The stock market, which gave Trump’s election a rousing reception in November, fell sharply on Monday, and then again on Tuesday. The wishful thinking that Trump was a good manager may be coming up against the harsh truth: He is not a manager, but rather a promoter.
As a campaigner, Trump could get away with sounding sour notes and making unsubstantiated claims. But as a president, his careless and historically jarring pronouncements have consequences. He hasn’t seemed to gather managers around him who are good, or if he has, he obviously doesn’t listen to them. Not even two weeks into his presidency, he is making enemies of needed Republican allies. And his unfavorable ratings have hovered around 50 percent, even as one survey shows nearly half of Americans support his most egregious policy so far, the Muslim ban.
As a campaigner, Trump could get away with sounding sour notes and making unsubstantiated claims. But as a president, his careless and historically jarring pronouncements have consequences.
Noticeably, the business community seems to be alarmed at Trump’s recklessness, with many companies expressing outrage at Trump’s Muslim ban. Starbucks, for example, said it would hire 10,000 refugees. The CEO of American Airlines called the order divisive. Lloyd Blankfein, the chief of Goldman Sachs, criticized the ban in a message to his entire firm. Media darling Uber has said the ban is “against everything Uber stands for.” High technology companies were widely upset.
Even to those who like what Trump wants to do with the economy, his blunder on implementing immigration policy (not to mention the odd dance about a tariff on Mexican goods) raises doubts about his sheer competence, and how his actions may alienate his Republican and conservative Democratic allies alike. If he can’t manage the immigrant issue, how can he possibly manage the development of a health care policy that satisfactorily replaces the Affordable Care Act, or the casually announced new nuclear weapons policy? More Republican friction, and he may not be able to get his tax cuts, regulatory reductions, and anything like his bold infrastructure plan passed. These policies are what drove stocks up since his election; a declining market may be indicating a dwindling of faith in his abilities.
Surprisingly, some of Trump’s economic thinking brought hope. The Republican superstitions about budget deficits, which so hampered Barack Obama, seemed to be laid aside, as Republican lawmakers expressed support for major infrastructure spending. Some Keynesian deficit spending was in order, and propelled the market higher for the time being, because it could have pushed the growth of the Gross Domestic Product up a point or more for a couple of years. While mainstream economists argue that economy is running about as hot as it can get, Trump and some progressives (of which I am one) believe there is room to grow. Investors also seemed to think so.
But Trump’s exaggerated promises of 4 percent growth for years to come are extreme. Reagan produced such rates of growth for a while, but his expansion began in the depths of severe recession. Trump will enjoy no such natural bounce-back. Even 3 percent growth a year would be victory, but not enough to keep the deficit within levels that make traditional Republicans comfortable, no matter how much they rally around Trump for the moment. With the travel ban opening the spigot of Republican criticism, they are more likely to press for their small government, fiscal austerity point of view.
While the stock market can quickly weigh in on a president’s actions, it is not good at looking further down the road. The real concern for the future of the economy is that, as federal budget deficits rise in order to pay for tax cuts, Trump and the Republicans in Congress are likely to deal a major blow to the social safety net of the post-World War II era. Of course, in true starve-the-beat fashion, that’s what Republicans (including Vice President Pence) want, but they as usual do not understand the serious implications for prosperity, not to mention mere decency. Growth itself is not enough to sustain prosperity for all. Such harsh policies will mean stagnating wages over time, and will lead to rising income inequality. Reagan himself went some way in this direction, sharply cutting social programs, and contributing to the rise in income inequality that began in his first term.
Evidence is strong that a free-market economy alone will not reduce inequality adequately. Market income inequality in the United States—which is measured before social policies such as Social Security, the earned income tax credit, and food stamps are counted—is by and large no worse than in Europe. But most European countries spend far more on children (including specifically poor children), families, and preschool and college education than the United States does, and these policies reduce both inequality and poverty in these nations below U.S. levels. Initially, the Trump economy will produce more jobs, as growth is stimulated for a while; but over time, the prospects for most Americans will be reduced opportunity, stifled expectations, stagnating wages, and more reason to be angry.
Evidence is strong that a free-market economy alone will not reduce inequality adequately.
Investment analysts don’t usually understand how healthy a more equal distribution of income is for the long-term growth of the economy. Strong and rising consumption is the lifeblood of growth, in turn stimulating investment.
There is one constructive way to make what economists call the pre-distribution economy—before government social policies—work more fairly: raise marginal tax rates on the incomes of the well-off. Thomas Piketty and Emmanuel Saez argue this will reduce wasted investment on financial speculation and other nonproductive uses of money, and encourage investments in industry that produce good middle-class jobs.
But higher income taxes are clearly not in the cards. I have thought the stock market could keep floating higher for a while based on more Keynesian stimulus from Trump tax cuts. Stock prices as usual will move up and down, but Trump’s newly evident extremism and growing friction with Congress has made a sustained rise less likely. Having made more enemies of his allies, the one path to his ideological commitment to tax cuts and deregulation will be to compromise in favor of harsh cuts in social policy. I doubt Social Security and Medicare will be excluded, with Trump likely to abandon his campaign promise not to cut benefits. Moreover, deregulation of finance will only stoke the sort of speculation that led to the last market crash, and could well lead to the next one.
The inevitable increase in inequality under Trump will begin to undermine the economy—and the stock market. As income for the rich gushes upward, there will be less overall consumer demand, as the middle- and lower-income Americans earn a smaller and smaller share of GDP. Evidence also suggests that growing inequality leads to poorer health outcomes, and indeed less happiness for society. And children in low-income families will not receive the social mobility and opportunity for prosperity that a great nation like ours should offer.
The light at the end of the tunnel may be a newly energized electorate. Such a reawakening of the electorate will not only improve the possibilities for decency and dignity in America, but for prosperity itself. New social policies are needed to raise wages for all, maintain people’s health, and get them better educations. Such policies would include apprenticeships, wage subsidies, generous family leave, child poverty support, free college, job creation for teenagers and young adults, and a progressive trade policy. They also require defending the social policies already won. Like so many of us, this commentator anguishes over the ethically vacuous policies of a president who now exhibits no sense of the spiritual and democratic meaning of immigration to America—and its benefits to the economy. Moral bankruptcy may undermine the economy more than anything else. Maybe even the stock market is reacting to fear of just this.