Market forces serve as disciplinarians for decision-makers. Now that "Trumponomics" is the new economic doctrine in the United States, several experts have assessed its content. Economic growth and inflation are expected to increase, while the independence of the central bank will probably be jeopardized. At the same time, the Republican Party has a strong grip on power and the Democratic Party is weak after being defeated in the elections. In this situation, the strongest counterforce is the power of the market.
Trumponomics 101
The incoming president wants to invest in energy, especially oil, and raise import tariffs while strengthening US manufacturing and defence. The programme is all about “Making America Great Again", or MAGA, the pursuit of US self-interest.
As president, Trump wants to tighten immigration policy. Former IMF chief economist Olivier Blanchard estimates that only a small portion of the announced deportations of illegal immigrants will be carried out. A strong call for deportations and public displays are important, but the end result, he says, will be that only a small percentage of the goal of millions of deportations will be achieved. However, this sends a message to potential new illegal immigrants keeping some of them away.
The good, the bad and the ugly of regulation
The president-elect’s agenda calls for reducing regulation and cutting expenditures of the government. Regulation tends to increase and bureaucracy to grow with time. A shake-up is probably needed from time to time, just like in business, where it takes the form of mergers, acquisitions and demergers. Structural changes make it possible to overhaul the organisation. With governments, the logic works differently.
There is good regulation and bad regulation. Often there are sound arguments for regulation. If it is to be reduced, it is pertinent to carefully assess what is necessary and justified and what regulation is unnecessary. The problem is probably the same as in marketing. Often half of a marketing budget is wasted, but no one knows which half.
The power of markets
The market mechanism is strong and hard to control. Government and central bank resources are enough for some actions, but ultimately it is the market forces that determine the direction of the economy. Now that Trumponomics is the dominant new economic doctrine, and the political opposition is weak, market forces are rising to great prominence in guiding decision-making.
Trump is defying political democracy and the independence of the central bank. But he will be unable to rein in market forces. Hence, the control exercised by market forces will keep the future president on the straight and narrow.
The alternative to market forces is a different economic system, and Trump has not declared himself in favour of it. Of course, if he really does ruin the market with his actions, bringing them under control will require a new phase in Trumponomics. Getting market forces under control will require a stronger regulatory economy, more regulation and a greater role for the government. And this is not what he is striving for.
The opposing power of the markets is based on intimidation, braking, panic and crisis. At each of these stages, the markets send signals to decision-makers worth paying heed to. Among the signals are raising interest rates, access to government borrowing, stock market crashes or other forms of panic. They could perhaps be considered as some sort of success indicators.
It is often said that the markets are always right. Personally, I don't think this is such a serious claim, and there is a lot of evidence against it. Even so, the power of the market is real, irrespective of whether market prices are right or wrong. At the end of the day, it doesn't really matter, because the power of the market can be overwhelming anyway.
Markets cannot assign a value to everything that is important. The political system makes decisions that affect citizens, the environment and society at large. Clearly, the value of these assets is not fully reflected in the marketplace. However, the market provides one measure of the quality of decision-making. The next elections in two or four years' time will give voters the chance to point the way for decision-makers. In between elections, the market forces take votes on an ongoing basis.
Conclusions
The incoming US president wields a lot of power. He is responsible for making sure that the United States is on the right track. The market is a force that even President Trump is compelled to listen to. It will be interesting to see when these forces will speak and voice opposition. If Trump succeeds, the current favourable market trend, or the "Trump-Trade”, will hold up. But mistakes tend to be made by those who take action. That's when market forces speak loudly, as if they were the opposition.
Writer is VER's CEO Timo Löyttyniemi
