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An uncertain time for business

 

AN AGE of uncertainty is upon us. For the past three decades or so, businesspeople have been able to steer by a few lodestars. Trade negotiators lowered and simplified trade barriers. Central bankers tried to keep inflation to a minimum. Policymakers around the world negotiated multilateral treaties on the environment. Global bodies such as NATO provided security in Europe. Today the lodestars are exploding, one after the other.

Meanwhile, Donald Trump is making policy on the hoof. It turns out that the Affordable Care Act of 2010, or Obamacare, is not so bad after all. A big section of his planned wall on the border with Mexico will be a fence. In the past presidents have always arrived in the White House with a detailed set of policies. Mr Trump arrives with a tatty envelope scrawled with a few jottings on the back. Across the Atlantic, Brexit has opened a Pandora’s box: nobody knows whether Britain will leave the European single market or negotiate the equivalent of an associate membership. The Supreme Court has yet to determine how much say Parliament will have in shaping the negotiations.

One of the big promises from populists is to get economies moving again. Mr Trump has laid out a neo-Reaganite policy of cutting taxes and boosting spending, particularly on infrastructure. His European allies, such as Hungary’s prime minister, Viktor Orban, and would-be allies, such as France’s Marine Le Pen, leader of the National Front, have made similar noises. Another is to “drain the swamp” of their respective capital cities by subjecting self-serving elites to the wrathful scrutiny of the people. Yet economic uncertainty, which holds down growth, will reduce the populists’ ability to honour the first promise. And the fact that firms usually respond to uncertainty by splurging on political lobbying may mean reneging on the second.

So far Mr Trump’s pledge to get the economy moving has received a surprisingly positive response from Wall Street—the stockmarket has surged since his victory. Economists polled by the Wall Street Journal slightly lifted their forecasts and are predicting that the economy may expand by 2.2% in 2017 and by 2.3% in 2018 as the expected fiscal stimulus kicks in. Optimism could easily pall. A fiscal stimulus could prove toxic if it leads to higher deficits, and thence to higher inflation and interest rates. Other signature Trump policies, such as restricting trade or legal immigration, would damage the economy if implemented.

All the while, political uncertainty will pull companies in the opposite direction from the one in which the stimulus is supposed to push them. Businesses will refrain from making hard-to-reverse investments if they are unsure about the future. Helpfully, three economists—Scott Baker of Northwestern University’s Kellogg School of Management, Nick Bloom of Stanford University, and Steven Davis of the University of Chicago Booth School of Business—have developed an index of economic-policy uncertainty that monitors this. It goes back to the 1980s and shows that high levels of policy unpredictability go with lower business investment and weaker economic growth. Companies have an excuse to put off big decisions, particularly of the long-term kind, such as investing in machinery or hiring permanent as opposed to temporary workers. Policy unknowns raise the cost of capital, because they increase the likelihood of default. Consumer demand is weakened because households will build up their savings rather than, say, buy a new washing machine.

The effects could fall most heavily on companies in less competitive industries, and those in manufacturing especially. Firms in the fastest-moving fields, such as technology, have a strong incentive to go ahead and invest in spite of uncertainty rather than lose out to a rival, note Mihai Ion of the University of Arizona and Huseyin Gulen of Purdue University in a paper, “Policy uncertainty and corporate investment”. Old-economy companies that rely on big capital investments in machinery—the sort Mr Trump appears to prefer—are more likely to hold back, hastening decline.

Uncertainty also makes it likely that the swamp will get even swampier. A new paper, “Political uncertainty, political capital and firm risk taking”, by Pat Akey, of the University of Toronto, and Stefan Lewellen, of London Business School, underlines the tight link between political uncertainty and political influence-mongering. The more worried companies are about policy flux, the more money they invest in trying to bring about desirable outcomes. Then they are readier to make long-term investments.

Swamp creatures

Members of Washington’s Republican establishment are particularly well-placed to profit from political turmoil with the Republican Party soon to be in control of the White House and both houses of Congress. Trent Lott, a former leader of the party in the Senate who works for Squire Patton Boggs, a lobbying firm, told the New York Times, “he is going to need some people to help guide him through the swamp—how do you get in and how you get out?” “We are prepared to help do that,” he added. Such people are also well positioned to profit from the fact that Mr Trump has fewer seasoned Washington hands in his entourage than any recent president-elect. The lobbying shops are already promising to help the incoming neophytes draft regulations and laws.

The populists will undoubtedly be able to claim some big victories in the coming years. In America Mr Trump could succeed in persuading companies to bring home billions of dollars that sit abroad by means of a tax holiday and a lower tax rate. In Britain one-off deals with multinationals on the model of the one recently struck with Japan’s Nissan will produce warm feelings on the part of business. A bonfire of regulations will delight small firms. But all the while, uncertainty will pull in the opposite direction. Cash piles will mount. Plant and equipment will age and ossify. The likes of Trent Lott will get richer and more self-satisfied. The age of uncertainty will also be an age of self-reinforcing evils.

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