Donald J. Trump trumped the political world. He won when few gave him a chance. But will Trump be able to trump markets and win there also?

How Does One Trump Markets?

Defining what it means for Donald Trump to win in the economic sphere is not a simple thing.

Markets are complex and difficult to define:

• First, there is no official definition of what winning and losing means.
• Second, there is no defined date when an assessment is made (as opposed to an election in politics).
• Third, “markets” mean different things to different people. Some see one or two markets while others see each individual transaction as itself a market.

For purposes of this article, assumptions are made to simplify what it means to win or “trump markets.” Only economic markets will be discussed.

Economic Markets

Defining Economic Markets

Economists divide economics between micro-economics and macro-economics. The former deals with individual entities within the economy. The latter purports to aggregate the outcomes into a composite measure of economic activity — GDP. Despite defects and limitations, GDP is the measure used to judge economic well-being.

Defining Winning in Economic Markets

President Obama inherited a terrible financial crisis which seriously affected GDP. The economic system survived the financial crisis but Obama’s policies were unable to restart growth and return the economy to normal. This chart shows peak economic growth by president from FDR forward:

Obama is the only president since Hoover to not have at least one year of peak growth exceeding 3%. Beyond this conclusion, several other observations from the chart can be stated:

1. Combining Kennedy/Johnson as if they were a two-term combination and Nixon/Ford results in a monotonically declining trend in peak level of GDP growth from Roosevelt through Jimmy Carter.

   

2. The decline continued after Reagan, with no subsequent president exceeding the peak GDP growth of Jimmy Carter.
3. The chart presents a picture of a nation in decline, growing slower and essentially becoming poorer. (Changes in the measurement of GDP over the years tend to make recent growth more favorable than measures used earlier.)
4. After Reagan no president produced at least one year of 5% growth. The “great economic times” of Bill Clinton had a peak year of just over 4% and that was exceeded by the “failed” Jimmy Carter.
5. Obama inherited a terrible economy and GDP in secular decline. He improved the former but worsened the latter.
6. It has been at least 28 years since we had a peak year of what could be called strong growth.

In light of this chart, a fair GDP growth rate to define as winning might be three percent. That would exceed all of the eight Obama years and several years for prior presidents.

Defining The Time Horizon

A time horizon of two to three years is reasonable. Assuming there is not another financial crisis, expect GDP to be north of 3% on an annual basis before the next election.

Rationale For Optimism

The secular decline in the US economy should be obvious from the chart above. During this period, government grew relentlessly, playing a larger role in the economy. Three factors are critical:

1. Government growing larger relative to the Productive Sector.
2. Macro-economic policies designed to spur Aggregate Demand via Debt financing.
3. Micro-economic policies that penalized individual effort.

Ronald Reagan entered office intending to reverse these. His success was limited to number 3. Tax cuts and rollbacks of regulatory overreach produced extraordinary economic growth temporarily.

Taxes and the regulatory state are now more burdensome than when Reagan entered office. What he accomplished has long been reversed and made worse.

To the extent that Trump does what he promises, a Reagan-type reversal in the size and role of government will occur. If that happens 3% GDP growth should return. To paraphrase an old Bill Clinton campaign slogan — It’s the government, stupid!

Less than 3% in three years should be deemed a failure (subject to the caution below). Four or five percent is not unattainable.

A Caution

The above commentary assumes there will not be another financial collapse in the next three years. This is an assumption, not a prediction.

The Federal government (and many State and Local governments) are insolvent. Their debt and promises are more than they can ever pay. (Federal obligations alone are now estimated at more than $120 trillion. That approaches $500,000 for every man, woman and child in this country.)

Ultimately this insolvency will produce a default that will trigger a crisis greater than 2008. No one knows what will trigger the event or when it will happen.