvenient facts. Mr. Trump’s first term included various attempts to meddle with data at the Census Bureau, the National Park Service and the Federal Emergency Management Agency, all in an effort to pressure them to present the facts he wanted. Other populists do the same; in India, Mr. Modi was accused of withholding unfavorable unemployment and consumer spending figures, and in Turkey, Mr. Erdogan attacked the source of independent inflation numbers.
This time around the president-elect will be in a much better position to centralize power and remove the constraints on his office. In his first term, Mr. Trump fired his attorney general and then attempted to oust an acting attorney general, seeking someone willing to do his bidding; he did the same through a rapid series of firings at the Department of Defense. With his party in power in Congress, he can more easily make such changes in more agencies. When a bad decision catches his fancy, there will be even fewer means to stop it. This is a general danger under populism, with a clear risk of policy surprises in the years ahead.
The election has left markets in a moment of euphoria. That sentiment is about to hit the realities of populist governance a second time around.
The post What a Trump Presidency Means for U.S. Business appeared first on New York Times.
