Politinomics

Foreword

The country has decided — Trump is the next president of the United States of America. What does that mean economically and financially?

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Politics

To be absolutely clear — I am a registered Democrat and I voted for Harris. She lost, Trump won. I’m not happy about it, but the country voted, and a democracy, a strong democracy, is one where the will of the people is respected. If you do not like the result, you certainly have the right to be upset and protest. But that right only extends to doing so peacefully and respectfully.

Other than the little paragraph on top, this post is about finance and economics, specifically what I think the results of Trump’s stated preferences, as well as his actions in office the first time around, have on the country.

Explicitly, this post is not about the differences in policies between Trump and Harris, nor why I (or anyone) prefer one candidate over the other, nor why one candidate’s policies are better or worse than the other.

Tariffs

Trump has made no secret of his love for tariffs, and how he intends to raise the tariffs of all imported goods by astronomical amounts once in office. As far as I can tell (and I am NOT a lawyer nor am I in any way qualified to say so authoritatively), I believe this is something that the president can do, almost unilaterally.

First off, and let’s get it out of the way — despite what the Republicans say, tariffs are inflationary. Yes, I understand that Trump may just be using the tariffs as a negotiating tool to get companies to reshore their factories. That’s irrelevant — tariffs are inflationary. To put it simply, consider this — why do you think companies offshore much of their manufacturing processes? If you say because it is cheaper, then give yourself a pat on the back. For better or worse, many workers in less developed countries are willing to work in manufacturing jobs for a lot less than what the typical American worker is willing to accept.

So, if the tariffs don’t work to push companies to reshore, then the cost of the tariffs will mostly be passed on to consumers via higher prices. But even if they do work, and companies reshore their factories, that just means that companies pay higher prices for the labor in their factories. Again, the cost of this will be passed on to the consumer in the form of higher prices. Either way, prices of goods and services that are hit by tariffs will likely go up. The only question is, by how much and when.

That said, tariffs aren’t all bad. If the gambit to reshore jobs work, there is a good chance that it’ll reinvigorate the flailing manufacturing sectors in many parts of America, and that can be a very good thing — providing dignified, good paying jobs to many despondent Americans, while increasing the income tax base significantly.

However, the inflation hit will be immediate and certain — companies can pass on higher costs (tariffs in the short run, higher wage costs in the long run) very easily, while factories and supply lines take years to build so any potential benefits may not even be materialized until Trump is out of office. On the bright side, if the introduction and management of the tariffs are managed well, the inflationary hit may be dispersed over time, so that it is less onerous.

In summary, this is a gamble, and a pretty high stakes one. But one where the reward could be potentially game changing for many, many American families. In that regard, and while I don’t particularly like the man, I certainly hope he succeeds in this goal.

Foreign workers

This is a thorny subject, and to be clear, I am biased — I’ve worked my entire life in tech, and foreign workers are a fact of life in tech — there simply aren’t enough Americans with the right qualifications to satisfy the needs of all our tech companies, and so a large part of the tech workforce are foreigners.

There are, in my opinion, 3 types of foreign workers:

• High skilled, consisting mostly of college graduates in STEM fields.
• Low skilled, consisting mostly of agricultural workers, temporary workers and family members of other foreign workers who don’t have the necessary qualifications for higher paying jobs.
• Illegal/undocumented/unauthorized workers. Regardless of their qualifications, these are generally low skilled workers, since they don’t have the legal right to work.

Trump is on the record for saying that he’s pro high skilled immigrants, going as far as to say that anyone who graduates from an American college with the right qualifications should be given a green card (permanent residency). I don’t know if the president has the ability to do so unilaterally, though I don’t believe so.

As for low skilled foreign workers, Trump hasn’t really made his stance clear as far as I know.

Lastly, for illegal workers, his stance is, frankly, abhorrent — often labeling and maligning them as criminals, especially violent ones.

To be clear, data has shown, consistently, that while undocumented workers do sometimes resort to crimes, the rates at which these workers commit crimes is much lower than American citizens. This makes sense — if you are in the country illegally, the last thing you’ll want to do is to draw attention to yourself. Keeping your head down, doing your job and getting paid while remaining outside of the radar of law enforcement seems paramount. Which is to say, the vast majority of undocumented workers really only want to do their jobs, to provide a better life for their families and to live their lives in peace.

Finally, the data has, consistently, shown that illegal workers are doing jobs that most American citizens don’t actually want to do — those low paid jobs that are less glamourous like agricultural work, janitorial work, construction, hospitality, etc.

For a more nuanced look at illegal immigration, I recommend reviewing these videos which at least try to be informative and neutral, rather than pure scaremongering:

This is not to say that undocumented workers are a boon for the US — they do have a negative downside for Americans, particularly those who are less educated via the crowding out effect, and as such, contribute to (though not the only nor even the main reason for) the economic malaise of those same Americans.

If the flow of unauthorized workers was to suddenly stop, then certain industries will be affected negatively — they would be forced to offer higher wages to American workers, and at the same time, be forced to deal with a labor force that is less motivated to work. These naturally translate into higher costs, which will then be mostly passed on to the consumer, resulting in inflationary pressures.

On the other hand, assuming an equilibrium can be reached such that these less glamourous jobs can be filled, at a labor cost that is not prohibitive, then an argument can be made that this will revitalize many segments of American society, which can have a positive multiplicative effect on the economy. As with the tariffs issue, though, the benefits are likely to take much longer to materialize than the downsides.

In the end, the issue of foreign workers in general and illegal workers in particular is nuanced and complex. There are pros and cons to whatever policies are implemented, whether welcoming them or not, and certainly broad brushes to try and get a quick fix are unlikely to work.

Global order

Anyone who has been paying attention for the past 50-60 years, will know that to a first approximation, the USA has been the underwriter of global security to a very large extent. By this, I mean that the USA has been active in many regions of the world, forming alliances, providing security guarantees, and maintaining military bases pretty much throughout the world.

There are complex geopolitical issues involved in this, and certainly not everyone is happy about the arrangement. To avoid the more thorny issues, I’m focusing mainly on the security of trade routes against illegal non-state actors (i.e. pirates, bandits, etc.), and ignoring the political issues.

While not always successful (see the attacks on ships around the Red Sea), the presence of a well armed and coordinated military has been made a real difference against less organized attackers such as around the Cape of Good Hope, South East Asia, etc.

This has resulted in reduced insurance (and thus carrier) costs for shippers and more shipping routes opening up, which then translates into deflationary forces for imported goods, which is a huge boon for both American consumers and many export-oriented economies, as the USA is the single largest importer in the world.

If the USA was to shift its focus dramatically inwards, as Trump’s (nuanced) isolationist tendencies have hinted at, this could spell trouble for the current system of global trade routes. Whether Trump will do that, though, is not certain — as noted, while he displays isolationist tendencies, it is more nuanced than that, and an outright withdrawal from the world seems unlikely.

Another thing to remember, is that the USA is uniquely positioned in the world — she has abundant natural resources, and is self-sufficient in most critical sectors (or can be with enough effort). So a truly isolated USA may not be economically bad… for the USA.

For the rest of the world, though, it is likely to be an extremely painful adjustment. The bulk of the world’s trades are conducted in dollars, and a large fraction of international debt is denominated in dollars. To simplify things massively, the world (minus the USA) is dramatically short the US dollar. If the US was to draw inwards, the flow of US dollars out of the USA to pay for her imports will slow dramatically, which will likely result in a massive shortage of US dollars around the world. This is likely to result in financial ruptures in hard to predict regions of the world, and can be extremely disruptive.

Summary

Trump’s policies, as he has opined on them publicly, are a fairly dramatic departure from the policies of both Republican and Democrat presidents in the recent past. Many of them have the potential to result in dramatic upsides for the USA in the long run, though come at a fairly high short term cost. Also, remember that we are now discussing the policies in a vacuum — the world is unlikely to sit still and do nothing, and the world’s reactions to Trump’s policies are likely to affect the outcomes as well.

In short, the only thing that seems certain right now, is that the economic and financial landscapes are likely to be volatile for the next 4’ish years. The question is, will this be the kind of volatility that ultimately results in good outcomes? Or not?