The markets like the news coming out of the United States, stock markets are up, not because of Joe Biden’s win rather they like the idea of a divided Congress, but they are wrong.
Markets celebrate divided Congress but they’ve got it wrong
I am often cynical about the difference politicians make, especially concerning the economy. Yes, up to Covid, the US economy was booming under Trump. But look at the data and it becomes apparent that we merely saw the continuation of a trend that began under Obama. But I don’t give credit to Obama either. Economies do tend to grow exceptionally well after a recession, and the 2008 recession was exceptionally deep, ergo we saw sustained growth.
It will be the same with Covid. Of course, the virus has hit the economy, and of course, we will see rapid growth post-virus.
But actually, you can go deeper than that. I don’t think Trumponomics is actually about Trump; instead, it is a response to conditions. I would make a similar argument about Thatcherism or Reaganomics. Never forget, for example, that the Labour leader before Mrs Thatcher, James Callaghan, whom my father used to describe as the best Tory Prime Minister the Labour Party had ever had, used to advocate policies that had a real Thatcherite tinge, before anyone had heard of Thatcherism.
Trumponomics is a symptom
The US election of 2020 saw a massive turnout. It seems people either love or hate Trump, and they turned out in huge numbers either to try and get rid of him or to try and keep him.
But I believe Donald Trump is a symptom. In this good explanation, Ian Bremmer of the political advisory group Eurasia Group, argues there are four reasons why Trump and his policies are so popular. They are:
- Many working and middle-class workers don’t feel they have done so well in recent years — and they have a point, median wages have seen weak growth as well paid jobs in manufacturing being replaced by less well-paid jobs in warehouses and the gig economy.
- Immigration — demographic shifts, including ageing of populations in many parts of the world, is leading to a rise in immigration, which many people find alarming. To illustrate his point, Bremmer cites Japan, which does not suffer from the same social unrest seen elsewhere, has economic challenges, but low immigration.
- Wars — in which the US has engaged in expensive wars without appreciating the sacrifices of those who fought them. He also says that the sons and daughters of the political elite don’t tend to fight in these wars.
- Technology creating rapid change, and echo chambers in which we only tend to hear opinion that we already agree with, driving people apart.
Speaking as someone who is pro-immigration, multiculturalism and diversity, I am uncomfortable with that second point, but that doesn’t make it not true.
What is clear is that there is massive division, not just in the US but across the world, including the UK.
It is dangerous. Studies from history show that civil war and revolutions often follow a period which at first saw rising wages and then declining wages — this describes France, Russia and the US before their revolutions.
Civil war follows periods of division — in the UK, for example, the enclosures movement disrupted traditional ways of life and created winners — including a new entrepreneurial class — and losers. The US saw massive divisions before its civil war.
Another common factor in revolutions and civil war was a new medium for spreading new ideas. The printing press spread new religous ideas – indeed, Martin Luther described the printing press as a gift from God. It helped sow the conditions for the English Civil War and the French Revolution. Since the Russian Revolution was partly inspired by the French Revolution, the printing press encouraged this revolution too.
Today, as I argue in my new book, Living in the Age of the Jerk, we see a dangerous mix of conditions. And I worry about the implications.
Yet, I have been optimistic about the economy post-Covid. I am confident for two main reasons:
- The resulting acceleration towards digital and creative destruction caused by the virus will create an economy that will see rapid productivity growth.
- I see the virus creating the kind of pressures that will lead to a massive Keynesian stimulus. As the experience of World War Two shows, massive government spending can create rapid economic growth without kicking off inflation, providing the conditions are right. But we rarely get political support for the required level of stimulus in peacetime. The Covid crisis may re-create conditions that will support such stimulus.
Joe Biden wants to spend money. He wants to spend $300billion a year on investment into renewables and a total of $2trillion on US roads, bridges, airports and seaports. He also wants to increase corporate taxes.
Berenberg Bank calls the Biden plans the biggest public spending programme in US post-war history.
The result will be a massive jump in US debt.
Markets fret and celebrate
The markets don’t like the idea of massive government debt and higher taxes on profits. So why do they celebrate? They celebrate because it looks as if US Senate will favour the Republicans — although we won’t know for sure until January when there will be runoffs in the State of Georgia.
That’s why the markets like it. They think that Senate will clip Biden’s wings turning him into a lame-duck president.
But they are wrong. The stimulus programme is affordable partly because interest rates are so low. And, as I argued here the other day, are likely to stay low for the foreseeable future.
And high government debts are affordable as long as economic growth is greater than the interest on those debts. For the reasons explained above, I think that growth will easily exceed this interest.
But I fear for what might happen if Biden does not enact his plan.
The US has to be brought closer together. Indeed, I would say humanity has to be brought closer together.
If Congress gets in the way, and we have four years of no change, the political reaction in four years won’t be gentle. Divisions will grow. The consequences will not be good.
Yet, it is the improving prospects of these precise conditions that are making the markets so ebullient. The markets are wrong.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.