Clive Crook: No crash, no problem? Good luck with that

Just how much disruption can America’s economy — and the world’s — endure?

On Monday, Denmark’s prime minister found it necessary to say, “If the U.S. chooses to attack another NATO country militarily, then everything stops, including NATO, and thus the security that has been established since the end of the Second World War.”

In other news, President Donald Trump says the U.S. is now running Venezuela (without actually running it, according to his secretary of state). And apparently the “Donroe Doctrine” really does have Greenland next in its sights, which is why Europe’s leaders are contemplating not just the collapse of NATO but — again, is this for real? — actual military conflict among NATO’s former partners.

All this makes America’s comprehensive repudiation of sound economic policy, as it used to be called, seem almost trivial. The global trading order has been torn down. U.S. public debt is exploding and nobody in Washington cares. The Federal Reserve’s operational independence — long seen, for good reason, as crucial for economic stability — is already compromised and might be about to end definitively.

The chances, a year ago, of such an astonishing lurch toward economic and geopolitical disorder would surely have been judged close to zero. Nothing is any longer to be taken for granted — yet the economy keeps growing and U.S. investors see no cause for concern, much less alarm. Why no crash? How is one to make sense of this?

One popular line of analysis maintains that the undiminished exuberance of financial markets proves the administration’s critics wrong. Each of these departures from normality was supposed to bring down the ceiling, and it hasn’t happened. Indeed, just the opposite: The stock market continues to set records. So Trump must be right — about trade, fiscal and monetary policy, Venezuela, Greenland, you name it.

Sadly, it means no such thing. This discussion overlooks an elementary distinction. There’s no neat or necessary connection between a “crash” — an abrupt reversal in financial markets, with effects that cascade through the economy — and a steady unspectacular toll of economic losses due to bad policy.

Financial markets represent the best available technology for processing relevant information — but they’re susceptible to trends, guided by narratives that are plausible until they aren’t. Whether investors regard current market levels as warranted, weirdly complacent or unduly pessimistic, they all understand (or ought to) that prices can, and from time to time do, shift abruptly on the basis of little or no new information. The U.S. stock market didn’t provide a reliable assessment of U.S. economic prospects in September 1929; nor did it nearly three years later, by which time it had fallen by 89%. The point is simply that the best available reading — historically high (as now), low, or somewhere in between — is reliably unreliable.

Today’s dominant narratives, underwriting steady optimism about the economy, seem to fall under three broad headings. Artificial intelligence will materially boost productivity and corporate earnings; the administration’s tax cuts and deregulatory initiatives will push the same way; and recent events notwithstanding, the administration’s unhelpful policy innovations are partly noise and will turn out to be much less disruptive than feared. Stories like this might even turn out to be true. In any event, they will continue to buoy markets — until they don’t. It was ever thus. Buyer beware.

The fickle judgment of financial markets needs to be distinguished from the slow, steady accretion of policy-induced costs — even supposing that, on balance, the economy continues to prosper. It seems to me not just likely but close to indisputable that many aspects of this administration’s policies will hold the economy back. Tariffs, even if milder than first threatened, will impede competition and promote inefficiency. Higher public borrowing will raise long-term interest rates and crowd out investment. A Fed that’s no longer trusted to guard against inflation will, on that account, be less successful at controlling inflation, which will also nudge longer-term interest rates higher.

Technological advances and pro-growth policies such as lower taxes and/or lighter regulation might offset and perhaps even outweigh all those negatives. With or without Trump, the U.S. economy is a formidable force. But the losses due to America First won’t be eliminated. Heightened geopolitical instability, even if it doesn’t result in NATO countries going to war with each other, will make things worse. The best-case scenario is no crash, plus worse economic performance than could otherwise have been achieved.

An instructive example is the UK after Brexit. Were Remainers proved wrong because the economy didn’t collapse and instead kept on growing? Britain depends on trade much more than the U.S., so leaving the European Union delivered a massive shock. This was Trump-level disruption, for sure — and it came as a stunning surprise, not least to the government. Yet there was no stock market crash, no recession. Instead, as a new study spells out, there was chronic underperformance. By last year, based on a panel of comparator countries, investment in the UK was 12%-18% lower than it would have been otherwise, and output 6%-8% lower. Going forward, these losses look set to worsen. No sudden collapse, no outright stagnation — but the Remainers were right.

Of course, the full-bore America First crash might yet happen. This White House has a seemingly insatiable appetite for risk and disruption. If ever there was a time to invest conservatively, this would appear to be it. If that narrative should ever catch on, watch out. Regardless, with or without a crash, it’s way too early to say Trump’s policies stand vindicated.

____

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics. Previously, he was deputy editor of the Economist and chief Washington commentator for the Financial Times.