Despite most polls showing Mrs Clinton likely to win, there has been a great deal of speculation that the polls might be wrong.
The polls could be systematically wrong for two reasons – uncertainty around turnout and the “shy tory factor” where voters are unwilling to admit their conservative views to polling companies. However, it seems unlikely that either factor would be sufficient on its own to hand Mr Trump victory given the very large number of polls and the lack for evidence for Mr Trump outperforming poll predictions during the primaries.
The election has shown a deep, widespread disillusionment across a large part of the US electorate and the factors producing this mood appear unlikely to suddenly vanish after the vote. This raises the distinct prospect that the anti-globalisation populist mood that Mr Trump and Mr Sanders tapped into could still be around to shape the political agenda through the term of the next President, the 2018 mid-term elections and into the 2020 Presidential election.
What underpins US voter mood?
Mr Trump’s election slogan “Make America Great Again” ties into voter concerns on many levels – some relate to domestic concerns, others refer to a worry that the US is no longer the world’s economic superpower.The US overtook the UK to become the world’s biggest economy in the 1870s and kept that position until a few years ago when China took the number one spot. At its peak in the 1950s the US had almost 30% of global output and its share was still 22% in the early 1980s. Back then China accounted for only 2% of global output but its growth has been so rapid that its GDP overtook the US in 2014. Currently China has almost 18% of global output while the US has 15½%. With Chinese annual output growth running almost 7% as opposed to the US’s 2%, the IMF expect China’s share of global output to steadily outstrip that of the US.
These global economic trends and sentiment have played a role in voter attitudes toward key electoral issues like free trade and globalisation. Criticism of trade liberalisation and unfair trade has been an important feature of the campaign, reflecting widespread voter concern about economic prospects and suggesting that political support for globalisation has peaked.
The squeezed middle class
Although the US has performed well recently in terms of economic growth and cutting unemployment, financial pressures on the American middle class and the disappearance of stable blue collar manufacturing jobs have been central issues in both the Democrat and Republican campaigns. The “hollowing out” of the middle class is a concern in OECD countries with very different characteristics and it has been blamed on such trends as globalisation, the erosion of union power, technological change demanding high skilled workers and “winner take all” pay systems. These concerns will not disappear post-election.
Growing inequality and lack of social mobility questions the American dream
Inequalities in income and wealth pose a particular problem in the US as they can limit social mobility, when those at the top lock in advantages through the use of money and networks to support the position of their children. The US has low levels of social mobility compared to many other OECD countries and its level of social mobility has declined since the 1980s, especially for middle class workers who are finding it harder to get into the upper income groups, helping polarize the workforce.Opinion polls show a sizeable percentage of US public opinion worries about growing inequality and how hard it is to get ahead. A regular poll finds over two-thirds of people believe the gap between rich and poor is widening in the US and more than half think the government should be doing something to lessen it.
How much damage could President Trump do?
Some of the apparent complacency in financial markets may come from a belief (or hope) that the powers of a US president are limited. While it is true that there are important constraints, the president does have more discretion than is comfortable in current circumstances. A key concern is, he can ‘un-sign’ the executive orders of previous presidents. Apparently Trump’s transition team are identifying orders issued by President Obama which could be rescinded – this does not mean that things can be reversed overnight, but these are genuine powers. For example, Trump could suspend the Syrian refugee program. More worryingly, he could ask the Commerce department to impose tariffs on Chinese goods (the World Trade Organisation would rule this illegal but Trump could ignore that and leave the WTO).One of the biggest areas of concern is US interaction with the rest of the world. Particularly worrying are suggestions that the US may reduce its role in tackling global problems – and may not provide guaranteed support for NATO countries under attack, which would fundamentally change the balance of power in Europe. Equally concerning are his beliefs that free trade and immigration are bad for the economy.
Trump will need the support of federal employees to get things done, which could prove an obstacle, even after appointing loyalists to senior positions. This is why Trump is looking at weakening the high level of employment security currently enjoyed by government officials.
Trump has the potential to damage the economy simply by undermining confidence. He has commented “I am the king of debt…I would borrow, knowing that if the economy crashed, you could make a deal.” This statement shows Trump’s astounding naivety. The implication that the world’s safe haven asset, US treasuries, might be much riskier than perceived could represent a more fundamental shift than even the US housing debt crisis in 2008. His naivety with respect to NATO treaty obligations to treat an attack on one as an attack on all is equally alarming.
Best and worst case scenarios in a Trump presidency
The worst case Trump scenario is that he triggers a shift in risk perceptions which leads to sharp declines in both bond and share prices. At the other end of the spectrum, being unconstrained by prevailing dogma, a Trump best case scenario for the economy could result from significant fiscal stimulus in the form of badly needed infrastructure spending. Though this would present challenges for financial markets, a properly targeted range of measures could stimulate demand in a sustainable fashion.Our base expectation is that a Trump victory would be destabilising for financial markets. We can hope that November will result in a new President Clinton; however, Trump has changed the political landscape and we also hope that policy makers will reflect on what has brought us to the current predicament.
The rise of Trump and extremist political parties in Europe, plus the Brexit vote, are a wake-up call for the establishment. We can hope that these forces empower governments to act more boldly and take on more of the burden of simulating the economy, rather than relying on the central banks.