Many economists already have weighed in about what would happen to the U.S. and the world economy if Donald Trump were elected president. Most give a thumbs down to his proposals and policies of massive tax cuts and trade restrictions (and we’re using the term “policies” loosely), but a new academic study was able to measure the Trump effect in real time during the first presidential debate.
The debate between the Orange Menace and Democratic nominee Hillary Clinton on Sept. 26 was the most-watched presidential debate in U.S. history, with more than 80 million viewers—and that’s just on television. Poll after poll (except for the troll-driven online polls artificially pumped up by Trumpeters) showed that Clinton basically cleaned Trump’s clock.
And no one was happier about Clinton’s performance—and Trump’s collapse—than investors around the world.
According to a story in The Atlantic with the non-subtle headline “Why Investors Are Terrified of a President Trump,” an “event study” by two economists showed that world markets reacted to Clinton’s Trump-thumping with major rallies.
Clinton’s victory triggered the financial equivalent of a worldwide happy dance. Soon after the debate ended, stock markets celebrated the news of Trump’s loss. Markets in the U.S., U.K., and Asia soared, the price of crude oil rose, and the currencies of America’s closest trading partners, such as Mexico and Canada, ticked up as well. It was “the most consequential single event (so far!) during the 2016 general election campaign,” [the paper’s authors] wrote.
The market reaction was the subject of an academic paper from Justin Wolfers, an economist at the University of Michigan, and Eric Zitzewitz, an economist at Dartmouth College. (A summary of the paper can be found here.) As they wrote:
During the debate event window, U.S., UK and Asian stock markets rose, crude oil rose, the currencies of trading partners such as Mexico, South Korea, and Canada rose against the dollar, and expected future U.S. stock market volatility dropped sharply. Given the magnitude of the price movements, we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15%, would reduce the oil price by $4, would lead to a 25% decline in the Mexican Peso, and would significantly increase expected future stock market volatility. …
All told, these movements suggest that financial markets expect a generally healthier domestic and international economy under a President Clinton than under a President Trump.
Remember that the debate was less than two hours long. That’s all it took for investors around the world to vote with their portfolios.
The Atlantic story describes the phenomenon as “Trump Shock.”
The economists use this data to estimate the perceived cost of a Trump presidency to the global economy. They say investors believe a Clinton loss would reduce the value of American, British, and Asian stock markets by up to 15 percent and lead to a 25 percent decline in the Mexican Peso. “Markets believe this election will have huge ramifications for the global economy,” Wolfers went on to write on Twitter. “It’s not just about us; it’s about the world.”
Just because investors believe something will happen doesn’t make it an inevitability. But Wolfers and Zitzewitz aren’t saying they can prove Trump will destroy the economy, only that a Trump presidency would, in the short run, severely shake investors’ confidence in steady economic growth and trade. And that in itself can prove destabilizing.
A Politico story further quotes the two economists comparing the fallout of a Trump presidency to the downturn after the United Kingdom’s Brexit vote. “You saw Clinton win the first debate and her odds jumped and stocks moved right along with it. Should Trump somehow manage to win, you could see major Brexit-style selling.”
The new report suggests that the stock market is worth 11 percent more under a Clinton presidency than a Trump presidency. This is a highly unusual circumstance because markets historically prefer Republican policies on taxes, regulation and trade to those of Democrats.
Before that September debate, polls had tightened after widespread reporting of Clinton’s pneumonia and her stumble at the Sept. 11 memorial service. The idea of a Trump presidency so frightened most economists that a major stock tumble was predicted if Trump won the debate, according to a CNN story.
As the old saying goes, the market loves good news, it can deal with bad news, but it hates uncertainty. And Trump is the motherlode of uncertainty.
"The typical investor just can't contemplate the possibility of a Trump victory," says Cary Leahey, chief U.S. economist at Decision Economics.
Clinton clearly won the debate, and investors rejoiced. The academic paper from the two economists measured the effects of that one debate. But those economists are not alone in their observations.
The British research firm Oxford Economics also predicted a worldwide economic letdown if Trump ever becomes president, according to a story in the Washington Post. “Broadly speaking, economists have been critical of Trump's proposals, which depart from the standard approach that Republican politicians have taken in the past.”
If the Republican presidential nominee was able to fully implement his plans to impose tariffs on goods from China and Mexico and force large numbers of undocumented immigrants to leave the United States, the U.S. economy would begin to stall by 2019, the research firm determined. Economic expansion would also slow globally as weakness in China and the United States spread to their trading partners.
Globally, the rate of expansion would decline to about 2.2 percent annually, compared to a forecast of 2.9 percent if Trump's policies were not implemented. Without the policies, the U.S. economy would be $430 billion larger after five years, according to the research.
Another economist quoted in the Post story paints an even bleaker picture of the effects of a Trump administration.
While grim, the forecast is in fact optimistic compared with another that Moody’s issued earlier this year. That forecast—authored by economist Mark Zandi, who has advised politicians in both parties—predicted that Trump’s policies could in fact create a recession in the United States. In other words, economic expansion would not just decelerate as Oxford Economics forecast, but would actually begin to reverse.
Trump loves to brag about his business acumen, despite nearly $1 billion in losses and his multiple bankruptcies. But his understanding of business and economics is really limited to his real estate deals, his hotels and casinos, and his brand-name products. Despite his bluster about China, trade deals, and other enterprises, he is showing that he doesn’t truly understand the concept of macroeconomics, his degree from the University of Pennsylvania’s Wharton School notwithstanding.
What Trump has never understood (or has chosen to ignore) is that success in business depends upon satisfying multiple stakeholders: owners, stockholders, customers, suppliers, and employees. Trump is concerned only with satisfying himself. How many stories have we read of Trump stiffing small businesses that supplied his hotels and casinos? How many tales have we seen of workers who got laid off from closed Trump casinos? How often have we heard about students, or customers, of Trump University who got shafted?
There are so many reasons to vote against Donald Trump for president. We might as well add “let’s not tank the world’s economy” to the list.
