Harper: How The Trump Presidency Will Affect The U.S. Economy

Nov 10, 2016

 

In this week’s Economic Report, Dr. Rick Harper discusses what the election of Donald Trump means for the economic markets, the Federal Reserve and international trade.

With Hillary Clinton favored to win the 2016 presidential election, many were caught off guard when Trump emerged victorious.

“It defied expectations, and the market showed that,” Harper said. “What we saw Tuesday night and stretching into early Wednesday was a very negative reaction from the stock market. Also, we saw some very dramatic changes – the Mexican peso went down eight percent reflecting the rhetoric of the campaign.”

As the day progressed, however, the markets began to right themselves.

“Stock markets sorted themselves out and hit new highs -- and realize -- that’s all happened just this week,” Harper said. “I think it is a period of adapting to changed expectations.”
 

Credit Michael Spooneybarger/ CREO

Harper said the short-term is not where attention should be focused.

“We really ought to be looking at the first 100 days, that traditional time during a presidency when presidents are in that honeymoon period and can do what they want,” Harper said.

Trump highlighted several key issues that he wants to address in those first 100 days.

“Some of the big campaign issues that will be relatively easy to implement would be thing such as dismantling the financial infrastructure that supports the Affordable Care Act,” Harper said. “Given that, anything which is strictly financial in nature, which does not create new statutory language but simply adjusts the appropriations, can be implemented and be immune from the filibuster which would otherwise require 60 senators, which the Republicans will not have under the new majority. They can get a simple majority to pass changes in the financial structure of Obamacare that will effectively nullify it.”

Harper also expects that Trump will begin to make changes through executive order as well.

“I would look for President Trump to nullify some of President Obama’s executive orders, particularly things having to do with immigration because that was a central plank of the campaign rhetoric,” Harper said. “I’d expect to see Obamacare and immigration be the two things to implement immediately and to the extent that trade legislation and trade agreements are not codified into statute, he will be able to change the negotiating stance of the U.S. on new trade deals such as the Trans-Pacific Partnership and clearly on international negotiations that have great importance strategically and militarily, such as Iran and the nuclear deal that was recently tentatively reached.”

Some believe that the Federal Reserve, which was expected to raise interest rates by the end of the year, may also be affected by the new administration, but Harper is skeptical.

“There has been speculation in the financial press that the Fed would take this as a cautionary sign and that the Fed would move to leave rates lower longer, although with rates at zero for eight years now, it’s hard to imagine what that means,” Harper said. “I don’t particularly buy into that concept. I think the underlying basics of the economy are fairly healthy.”

Harper cites full employment and low numbers on jobless benefit claims as two good indicators that the U.S. economy is strong.

“I wouldn’t expect the Fed to respond in a shocked way to the election,” Harper said. “We’re still several weeks off from their meeting in December, and I’d expect to see the Fed raise rates given signs that the economy is back at normal levels of activity. There’s still some shortfall, however- that’s the consequence of a balance sheet recession – but I am still expecting the Fed to raise rates.”

New York Times columnist and Nobel Laureate economist Paul Krugman published an opinion piece this week on what he believes will be the economic fallout of the Trump victory. Krugman is recognized as a pioneer in the field of trade and economic geography and believes that from the Reagan era onward, the U.S. economy has favored the elite.

“(Krugman) is rather horrified by the prospect of the Trump presidency and said that it will damage us in ways that we won’t recover from,” Harper said. “Given his background as a trade economist, his position is that businesses do well when they can contract with whoever provides them with the best deal, whether domestic or international.”

Krugman said that Trump’s campaign promises to significantly increase trade tariffs - as much as 50 percent on goods from Mexico and China – will create increased costs for both businesses and consumers.

“It’s simply a restriction on people’s ability to buy that blouse or shirt cheaper at T.J. Maxx manufactured abroad. It’s a restriction on businesses’ ability to source wherever they feel is most efficient,” Harper said. “And by diminishing the access to low-cost goods and services in the U.S. economy, it raises both the prospect of inflation and making Americans worse off economically because businesses can no longer be efficient in sourcing where they want and because consumers won’t have access to a worldwide market in goods and services.”

Harper said that Krugman’s assertion is hard to argue with.

“Krugman points out correctly, I think, that the real problem is that while capitalism is great at creating efficient outcomes, capitalism is not good at creating equity,” he said. “So much of the concern that President-Elect Trump capitalized on was certainly about the diminished economic prospect for the great American middle class. However, Krugman would point out that Trump was barking up the wrong tree blaming people of different nationalities, even different ethnicities for these problems when really the problem is the onward march of technology, of automation, of low cost shipping, and none of those things were even mentioned.”

The reality is that there are two spheres at play – the campaign promises and realistic policy.

“President-Elect Trump, clearly a smart guy, hears from advisors that there’s a distinction between what you say in public to the masses and then the policies you’ll have to undertake as president. It’s going to be fascinating to see how he squares that circle.”

Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at rharper@uwf.com. CREO staff writer Mike Ensley contributed to this report. He can be reached at kensley@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.