The fall of the pound is not exactly big news here in the US, though it is a painful shock for the many British over for the annual meetings of the IMF and World Bank. But the fact that a political event should have such a profound impact on financial markets has caused deep concern for an obvious reason. Now it may be that the revelations of the past couple of days, coupled perhaps by the next TV debate between Hillary Clinton and Donald Trump on Sunday night, will change things. But a Trump victory would be a much greater shock to global finance than the Brexit vote, yet the markets have hardly begun to factor that into their considerations.
There are two separate issues here. One is the extent to which economic policy may change after the US presidential election. The other is how global finance will view the outcome.
As far as policy is concerned, you have to remember that the President proposes, but Congress disposes. A Clinton administration would in all probability have to contend with a Republican Congress, which would limit its ability to increase taxes on high earners. She has proposed a set of increases, including cuts in the ability of top earners to make specific deductions from their taxable income, and an increase in estate duties, that would largely fall on the top 1 per cent of American earners. Mr Trump, by contrast, proposes cuts on all taxes, but with the effect skewed towards the wealthiest. The top tax rate he proposes would be 25 per cent, compared with 39.6 per cent now.
If you believe the calculations (which are as suspect as all estimates of the effect of fiscal changes), the Clinton plans would have the effect of cutting GDP growth by 1 per cent in the long term, while the Trump plans would increase it by up to 10 per cent – if it were appropriately financed. And there’s the rub. The Trump plan would add hugely to national debt, which might drive up long term interest rates and so reduce the potential for growth.
The point about all these calculations is that they are based on what a candidate would like to do rather than what would happen in the real world. This is particularly so in the US. Policy will change after the election, but I suspect by less than people expect. What will matter more will be the mood music about future policy, and whoever wins there is capacity for surprises.
You see, both candidates have caught the mood of the country running against free trade. Mr Trump articulates it more strongly, but Ms Clinton has been forced into less liberal statements in recent months. In private she is pro-trade. In the past 24 hours there have been leaks of statements she made in paid speeches to the business community, calling for “open trade and open borders”. But in public she is more circumspect.
“I will stop any trade deal that kills jobs or holds down wages – including the Trans-Pacific Partnership,” she told a union audience in August. “I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president.”
The US going protectionist? That would be a huge shift for the whole world, and a big blow to global business confidence. At the moment such a shift is not even being considered by the financial markets, but there is a very real chance it might happen.
For those of us who grew up in the immediate post-war world, the creation of the three organisations what were founded following the Bretton Woods Agreement in 1944 – the IMF, the World Bank, and the General Agreement on Tariffs and Trade, later the World Trade Organisation – were the base on which the great burst of post-war prosperity was founded. Further regional deals, including the North American Free Trade Agreement signed by Bill Clinton, took the process further. The TPP would take it further still.
The problem is that people hurt by trade deals, including workers who lose their jobs because of cheaper goods imported from abroad, are specific and can be identified. The beneficiaries, including consumers who buy cheaper goods, are far more numerous, but the gains are more general and harder to pin down. Successive American administrations have in general been champions of greater freedom for trade, supporting the post-war consensus, though in some specific areas the US remains protectionist. Now that general support seems to be fraying.
The key point here is that the forthcoming election, whoever wins, may see a shift in the position of the US on freedom of global trade and investment flows. The shift would probably be greater were Mr Trump to win, but there seems likely to be some movement against free trade and capital flows were Ms Clinton to do so. This would be a far bigger shock than Brexit.Reuse content