A view over Trump’s victory and his future economic policies from an expert in behavioral economics and philosophy of mind, who kindly accepted to write for http://www.tnk4finance.com about this topic.
People who feel to be losing tend to be riskier (Prospect Theory of Kahneman and Tversky), and even if ambiguity and uncertainty support a more prudent behavior the risk propensity in a losing condition is stronger. This behavioral propensity may explain why many Americans from the declining middle class in states traditionally democratic such as Pennsylvania, Michigan, Wisconsin and Ohio voted for Trump on Election Day. It is better the uncertainty of a Trump presidency than the progressive loss of purchasing power experienced during the last years. Trump’s electoral success in these states is the major determinant of its election as President.
What may this middle class expect from Trump’s economic policy? In the short term, some good news are coming from his commitment towards a Keynesian multiplier of a strong public demand for new physical infrastructures as bridges, buildings, trains, airports, harbors and so on. Undoubtedly, other good news arise from the likely decrease of taxes and fiscal burdens. These changes will fuel an increase in the private demand and consequently a stronger economic growth.
Perhaps also some protectionist measures towards goods and human capital will increase in the short term their purchasing power.
However, what about the middle class and the long term? The consequences of this policy will be a dangerous increase in public debt. The spike in public debt will make federal expenses soaring. Federal Reserve, consequently, would hike official discount rates in order to prevent inflation, strengthening the US dollar. More inflation and higher cost of imported goods will be the result of these expansionary spending policies of the White House. Trump would be then forced to increase tax imposition and to stop public demand. The deterioration of economic climate would be worst if Trump, along with the Republican Congress, tried to change the independent status of the Federal Reserve. The situation would be higher instability and volatility for the loss of transparency of the monetary policies of the Federal Reserve in a moment when cost of debt would be higher and the deficit increased.
After some years, the middle class worker of Michigan or the white collar of Pennsylvania would find themselves in a worst condition than the one experienced during Obama administration. Probably they would have been better off by listening to their System II of thinking (Kahneman, “Thinking, Fast and Slow”, 2011) for a more prudent choice of an experienced politician such as Hillary Clinton, instead of shooting in the dark with a Trump presidency.
By Riccardo Viale
Professor of Behavioral Economics, University of Milano-Bicocca