Uncertainty as a Policy
(picture from Wix's library)
Economists all around the world should thank Mr. Trump for his constant support to our field. Whether he is a genius negotiator, a world-class strategist, or just a very loud egocentric sociopath, Mr. Trump has provided us with an almost limitless number of economic experiments. Thanks to him, we can test many of our models and theories against economic shocks resulting from his political decisions.
As the name suggests, this article discusses the use of uncertainty as a negotiation strategy in politics. Mr. Trump might have used such strategies with remarkable success as a business man but let’s see how this can apply to a country.
Before we start, remember that uncertainty is often said to be bad for business. Although it depends on which market we look at (take a look here for one of my articles on the subject), the economy as a whole tend to slow down when there is too much uncertainty.
Let’s start by trying to understand how an uncertain situation can lead to better results when negotiating policies. The idea is fairly simple: if your political opponent (another political party or a trade partner for example) doesn’t know how far you are willing to go or what you are willing to give up in the negotiations, he or she will be disadvantaged. That’s mainly because the other doesn’t know how much is expected in return for his or her concessions. The same applies when trying to haggle the price of a product down… use your poker face to get better results.
SO!! How does it apply to Mr. Trump and the mighty USA economy?
Well… as per Mr. Trump, he has publicly announced (and promoted through Twitter) very controversial and somewhat extreme policies regarding a wide array of topics: From the Muslim bans to the Mexico wall, passing through cancelling DACA and scrapping the Affordable Care Act (Obama Care), and now to a trade war with China. We’ve had our share of uncertainty with this President of the USA.
In most of those examples, the starting position of Mr. Trump ended up being much harsher than the end result. Assuming that his behaviour is purely strategic (a very generous assumption if you ask me) and not just a lack of knowledge and tact, we can conclude that his consistent use of extremism and uncertainty gives good results… but a good agreement in negotiation doesn’t mean a good result for the economy.
Let’s now focus on how the economy is likely to be affected by Mr. Trump’s conflictive nature.
An economy’s health is based on two basic forces: (1) its current production capacity; and (2) it’s future production capacity. The first force depends on its current access to resources, including natural, human, technological, and political resources. I wrote ‘access’ because things can be imported if they are not locally available. The second force depends on investments that are made today but will become productive later. This includes research and development, investment in infrastructures and the like (population growth can also enter here). We can also include what we call soft-power, which is the political and/or cultural influence of a country internationally.
When a government is stable and somewhat predictable, as most governments of the USA have been in the past decades, firms can accurately assess the future conditions they will face in their respective markets. With this, they can distribute their resources between current and future driven projects, depending on their inter-temporal preferences for investment. Relatively known future conditions means that more firms can feel confident about investing in future projects.
An unstable government, or in this case an unstable President, can obviously have the opposite effect. Although Mr. Trumps’ political strategy may lead to good results for current production (this is very debatable at best), it most probably leads to negative impacts on long-term private investments. Firms may prefer to wait and see what the final law or regulation will be rather than invest right away. This can lead to months or years of low investment in future projects, in addition to projects that will never see the day if they can be moved to another country with less uncertainty.
As an example, I heard interviews with a few CEOs of multinationals operating in countries where corruption was very present. While all of them agreed that a diminution of corruption would be desirable, they also said that institutionalised corruption was much easier to deal with when compared to what we could call free-agent corruption. When corruption is predictable, it can be accounted and planned for. The firm can make long-term decisions even in environments that are not ideal for business, such as a corrupted leadership. However, when corruption is unpredictable, even if it tends to cost less, it becomes an impediment to long-term planning.
To make matters worst, most economies are composed of thousands of firms and millions of economic agents. The majority of these are part of a complex web of interactions that dynamically changes as economic conditions change. Any shock that starts in one industry can have repercussions on many others, in ways that are often very difficult to predict… this can lead to a domino effect in some cases. Markets that are disturbed by uncertainty can have spillover effects on other markets.
Although Mr. Trumps’ approach can eventually lead to political results that are closer to what he had initially wanted, the whole economy is very likely to lose in the end. The prolonged periods of uncertainty during negotiation as well as the extremity of his positions means that less firms are willing to take long-term risks.
We unfortunately don’t have enough data yet to see the effect of his strategies. I will write again on the topic in a few years to let you guys know if my intuition was validated… or not.
I hope you guys enjoyed, take care and don’t forget to have fun!!!!!