We were warned. The new president of the United States wasn't here to sit idly by. Only the chosen few can make America great again in four years. He must be thinking, furrowing his brows, to get to work. But the impatience with which he's implementing his illiberal agenda has stunned half the world. It seems like nothing can stop him. But is that really the case? The uncertainty he's generated in 50 days and the risk of economic contraction already looming over the White House could ultimately slow him down.
Tariff policy is its main economic weapon, for the moment. The speed at which it is adjusting makes it difficult to keep track of the scoreboard. In contrast, fiscal policy has so far remained in second place. The scope for tax cuts is limited. With public debt close to 120% of GDP and a deficit above 7%, the sustainability of public finances could be called into question, and a tightening of financial conditions would be difficult to avoid. Furthermore, fears of possible intervention in the foreign exchange market have resurfaced, but it seems that this option is not on the table for the time being. The so-called Mar-a-Lago Accord would aim to devalue the dollar to make the US economy more competitive. Stephen Mirran, the economist chosen to chair the hitherto prestigious White House Council of Economic Advisers, details how this could be achieved in the Guide to Restructuring the Global Trading SystemBeyond the technical difficulties and the disruptive effects that such an action could have on financial markets, Mirran insists that it is possible and desirable.
On the institutional front, activity is relentless and the goal is ambitious: to increase the efficiency of public spending and make the economy more flexible. But the actions being taken point in a different direction. There are fears that the cuts will be selective and ideologically motivated; there are fears that the most vulnerable groups will be left unprotected; there are fears that interference in the judicial system will reduce the accountability of political power; and there are fears that deregulatory policies will be carried out to benefit special interests. If this were the case, neither efficiency nor economic flexibility would be strengthened.
Uncertainty, soaring
In this context, uncertainty has skyrocketed. On a global scale, it is already above the levels reached during the pandemic. In just two months, it has reached historic highs. Uncertainty, if it intensifies or persists, is the mechanism that can have the worst impact on economic activity in the short term. It is already beginning to be felt in the US. The decline in the latest indicators of activity, consumption, and confidence does not allow us to rule out the possibility of an economic contraction. At the end of 2024, the US economy was one of the most dynamic in the world. It is early days, but if confirmed, the turnaround would be historic. The stock market decline is partly due to this fear. The new tenant of the White House has already warned that his agenda pursues long-term objectives, but a rapid deterioration of the economy could act as a brake on his economic policy.
And the institutional agenda? The deterioration of institutional quality, if confirmed, will ultimately impact the economy. Social justice will also suffer. Jaume Vicens Vives wrote that patience is "the art of people who have dominated the political scene." (Industrialists and politicians, Ed. Vicens Vives). It seems like a Chinese proverb, but it is the tempo that the White House has practiced for decades, with greater or lesser success. The same tempo Imposing from the small island of freedom, the woman with soft eyes patiently awaits the arrival of new Americans. We hope that the torch she raises with her firm arm will soon be rekindled.
