The markets delivered their opinion on Donald Trump's probable victory in the U.S. presidential race hours before Hillary Clinton admitted defeat, and it wasn't pretty. The numbers said the American and global economies were about to enter the House of Pain and stay there.
But shortly before Mr. Trump delivered his victory speech and promised economic stimulation measures, the markets started to recover. A few hours later, the markets, amazingly, won back all their lost ground and then some. In London, the FTSE-100 index closed up 1 per cent. The S&P 500 rose, too, and the euro gave up its early safe-haven gains against the dollar.
It could be that Mr. Trump's presidency might not be an economic disaster after all, even if it is, as The New Yorker magazine said on Wednesday, "a tragedy for the Constitution, and a triumph for the forces, at home and abroad, of nativism, authoritarianism, misogyny, and racism."
Mr. Trump's populist economic policies are unfocused and lacking in detail. He has zero experience as a politician and could well encounter fierce resistance to some of his legislative initiatives, even though the Republicans retained control of the House of Representatives and the Senate.
Broadly speaking, he wants America to retreat from globalization and somehow revive the U.S. rust belt, which has been a marvel of deindustrialization for close to half a century. He wants to erect a wall along the Mexico-United States border and punish U.S. companies, such as car makers, that shift production to low-wage Mexico. The alphabet soup of transatlantic and transpacific trade deals on the drawing board – TTIP and TPP – seem doomed, though Ms. Clinton had little enthusiasm for them, either.
In other words, Fortress America might be coming. Exporting countries, beware. No wonder the currencies of emerging-market countries, notably Mexico, which delivers 80 per cent of its exports to the United States, went into something close to free fall on Wednesday morning.
On the other hand, the president-elect has also vowed to increase infrastructure spending, cut corporate and personal taxes and reform the insanely complex U.S. tax code, which encourages rich companies, such as Apple, to park hundreds of billions of dollars of cash overseas. Mr. Trump is a businessman. Businessmen think cutting taxes is the cure to all problems, and the Republican House and Senate might agree; there is a good chance that he will make good on his tax-cutting promises.
Generally speaking, tax cuts and extra government spending on bridges and roads (as Canada wants to do) can goose the economy, even if they present potentially ugly long-term problems such as fat budget deficits and crushing debt. In a Wednesday report, economists at the French bank Société Générale SA said that "major" tax cuts would add half a percentage point to U.S. growth in late 2017 and through 2018. "Trump's proposed tax cuts lined up with House Speaker Paul Ryan's tax cuts, and therefore we see room to go forward," the bank said.
If the tax cuts do what they're supposed to do and stimulate the economy, the great American job-creation machine could pick up momentum. Tax cuts probably will not encourage big companies to add jobs – they are prone to spending their profits on share buybacks, all the better to juice up stock-based pay packages – but it would encourage the small and medium-sized companies to take on extra employees. They, not the biggies, have always been the prime job creators, at least when times are good.
A lower tax rate would have other potentially positive economic implications. It would level the playing field between debt and equity. With lower tax rates, equity would become more attractive. If companies raise funds through equity rather than by issuing debt, corporate debt loads would fall.
Lower tax rates, coupled with a reformed tax code, would also encourage the big U.S. companies to repatriate their overseas cash stash. Better to have that cash taxed a lower rate in the United States than to leave it largely untaxed in a foreign tax haven. If the new corporate tax rates are low enough, European companies would be tempted to shift some operations, maybe even their headquarters, to the United States. London, which is already under threat of a Brexit-inspired corporate hollowing out, would be the victim.
The question is whether the economic jolt delivered by the Trump tax cuts would offset the economic losses sustained by stalling or reversing globalization, including the potential gutting of NAFTA, erecting a wall along the Mexico border and putting a cork into the immigration pipeline. It could. Turning the United States into an island is not a recipe for sustained growth, to be sure. "The degree of protectionism that Trump has supported throughout the campaign could push the U.S. – which only has potential GDP growth of 1.5 to 2 per cent – into recession," Manulife economist Megan Greene said in a note.
But will Mr. Trump make good on these threats? The awesomely powerful corporate lobbies won't roll over and die when Mr. Trump gets the keys to the White House in January. They will fight tariffs and border and immigration controls in the same way they lobbied in favour of deregulation. Big money usually gets what it wants and no one knows that more than Mr. Trump. He may well be a disaster on women's rights, the environment and foreign relations – he is hated in Mexico and feared in Europe and Canada. He may not be a disaster on the U.S. economy. The market's return from the depths this morning said as much.