The political economy of Trump’s luck
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Donald Trump’s ill-wishers often reassure themselves that his health will fade soon. A PhD could be had from analysing the cottage industry that for years has been predicting Trump is about to keel over, or has finally lost his mind. Yet the 79-year-old is still going in roughly the same way.
The same is broadly true of the US economy. Throughout this year, as was also true when he was first president in 2017, the Trump recession has always been just around the corner. Yet the term “Trumpcession” still has no reason to enter circulation.
There is a recurring lesson here for liberals, which is that they should base their plans on the world as it is, not as they want it to be. In terms of the US economy, forecasters should add a Trump luck factor to their models.
Like Napoleon’s generals, Trump is a lucky man. Having done what he can to give us a recession, the AI gold rush has so far spared him that fate. Most of this year’s US growth has come from Big Tech’s huge investment rollout. The AI spending spree is a secular shock that began under Joe Biden. Neither president should take credit. To be fair, however, Trump has been a big cheerleader for the boom.
Naturally, liberals are focused on ensuring that Trump takes the blame for the AI crash that has not yet happened. If there is a big correction, as there eventually must be, Trump will be deservedly blamed. But as my colleague Robert Armstrong recently observed of financial journalists, Trump’s opponents suffer from negative bias and thus often miss upturns. Americans see their economy through a partisan lens, according to years of polling. If the economy deserves to be bad, then it surely must be. And what could be more self-harming than so many trade wars of choice?
For the time being, however, the bears inhabit their own cave. Those who lightened their US equity portfolio when Trump took office in January have missed out on a nearly 19 per cent rise in the S&P index since then. By the same token, there is much to fear from the AI world we are entering — loss of jobs and cognitive skills among them.
That does not mean the boom is based on fantasy. AI is real and has potentially big upsides. Whether you like it or not, it is coming soon to a theatre near you. The US equity markets indeed look wildly overpriced and at some point many big AI players will surely fail. That does not mean AI has no underlying value.
America’s economy, meanwhile, continues to expand. Again, Trump is lucky. Stagnant jobs numbers and slightly lower than expected inflation means the US Federal Reserve is likely to cut the interest rate this week. He also looks tempted to strike a truce in the trade war with China’s Xi Jinping later this week. Both sides are heavily armed — China with its stranglehold on rare earths, Trump with his ability to threaten 100 per cent tariffs or more.
Trump of course is the cause of most of this year’s market panics over US-China decoupling. Every time he backs down, he also laps up the rally. In contrast to economic gloom, every bleak forecast about what he will do to America’s constitution and the rule of law has proven true, or even too optimistic.
Those who are bearish on the outlook for US liberal democracy are unlikely to lose their shirts. That same analytical realism should be applied to America’s surprisingly robust economic outlook.
The One Big Beautiful Bill Act, which passed in July, contained the essence of Trump’s political economy. It was a reverse Robin Hood budget that funded tax cuts for the rich partly from the proceeds of squeezing the safety net for the poor.
In moral terms, Trump’s budget was a betrayal of his promise to blue collar Americans. The bill was also fiscally reckless. Yet its tactical art was to frontload most of the tax cuts for today and delay most of the spending cuts until after next year’s midterm elections. The pleasure now/pain later approach is standard Trump. There is no law that says his luck will end in the next year.
Democratic candidates are nevertheless likely to do well in next week’s Virginia and New Jersey gubernatorial elections. The US government has been mothballed for almost a month. Democrats refuse to agree on reopening until Trump reverses impending cuts to healthcare subsidies. Should the impasse persist, millions will suffer soaring costs. Millions could also lose their food stamps.
My bet is that Trump will climb down while claiming not to. Even in surrender, however, his luck might persist. The market would doubtless toast the removal of yet another brake on its irrational optimism.