Time to think about a second Trump term

What will it mean for the U.S. and the world?

"Donald Trump" by Gage Skidmore, CC BY-SA 2.0

It’s difficult to overstate how bad Joe Biden looked in the first presidential debate. He stumbled over his answers, sounded confused, and sometimes even forgot what he was saying halfway through. On the biggest and most important stage, Biden just couldn’t perform. It was easily the most disastrous debate performance I have ever seen.

Which is not to say Trump did well; against an alert, well-spoken opponent, he would have come off very badly. He seemed manic and incoherent; his answers to questions resembled unhinged rants, skipping from topic to topic and full of obvious falsehoods. He is obviously going mentally downhill in his old age as well — just not as much as Biden.

Personally, I still strongly endorse Biden over Trump. A President half-incapacitated by old age, but with competent appointees, is still preferable to a President who denies election results, encourages coup attempts against his own country, and encourages enemy empires to conquer U.S. allies. But I doubt most Americans will agree with me on this. Even before this disastrous debate, Biden was chronically behind in the polls, and Trump was favored to win in the election forecasts. Biden needed a very solid debate performance to turn things around, and he got the exact opposite of that.

Not being an expert in electoral politics, I don’t really know what comes next. Perhaps none of this really matters and I’m just jumping the gun. Perhaps Biden will pull off a miraculous resurgence, though from where I’m standing that seems unlikely. He could step aside in favor of Kamala Harris, but she’s extremely unpopular. I suppose a dark horse like Gavin Newsom could step in, but he’s an unknown quantity to most Americans. So while I’m certainly not ready to call it yet, my instinct here is that the betting markets are right, and that Trump is now the clear favorite to win the presidency this fall.

So unfortunately, it’s time to think hard about what a second Trump term could mean, for the U.S. economy and for the world.

On the economic front, I see some big dangers. Trump’s populist approach to inflation and debt is extremely risky, and his tariffs run the risk of isolating the U.S. economy and fragmenting our trading bloc. As for industrial policy, he seems likely to embrace the semiconductor push but to nix the push for green energy.

On the international front, this looks like it could be the end — at least for now — of the transatlantic alliance. Trump will cut off support for Ukraine, forcing Europe to step in. A withdrawal from NATO, or a de facto withdrawal, is a possibility. The big question, though, is what Trump does with regards to China and the increasingly perilous situation in the Pacific.

The big economic danger: Inflation

I wrote a whole post about Trump and inflation three weeks ago, so I won’t rehash all my arguments in detail:

Trump and inflation

Briefly, government debt is inflationary, and Trump doesn’t seem to mind government debt much. He’s a populist, and people like getting tax cuts and government checks. In his first term, even before Covid struck, Trump ran up the debt instead of using the strong economy as an opportunity to balance the budget.

The U.S. is now in a situation where we really need austerity. Interest costs are exploding as the government is forced to roll over its stock of debt at higher rates. This is forcing deficits higher, as the government is forced to borrow more just to pay interest on the money it already borrowed. Meanwhile, inflation is still at an uncomfortably high 3-3.5%. The big deficit is probably a reason it’s still high.

In this situation, what the U.S. needs to do is enact austerity. This will mean both raising taxes and making painful cuts to things like health care spending — especially because the U.S. also needs to pay for national security priorities like increased defense spending and industrial policy if it wants to deter China from launching World War 3. That will require even more deficit reduction elsewhere in the budget.

But Trump seems unlikely to either raise taxes or to cut health spending, because he is a populist. Two exceptions are that A) he might cut the SALT deduction even more, taxing high earners living in progressive states, and B) he might cancel Biden’s student debt relief. Honestly, both of those would be good moves.

Overall, though, Trump seems likely to deal with exploding deficits by trying to bring back the macroeconomic environment he enjoyed in his first term. He seems likely to pressure the Fed into lowering interest rates, allowing the government to borrow more money while paying lower interest costs.

Pressuring the Fed into lowering interest rates would relieve some of the pressure on government finances, allowing the U.S. to raise defense spending without making painful cuts elsewhere. But there’s just one problem: inflation. Lower rates are inflationary. And if the market decides that the Fed’s independence is compromised and that Trump will never allow rates to rise in response to inflation, it could touch off a self-fulfilling prophecy — an inflationary spiral, where everyone raises prices because they expect the Fed not to do anything about rising prices.

So, that’s very dangerous. It’s the kind of thing that happened during Erdogan’s rule in Turkey, and it’s the kind of thing that happens to Argentina every decade or so. This is the greatest economic danger of another Trump term.

Industrial policy: More bullish for chips than for batteries