The Trump Bubble

The stock market is up some 7 percent since the election. Stock markets are an expression of confidence in future economic growth, because buying stock in a corporation means buying a share of its future profits. The market clearly thinks that the Trump presidency will be good for business.

But the evidence shows that it won’t. In fact, the evidence demonstrates that two key tenets of the Trump agenda will hurt business profitability and competitiveness. We at NRDC care about this because the first one—cutting regulations, is bad for the environment in myriad ways. But this policy is bad for business, as well.

Two main components of the Trump agenda are cutting regulation and tax cuts for high earners. These policies have been proven to backfire.

Other components of Trump’s agenda are barriers to trade, planned unpredictability of U.S. positions, and the restriction of travel into the U.S. by foreigners. All of these are widely believed to be bad for business, although the evidence is not as solid.

Deregulation Hurts the Economy

As part of a visiting professorship at the University of California, I have looked at the effects of regulation on economic growth and jobs, studying both the correlations and the mechanisms by which regulations affect the economy. My class and I found that regulations, especially environmental regulations, increase economic growth and the number of jobs by driving innovation and increasing competition. For example, when California tried to deregulate electricity in the 1990s, it suffered from rolling blackouts and price gouging at the wholesale level in 2000, followed by a 40 percent increase in electricity rates in 2001 that has continued to burden consumers and businesses.

The near-crisis of 2000—a crisis largely averted (except for the cost impact) by a quadrupled utility expenditure on efficiency—ended the deregulation experiment by 2001. But proponents of deregulation have not gone away: they continue to advocate for it and try to brush the evidence of failure under the rug.

I later found out that the measured cost of regulations—the cost observed after industry had complied with them—is nearly always much less than what was estimated by the regulation-setting agency. Not infrequently the products cost less after the regulation than before.

John Kay, an economics professor, came to the same conclusion in his book Culture and Prosperity, noting how New Zealand tried this recipe of deregulation in the 1980s and consequently experienced the worst economic performance of any developed country in the world, as well as a month-long electricity blackout in Auckland.

Deregulatory polices are, of course, key problems for environmentalists. Reducing environmental regulations leads to more pollution, greater disruption of climate, and more loss of biodiversity. But as I have shown, it also results in lower economic growth, fewer jobs, reduced innovation, and restricted competition.

Low Taxes for the Rich Reduce Economic Growth

The Congressional Research Service—a rigorously nonpartisan outfit—released a study on tax cuts for the rich in 2012. The summary said that a correlation could not be found between these tax cuts and higher economic growth. However, though the study found a correlation between tax cuts for the wealthy and greater economic inequality, this conclusion was minimized in the detailed text of the report. The report said that there was a statistically significant correlation between lower taxes on high earners and LOWER economic growth. The average household loses two ways: 1) the whole economy gets smaller, and 2) the lower 99 percent gets a smaller piece of it.

In fact, even if we accept the summary section’s statement that one cannot prove that tax cuts for the rich help the economy grow, it is still true that the lower 99% are worse off. The only difference is that in this scenario the top 1% are better off by the same overall amount.

Other Trump Policies are Expected to Backfire

The other pillars of the Trump economic agenda are trade restrictions, planned unpredictability in policies, and travel restrictions. These policies are all widely believed (with considerable evidence, but not full proof) to hold the economy back. Free trade has advanced for the past century because of this belief, and the world economy has grown steadily. Businesses often note that investment certainty encourages job-producing new investments, while uncertainty delays or cancels them. And now, American high-tech companies are expressing deep concern over travel restrictions that may prevent them from recruiting and retaining the world’s best talent.

The Consequences of Believing in False Promises

What happens when the market holds one belief and reality goes the other way? In economics, the technical term for such a phenomenon is a bubble, or an increase in asset prices that is unjustified and unsustainable. One example is the escalation of housing prices ten years ago. The market believed that housing prices would continue to rise forever, and trillions of dollars were optimistically lent under the pretense that the mortgage loans were secure. This turned out to be wrong.

The markets for mortgage-backed securities, as well as for American homes, collapsed in 2008-09 at a cost to the global economy of some $4 trillion. (There is a wide range of estimates of how much value was lost, because the result depends on what the analyst thought would have happened without the crash, and on what timeframe is chosen. But the estimates of losses are all deeply into the trillions of dollars.) In any case, the losses were so large that this collapse triggered a recession, from which half of American households have yet to emerge.

Bubbles tend to collapse rapidly when the market assimilates more accurate information.

Therefore, I worry about the economic trouble ahead for investors. This worry is compounded by the fact that my investment advisors all agree that the question of who is in the White House normally doesn’t affect stock prices much, so the fact that it seems to be doing so now, and doing so in a way contrary to the evidence at hand, should be of concern to anyone with a 401(k).

I am NOT offering investment advice in this blog, nor am I predicting that one should sell stocks. One of my investment advisors quotes John Maynard Keynes as saying, “markets can remain irrational longer than YOU can remain solvent [betting against the irrationality]".

But I am asking investors and businesses to re-evaluate what consequences the key Trump policy proposals would likely have if they were enacted, and consider working with NRDC to resist policies that are harmful to both business and to the environment before the bubble bursts. Most of the damaging policies have yet to be enacted. As was the case for housing in 2003-06, if we can spot the problem in advance, we can avert it.

About the Authors

David B. Goldstein

Codirector, Energy program

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