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Wesley G. Hughes | Donald Trump’s win and the future

Published:Sunday | January 8, 2017 | 1:00 AMWesley G. Hughes
Trump

The election of Donald Trump as president of the United States has elicited a torrent of analyses to explain this 'unexpected' outcome. I don't view his election with the same degree of alarm as many do. In fact, I predicted the outcome and told my colleagues and friends long before it happened.

As was the case for other elections, I used mainly economic and social indicators to speculate on the outcome. From my perspective, Trump was always going to win because of 'the economy, stupid', to quote former President Bill Clinton.

The current liberal economic model which has largely guided the global economy since the Thatcher-Reagan era, with globalisation at its core, has hit a roadblock. This is causing real pain for many, especially since the recession of 2008.

The post-war explosion of technological innovations, entrepreneurship along with the process of globalisation, has brought about what is arguably the most rapid period of global growth in wealth creation in recent history. Despite this great achievement, the disruptive impact of the changes on large segments of society has been quite negative. Winners and losers have been created on a vast scale. And while the benefits have been quite diffuse, the negatives and pain tend to be quite direct and immediate. Many communities have been devastated by the closures of mines, factories and even industries. The speed and scope of the changes often leave governments unable to respond quickly or adequately.

The overall outcome of the model has also led to the most amazing degree of inequality between countries as well as within countries. The share of wealth that is held by the top 1 per cent is now more than 60 per cent of the total global wealth, and the gap is growing.

Most sensible economists recognise that a system with such a high degree of inequality is likely to be unstable in the medium to long run. While inequality has been identified as a motivator for wealth creation and even an outcome of the process, the current degree of inequality is weakening social capital. The disruptive impact of inequality tends to be exacerbated when the real wages of the middle classes and workers stagnate, as has happened over the last 15 years in the USA.

This wage stagnation was the key indicator for me in determining what the outcome of the election was likely to be. As it was with Brexit, so it was with Trump's election: the economic prospects of those at the bottom largely determined the outcome in a modern democracy. If there is no clear message of hope and improvement coming from the status quo, its candidate will have difficulties winning in an era of non-ideological politics. Even false hope appears to resonate more with voters than a message of more of the same.

 

WHAT DID THE VOTERS HEAR?

Over many election cycles, some 45-50 per cent of the US electorate, don't usually vote. Of the remaining roughly half of the electorate who usually vote, either candidate can be certain of about 40 per cent for each. Therefore, the noise, nastiness and nonsense of the campaign seemed largely designed to convince the remaining 10 per cent. In fact, it came down to swing voters in the so-called swing states (Florida, Pennsylvania, Virginia, North Carolina, Indiana, Michigan and Ohio). Trump basically won the election by focusing on these states and speaking to the hurt and fears of the electors there. He galvanised their anger at the status quo (inequality, job losses, neglect of farmers, effects of global trade arrangements, illegal foreigners taking their birthright). Trump essentially said the US was 'going to hell'; while Clinton said 'all was well'. The contrast could not be greater. Clinton focused on the awful things said by Trump to generate fear of him. Trump spoke to the need for change of the status quo. In the end, the desire for change was greater than the fear of the unknown that Trump represents. Those who were deriving little from the status quo were unlikely to vote for the status quo candidate. In essence, therefore, the election was largely about fear versus change; and change won.

 

THE GAME

In game theory, we have a model that can be used to explain why people chose Trump despite the fear he generates. The game is called Ultimatum.

The Ultimatum game is when the first player (the proposer) receives a sum of money and proposes how to divide the sum between the proposer and the second player (responder). The responder chooses to either accept or reject this proposal. If the responder accepts, the money is split according to the proposal. However, in the instance where the second player rejects, neither player receives any money. The game is typically played only once so that reciprocation is not an issue.

The proposer is usually incentivised towards fairness. The closer to equality the initial offer is, the greater the likelihood of acceptance.

The share of the pie that was being offered by the status quo currently to those affected by global trade arrangements is being rejected. In such a scenario, voting for Trump is tantamount to all potentially losing in this Ultimatum game; that does not, however, have to be the final outcome. Essentially, Trump appears to be offering a fairer proposal to many at the bottom of the existing economic arrangement.

The nearly two decades of profound structural and technological changes and global re-positioning of the production of heavy industrial and consumer goods have led to significant job losses and status among US workers and middle-income families (black, whites, Latinos). These changes have led to high degree of scepticism and fear of outsider competitors, among many. The same phenomenon was a large driver of the Brexit referendum vote in the UK. The fear of immigrants taking jobs, as well as some amount of xenophobia, exacerbated the problem for the 'incumbent candidate'.

The same anger and fear that drove the anti-establishment voters to Trump was to some extent the same set of forces that drove many of these same voters to go for Obama in 2008 and 2012. The current economic arrangement is not seen as serving them well enough. Despite the brilliant job the Obama administration did in stabilising the US economy after the great recession real wages have stagnated for the last 15 years and so workers have been hurting. That was the bottom line for many lower-income voters of all ethnic groups.

Obama earlier and now Trump are seen as anti-establishment candidates who would or can bring back jobs and restore hope and pride.

Trump ran from a more extreme anti-establishment position. In doing this, he has stirred up some strange and extreme elements. For him to succeed he will ultimately have to govern from the centre while outflanking his most extreme supporters.

His populism will be tempered as real economic forces assert themselves. Many of the jobs he hopes to bring back to the US from overseas will not come. They never left the US in the first place. One estimate suggests that up to 80 per cent of the job losses in the US industrial rust belt and energy sector were due to technological innovations. Even if the large infrastructure projects that Trump wants to implement do take off, they will not have the job impact in some of the communities that voted for him in the swing states. A large proportion of those workers need significant retraining and re-education to participate in the new economy. Coal miners in West Virginia or former steelworkers in Pennsylvania are not likely to find quick employment in the new economy without serious retraining. The drive for efficiency will ensure that major projects will be capital and technology intensive and labour will have to be very high skilled.

 

ECONOMIC UNCERTAINTIES

Many of the stated economic positions of Trump could make US export more uncompetitive and thus lead to fallouts in jobs and income. For example, his plan to renegotiate NAFTA will lead to ongoing economic uncertainties in both Canada and Mexico. The threats of major disruptions will cause the currencies of both countries to weaken against the US dollar, thereby making US exports more expensive and imports from these countries cheaper. Thus, in the short run the US is likely to suck up more imports from the countries that Trump is threatening with disruption; China and Japan, for example.

The treat to impose punitive tariffs would likely lead to retaliation and could have disruptive effects on financial and foreign exchange markets. The impact on global trade will likely affect US multinational businesses negatively. If these negative developments do emerge, it will only be a matter of time before US businesses start pushing back hard against Trump. He will, therefore, have to temper his policies to accommodate US interests in the global economy.

 

HOW CAN TRUMP BE A SUCCESSFUL PRESIDENT?

My understanding the power of economic forces makes me far more hopeful about the future under Trump than many others do. As president after January 20, 2017, he will have to come to terms with the fact that ultimately it is the economy, stupid. Since the election, Trump has made significant steps back from promises made during the campaign. If he continues with his climb down from the extreme positions like banning Muslims; building a wall along the southern border with Mexico; and unilaterally walking away from treaties, he will likely find greater support from the centre.

Many of the structural changes the US needs to cope with the unfolding global and technological order are similar to the changes most other countries must undertake over time.

Trump could make a major contribution to the welfare of many of those who voted for him if he were to focus on:

- Investing heavily in training and retraining the labour force in areas that lost out from the impact of global trade and technological change. Renegotiating or tearing up trade agreements will not nullify this need;

- Significant strategic infrastructure investment by the state and Federal government in the areas negatively affected by these global changes;

- Investing in ways that will really cut, on a sustained basis, the cost of health care. This is crucial for the large and growing elderly population;

- Undertake serious education reform that will lead to real social mobility for those in the rural and poor urban areas. There should be less focus on reforms that only improve exam scores. This will be giving more real people a real chance to escape poverty and hopelessness. Education must allow people to escape areas where jobs and opportunities have disappeared permanently.

If Trump were to succeed at doing these things and govern more from the centre, he could well become a successful president.

- Wesley G. Hughes, CD., JP, Ph.D is an economist. Email feedback to columns@gleanerjm.com and weshug@gmail.com. Or tweet @WesleyGHughes