Thoughts on the Trump-Biden-Trump era

Nationalism and fiscal excess

Yesterday was a loooong day. I woke up in Kii Katsuura, on Tuesday, November 5. Took a 4-hour train to Nagoya, and then another 2 hours to Haneda airport. At 6pm I left on a 9-hour flight for San Francisco. Barely got 20 minutes of sleep. After all that, I found it was still only 10am when I landed. And what a shock to leave a country where everything is priced 1/3 to 1/2 US levels, and land at an airport where everything is twice normal US prices.

After a long layover, I had another flight to Orange County, where I turned on the TV and immediately saw that Trump would win. Was annoyed to hear the news commentators talk like it was a close election, still up in the air. Why must they treat us like children? Today, I’ll discuss the polls, and then a bit about economic policies. But last night’s big winner was Vladimir Putin.

Part 1: What’s wrong with the polls?

I don’t have a strong track record as a presidential election forecaster, as I got the two previous ones wrong. But even in 2020, I was more accurate than the polls in a “point estimate” sense. The polls had Biden about 7 or 8 points ahead, and at least 4 points ahead in tipping point states like Wisconsin. He actually won Wisconsin by about 1/2%. I knew that the polls were biased, consistently underestimating Trump’s strength, and I also knew that the Electoral College favored the GOP by more than 3%.

Last night’s election showed the exact same bias—Trump did better than polls suggested in tipping point states like Wisconsin, for the third election in a row. Will the pollsters ever learn? (The polling miss cannot be explained by “margin of error” excuses, as almost all state polls showed errors in the same direction.)

In my previous post I gave Trump a 75% chance of winning, including a 50% chance of a comfortable win with a popular vote majority and a swing state sweep. That seems to be roughly what happened (although the popular vote lead will shrink somewhat as late California votes are counted.)

This is part of a global trend of voters punishing politicians in power during the post-Covid inflation, with incumbent governments in places like Japan and India also doing worse than expected. The only surprisingly strong showing for the Democrats was in the Nebraska senate race. But even that fairly close race reveals the weakness of the Dems, as Dan Osborn did surprisingly well precisely because he ran as an independent.

Lots of people predicted this outcome, but (AFAIK) I was the first, with an accurate prediction of Trump’s 2024 victory at a time when the media suggested that even the 2020 election was still in doubt. So perhaps that makes up for getting 2016 and 2020 wrong. On the downside, the Electoral College advantage to the GOP mostly went away, something I did not anticipate. The margin in the tipping point state (Pennsylvania I believe) will be similar to the national vote margin (close to 2%).

[Nate Silver has an excellent explanation of why Harris lost, and I’d especially emphasize point #14.]

Part 2: The wolf is approaching

For almost my entire life, pundits have warned about an impending fiscal crisis, due to America’s chronic budget deficits. Like the boy who cried wolf, that risk was mostly imaginary. But in the late 2010s, our fiscal policy really did become quite reckless. And just as in the famous story, the townspeople have tuned out the relentless warnings. Thus I need to spend a bit of time explaining why prior to 2016 our fiscal situation wasn’t as dire as people thought, but now really is quite bad.

I’m going to show you some timelines for the US budget deficit during periods of economic expansion. As you know, deficits generally get much worse during a recession. That’s actually appropriate. They usually get much better as the economy recovers, which is also appropriate. Even during the Vietnam War period, there was only one year of a significant budget deficit:

The deficit got worse during the severe 1974-75 recession, but then gradually improved:

Same story in the 1980s:

The 1990s is a particularly strong example:

But the same general pattern occurred during the 2000s:

After the severe 2008 recession, the deficit did significantly improve. But after 2016, the deficit began worsening again even as the economy continued to strengthen. Even before Covid, the deficit had more than doubled in size over 4 years, at a time when it should have been rapidly shrinking:

Unfortunately, the same pattern is occurring in the recent recovery. By early 2022, the economy had reached 3.5% unemployment. We should have had a budget surplus, or perhaps a small deficit. Instead, the deficit remained very large, and has again begun to worsen:

Prior to 2016, we were not on an unsustainable fiscal path. We generally ran budget deficits, but (nominal) economic growth kept the national debt on a sustainable path as a share of GDP.

Today, the “grown-ups in the room” have lost power in Washington and we’ve adopted the fiscal policy of a banana republic. Unfortunately, my profession is partly to blame for this sad state of affairs. In the late 2010s and early 2020s I saw economists on twitter dismissing budget deficits as if it was something that only old fogies complain about. But just as inflation becomes a problem when central banks stop worrying about inflation, deficits become a problem when economists and politicians stop worrying about excessive borrowing. And now we have a truly dire fiscal situation.

Part 3: Authoritarian nationalism

Fiscal excess is one unfortunate aspect of the Trump/Biden years. Nationalistic economic policies are another. Trump instituted a series of protective tariffs, which failed to reduce the trade surplus (just as economists predicted). Biden mostly kept those policies in place, and added some of his own. Protectionism is another typical characteristic of banana republics.

For my entire adult life, I’ve strongly opposed socialism and nationalism. For a time in the 1980s, 1990s and 2000s, things seemed to be moving in my direction. These were far and away the best decades in global history, with an amazing reduction in global poverty and a wave of democratic reforms. Unfortunately, neoliberalism is now out of style, and nationalism increases the risk of international strife. (Let’s hope we avoid an outright war.)

Right now, the US economy looks very good. But I see a few warning signs. The inflation problem has not gone away, despite reports of a “soft landing”. As with fiscal policy, I worry that stimulative monetary policy is making things look good right now at the cost of future problems. Next year should be a good test—I anticipate that inflation will remain stubbornly above 2%. My hunch is that 2026 will be the year when we start paying the price for irresponsible monetary, fiscal and trade policies. I hope I’m wrong.

I should probably add banking policy to the list, as I expect the new administration to add more “moral hazard” to the financial system. Good for juicing the economy in the short run, but as we saw in 2008 . . .

Some of this will depend on future policy choices. Expelling 11 million illegals would obviously hurt the economy, which is why I don’t think it will happen. Will Trump impose taxes increases on low income Americans to provide a big tax cut for Elon Musk? Your guess is as good as mine. Some people claim that protectionism is Trump’s only sincere policy preference, and that all the other stuff was fake—done for political reasons. Now that he’s a lame duck, it will be interesting to see his actual policy preferences.

I do not expect a repeat of Trump’s first term, as he is now in a far more powerful position. There is no longer any chance that the Senate would ever convict him in an impeachment trial, and the Supreme Court has ruled that he’s completely above the law for any (vaguely defined) official duties. Whatever you think of the old idea of “checks and balances”, that system is gone. Trump can do as he likes. This time, I expect he’ll be able to find one of those “German generals” (Trump’s term) that will not push back at his more whacky proposals.

On the plus side, it’s important to recall Adam Smith’s remark that there is a great deal of ruin in a nation. The US is still the world’s leading economy, and it is likely that we’ll come to our senses before declining to the level of a place like Argentina. History goes in cycles, and the US has been through some other difficult periods. There was a moment in 1937 when the system of checks and balances seemed gone, before we pulled back from the brink. Presidents have only a marginal impact on the direction of the country. So there’s always reason to hope.

Random notes:

1. I was somewhat of a contrarian grouch during Biden’s first year in office, when I saw center-left pundits suggesting he was the most consequential president since LBJ. He may or may not be judged to be a bad president, but it’s now clear that he was no more important than Jimmy Carter.

2. Perhaps this election will cause the GOP to favor open borders as a way to bring in more Hispanic GOP voters. Seriously, it’s amusing that people still believe open borders are a Democratic plot to boost their electoral fortunes. Smart GOP insiders react with glee when the Dems allow in millions of undocumented immigrants. Ditto for far right parties in Europe.

3. I’m sticking with my earlier claim that female candidates are at a disadvantage in US presidential elections (but not in other elections.) Unfortunately, some voters (both male and female) see the presidency as a man’s job. Nonetheless, Biden also would have lost, probably by an even larger margin.

4. One silver lining is that the far left was crushed in local California elections. Perhaps my state is beginning to wake up and woke down.

5. In my tipping point post, I suggested that Trump’s scandals would hurt him more in Wisconsin than in most other states. That seemed to be the case. Also note that the two states where Trump seems to have been hurt the most were Utah and Washington, both areas with a strong distaste for corruption. And then there’s New Jersey . . . LOL.

6. Cleveland and Trump are the only two people to serve non-consecutive terms as president. Cleveland was one of America’s most honest politicians. He favored lower tariffs. He ran budget surpluses.