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Disaster in chief

If the market’s expectations for Trump rapidly change, stock prices will plummet, and the financial markets will face chaos.
Feb 18,2017
When Donald Trump was elected president, many economists worried that his policies would have negative impacts on the economy. But the market, including Wall Street, welcomed his victory, and stock prices have skyrocketed.

Economists were pessimistic because Trump’s policy pledges were contradicting one another and seemed impossible to realize. It was believed that trade protectionism, a key policy of Trump, would shrink global trade volume and damage the American and world economy.

While condemning the greed of Wall Street, Trump also pushed massive deregulation in the financial sector. While arguing for tax cuts, he also promised massive infrastructure investment. Such contradictory pledges weakened reliability in his policy pledges.

Trump also denied the mutual benefits of free trade, one of the most fundamental principles in economics. Free trade might be harmful to some, but the benefits to an entire economy are more than enough to cover the damages. Those suffering from the downsides of free trade should be covered by proper assistance policies. But Trump has only focused on the victims and chosen trade protectionism.

Despite economists’ concerns, why has the market reacted enthusiastically to Trump? It’s because of the belief that Trump’s policies will bring about a boom in the U.S. economy, at least temporarily.

Yet his actions since inauguration have only caused extreme confusion. His ban on immigration from seven Middle Eastern countries and an extreme trade protectionist policy, symbolized by a wall on the Mexican border and a border tax, only remind us of Trump’s past, when he hosted a reality show that pushed people into extreme chaos to boost ratings.

As the people become aware that Trump will concentrate only on anti-immigration and trade protectionist policies, and that his contradictory promises are hard to realize, the market evaluation is changing. A recent Bloomberg article said the plan to scrap Obamacare played a decisive role in changing the people’s evaluation of Trump.

Trump has promised a new health insurance project that will allow anyone to join and leave anytime they want. Many economists have called the idea a classic example of populism. It seems to satisfy everyone who wants to subscribe to an insurance program and leave the program, but such a plan is actually impossible.

Those suffering from serious illnesses will naturally want to subscribe to the insurance program, but fees will have to go up if such patients continue to join. If leaving is allowed, healthy people will drop out in order to avoid high insurance payments. In the end, only sick people will want to stay, and costs will continue to go up.

Obamacare resolved this issue by forcing everyone to join the program. If it is scrapped, more than 20 million people will lose their insurance. Trump realized this reality and said he would present an alternative system next year.

Skepticism is high about the Republican Party’s ability to push forward tax cuts and other deregulation policies given the growing negative evaluations of Trump. His promise to boost infrastructure investment by luring private funds is also unfeasible.

Paul Krugman, who has consistently criticized Trump’s pledges, said his policy will only increase instability and end up being shelved.

If the market’s expectations for Trump rapidly change, stock prices will plummet, and the financial markets will face chaos. Perhaps the disaster has already started.


*The author is a professor of economics at Korea University.

Shin Kwan-ho