By Christopher A. Hartwell, President of CASE Management Board
Europe awoke to a stunning surprise Wednesday morning, just as most Americans were still awake — the election of Donald J. Trump to the presidency, discounted by the media and seemingly impossible in the estimation of most pollsters, was a reality. A political outsider who nonetheless appeared to hold social and economic positions closer to his rival Hillary Clinton than to his nominating party, Trump rode a wave of discontent that has been making its way around the world in the wake of the global financial crisis. Unfortunately, like the previous results of this wave crashing ashore, the election of Trump is sure to engender more uncertainty and less stability. This is because the problems that gave rise to this wave of discontent are likely to be exacerbated by the policies of President-elect Trump rather than ameliorated.
For proponents of free markets, individual liberty, and rule of law, the US Presidential election offered no good alternatives. From a Democratic candidate who had once been sane on trade but now disavowed work she herself had been involved in to a Republican who made extensive use of eminent domain (the removal of private property deemed to be in “the public interest”), the election appeared to be a battle amongst the left rather than a real choice of alternatives. With a US economy that was still fragile a full eight years after the nadir of the global financial crisis, the policies that were banded about seemed to promise more of the same.
The stunning election result has not changed this reality; in fact, it has only clarified this point, bringing with it a new dose of uncertainty to global markets. Indeed, this has been the defining feature of the wave of populism across the world, in that policies are far less predictable: Brexit stunned the literati in Europe, much as Trump’s victory has shaken the American and global landscape, and the full economic consequences of these electoral victories are not yet apparent. Markets thrive in an atmosphere of certainty or, at the very least, an absence of institutional volatility (as I show in a paper from 2014 for the Bank of Finland). The uncertainty that accompanies such major political changes will continue to roil markets until it can be seen if policies will continue on their damaging path since 2008, or if they will veer off and once again embrace a liberal approach. As I’ve already mentioned, the results are not encouraging.
From an institutional standpoint, there may be a silver lining to Trump’s victory, as it may be the tipping point against the centralization of power in the Presidency which America has enthusiastically applauded for 20 years or more. Obama was perhaps the most blatant example of an imperial President; one only need consider his pronouncements that Obamacare was “the law,” that Republicans should stop dissent because “[he] won,” that he would act if Congress wouldn’t, and other soundbites that portrayed him as a man of action. The rule of law, in the shape of checks and balances, suffered mightily under Obama but was supported by Democrats and the media. Now that that same untrammeled power has shifted to a President Trump, less likely to support initiatives that many Democrats would want, one can only hope that there is a revival of federalism and separation of powers in the Democratic party. With a constrained executive, economies tend to thrive, a point I make repeatedly in my latest book; if Trump’s Presidency leads to a bipartisan consensus that such constraints are necessary and beneficial, no matter WHO is in power, the global economy may yet benefit. In particular, policy uncertainty will have less of an effect if each policy has less power to affect the markets.