The U.S. presidential election is over. What remains is a disorienting miasma of fresh economic uncertainty.
Despite reams of campaign proposals, just how President-elect Donald J. Trump’s administration will handle policy decisions that are crucial to the global economy’s path — on trade, technology, climate, industrial policy and more — is still unclear.
Meanwhile, pre-election sources of instability keep spinning. War rumbles on in Ukraine. Escalating conflict in the Middle East could reignite a rise in food and energy prices. China, a vital engine of global growth, is trying to resuscitate its flattened economy. Many poor and middle-income countries face an unscalable wall of debt.
Increasing bouts of extreme weather continue to destroy crops, wreck cities and swell the flow of migrants from economically devastated regions. And advances in artificial intelligence are poised to eliminate, create and reconfigure tens of millions of jobs.
Then there is the hangover from the pandemic. Philip N. Jefferson, the vice chair of the Federal Reserve, has said that policymakers are still trying to understand the economic aftereffects of this “once-in-a-century disturbance of worldwide consequence.”
Inflation, in particular, has become harder to predict in the pandemic’s aftermath as political and military tensions have risen, he noted.
The one certainty about such uncertainty is that it tends to be bad for the economy. Businesses are more wary of investing, expanding and hiring. Consumers are less eager to spend their savings. Lenders may be more worried about extending credit, and as a result will increase the costs of borrowing. And such broad uncertainty almost always foreshadows a decline in output.
Researchers have created several surrogate indicators for economic uncertainty. One of the most widely used is the Economic Policy Uncertainty Index, which track mentions in the media of the term “policy uncertainty.”
According to this index, uncertainty has been steadily rising in the United States since the 1990s.
Election years traditionally see an uptick. In American presidential elections that were polarized and closely fought, uncertainty rose by 28 percent on average in November compared with other election years.
As for this election, it hit “all the alarm bells for extremely high levels of uncertainty,” said Nicholas Bloom, one of the creators of the index and a co-author of the election study.
“Trump is a one-man uncertainty machine,” Mr. Bloom said. He noted that even in 2016, when the index was created, “all the uncertainty metrics surged after Trump’s election because he used to just kick out a lot of pretty radical policy ideas and no one was quite certain if they would happen.”
And the effect was global. Mexico, Canada, China, Taiwan and Europe all felt the impact, Mr. Bloom said, primarily because of Mr. Trump’s victory but also because of Britain’s decision several months earlier to withdraw from the European Union.
A second Trump term promises more of the same.
Mr. Bloom, who surveys hundreds of companies, said most were “holding their breath, and could continue to hold it through 2025 or even 2026,” delaying investment and hiring decisions depending on how quickly clear policy decisions are made.
Mr. Trump has proposed a raft of economic policies that sharply diverge from decades of American policy and trounce the rules of international commerce, including across-the-board tariffs as high as 50 percent on all imports, with those on China reaching 200 percent. Most economists predict such a path will invite retaliation, slow growth and fuel inflation.
Plans to further cut corporate taxes could bolster growth but also drive up the deficit.
He has criticized bipartisan multibillion-dollar legislation to invest in critical advanced technologies like semiconductors and electric batteries.
And his plan for mass deportations would not just extract an enormous human toll, but also severely disrupt the labor supply.
Other proposals that have been floated are more extreme, like eliminating the national income tax.
In reaction on Wednesday to Trump’s electoral win, the markets signaled disruption: The value of the dollar surged, flattening the currencies of Japan, Mexico and Europe, all key American trading partners.
The latest economic outlook from the International Monetary Fund predicted slow but stable growth in the global economy of 3.2 percent. The report, which came out two weeks ago, also noted that the United States was likely to grow 2.8 percent next year, more than previously expected.
But fat red flags were attached because of the high levels of uncertainty. Sudden eruptions in financial markets could weigh down investment and growth and push new debt crises. Unexpected spikes in commodity prices and persistent geopolitical tensions could prompt inflation and financial instability. The once-inconceivable contraction of China’s real estate sector could last longer than expected and dampen global growth. New tariffs and trade restrictions could disrupt supply chains. Rising social tensions could puncture consumer and investor confidence and paralyze policymakers.
More recently, fights over policies in other in major economies like Germany threaten to bring down the governments.
Before the election, JPMorgan Chase had put the probability of a recession next year at 45 percent — pretty much the same odds of a coin toss.
Mr. Bloom has what he calls an “Anna Karenina” view of the economy based on the novel’s opening line about happy and unhappy families.
“Expansions are all alike,” Mr. Bloom said, “but recessions are all totally different.”
“If you look back at recent recessions, they’re always completely unexpected events that no one saw coming,” he added, and they arrive at random intervals.
Such uncertainty can increase risky behavior.
In China, investors who are flooding into the casino-like stock market said that doing something — anything — at least gives them some sense of control at a time when the economic future looks grim.
Economists are at pains to differentiate between risk and uncertainty.
Think of the coin toss risk of a recession next year. Even if you do not know which side will come up, you at least know the range of possibilities: heads or tails. You know the chance of winning or losing is one out of two, even if you do not know how the coin will fall.
But now imagine if a winner or outcome were determined by the flips of several coins — except you do not know how many coins or how many times each one will be flipped. That’s uncertainty.
“I don’t think people understand how damaging uncertainty is,” said Dan Ariely, a behavioral economist at Duke University and the author of “Misbelief: What Makes Rational People Believe Irrational Things.”
Uncertainty ends up breeding more uncertainty as people search for answers and explanations. “You want an organizing principle, you want to understand what is happening, you want to feel in control,” he said.
Norman Mailer’s 1995 book “Oswald’s Tale” about Lee Harvey Oswald makes a similar point that any explanation is better than no explanation when it comes to traumatic events like John F. Kennedy’s assassination — or to update, a pandemic that leaves economic scars and a profound anxiety about future prospects.
To concede that such events are blindingly random, Mailer writes, is to concede that “we live in a universe that is absurd.”
And what could be more terrifying than that?
The post Another Jolt of Uncertainty for a Global Economy Mired in It appeared first on New York Times.
