Sorry, investors, but there is no sanity clause.
By Paul Krugman
Opinion Columnist
President Trump on a monitor at the New York Stock Exchange, as stocks plunged on Monday.CreditSeth Wenig/Associated Press
Image
Two
years ago, after the shock of Donald Trump’s election, financial
markets briefly freaked out, then quickly recovered. In effect, they
decided that while Trump was manifestly unqualified for the job,
temperamentally and intellectually, it wouldn’t matter. He might talk
the populist talk, but he’d walk the plutocratic walk. He might be
erratic and uninformed, but wiser heads would keep him from doing
anything too stupid.
In other words,
investors convinced themselves that they had a deal: Trump might sound
off, but he wouldn’t really get to make policy. And, hey, taxes on
corporations and the wealthy would go down.
But
now, just in time for Christmas, people are realizing that there was no
such deal — or at any rate, that there wasn’t a sanity clause. (Sorry,
couldn’t help myself.) Put an unstable, ignorant, belligerent man in the
Oval Office, and he will eventually do crazy things.
To
be clear, voters have been aware for some time that government by a bad
man is bad government. That’s why Democrats won a historically
spectacular majority of the popular vote in the midterms. Even the
wealthy, who have been the prime beneficiaries of Trump policies, are
unhappy: A CNBC survey finds that millionaires, even Republican millionaires, have turned sharply against the tweeter in chief.
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But market behavior has, until recently, been a different story.
The
reality that presidential unfitness matters for investors seems to have
started setting in only about three weeks (and around 4,000 points on
the Dow) ago. First came the realization that Trump’s much-hyped deal
with China existed only in his imagination.
Then came his televised meltdown in a meeting with Nancy Pelosi and
Chuck Schumer, his abrupt pullout from Syria, his firing of Jim Mattis
and his shutdown of the government because Congress won’t cater to his
edifice complex and build a pointless wall. And now there’s buzz that he
wants to fire Jerome Powell, the chairman of the Federal Reserve.
Oh, and along the way we learned that Trump has been engaging in raw obstruction of justice, pressuring his acting attorney general (who is himself a piece of work) over the Mueller investigation as the tally of convictions, confessions and forced resignations mounts.
But
let’s play devil’s advocate here: Does all this Trump chaos matter for
the economy, or for the stock market (which isn’t at all the same
thing)? At first sight, it’s not all that obvious.
After
all, aside from the prospect of trade war, none of Individual-1’s
tantrums, unpresidential as they are, have much direct economic impact.
Even the government shutdown will impose only a modest drag on overall spending.
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And
even trade war might not do that much harm, as long as it’s focused
mainly on China, which is only one piece of U.S. trade. The really big
economic risk was that Trump might break up Nafta, the North American
trade agreement: U.S. manufacturing is so deeply integrated with
production in Canada and Mexico that this would have been highly
disruptive. But he settled for changing the agreement’s name while
leaving its structure basically intact, and the remaining risks don’t
seem that large.
So why do investors seem to be losing their what-me-worry
attitude? It’s not so much what Trump is doing, as what he might do in
the future — or, perhaps even more important, what he might not do.
The
truth is that most of the time, presidential actions don’t matter much
for the economy; short-term economic management is mainly up to the Fed.
But when bad things happen, we do need the White House to step up. In
2008 and 2009, it mattered a lot that officials of both the outgoing
Bush administration and the incoming Obama administration responded
competently and intelligently to the financial crisis.
Unfortunately, there’s no reason to expect a comparable degree of competence if something goes wrong again.
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Consider
how the Trumpistas have responded to falling stocks. So far these are
just a minor economic bobble. Yet Trump himself, having claimed credit
when stocks were rising, has flown into a rage and lashed out; hence the
attacks on Powell. Meanwhile, top officials are still claiming that
last year’s tax cut was a triumph in the teeth of the evidence, and issuing bizarre statements — via Twitter — about the health of the banks, which nobody was questioning.
Now
imagine how this administration team might cope with a real economic
setback, whatever its source. Would Trump look for solutions or refuse
to accept responsibility and focus mainly on blaming other people? Would
his Treasury secretary and chief economic advisers coolly analyze the
problem and formulate a course of action, or would they respond with a
combination of sycophancy to the boss and denials that anything was
wrong? What do you think?
Let’s be clear: There isn’t an obvious crisis-level threat looming at the moment. But growth is slowing,
and as the bumper stickers don’t quite say, stuff happens. And if and
when it does, the people who would be supposed to deal with it are the
gang that can’t think straight. Merry Christmas.
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