Wednesday, December 28, 2016

In the aftermath of a 20,000 stock market, what next?

Catherine Rampell (Washington Post) states a fact and asks a question in Trump is being handed a great economy. What happens when it goes south?

The economy was in shambles when Obama took office. Now it is roaring ahead. Some of it is the short-term bounce from Trump’s promises of a tax cut and a regulation cut. But the low unemployment rate is not due to Trump. Regardless of all this (and you can check Rampell’s editorial for more details on the economy) the only thing that the economy can do under President-elect Trump is to head south.

… if Trump implemented some of the other wacky policies he’s flirted with — a trade war, mass deportation, defaulting on our federal debt obligations, returning to the gold standard — a painful recession would ensue, according to multiple private-sector economic forecasters.

Regardless, the historical record suggests that four more years of expansion are unlikely. That is, even if recoveries don’t die of old age, and even if Trump doesn’t spark a worldwide financial crisis by refusing to raise the debt ceiling, it seems reasonable to expect that we might face a recession at some point during his presidency.

So, what happens when the numbers turn against him?

Three consequences seem likely.

One, the administration will start searching for scapegoats other than Trump’s own party and its choices. Immigrants, minorities, Fed officials: Watch out.

Two, assuming Trump will have already signed a major fiscal stimulus package during an expansion, there won’t be much powder left in the keg when Keynesian stimulus is actually needed. That is, fiscal tools available to mitigate the recession will be unusually limited.

And three, the numbers will become suspect once again, and Trump may even try to mess with the official government numbers to suit his narrative. This — and not a recession, blame-gaming or impotent policy response — would cause the most enduring damage to our democracy.

It’s not really that the numbers are suspect - it’s just that Trump has a habit of making them appear so in order to make himself look good. Given Trump’s track record it is totally imaginable that Trump could accuse Obama of causing the next recession.

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