As the prospect of Donald Trump’s impeachment became a shade more real last week following a big day in court for Michael Cohen, the president went beyond his standard “witch hunt” mantra, and warned of the economic impact his impeachment would have. "I will tell you what, if I ever got impeached, I think the market would crash,” Trump said in a Fox News interview. “I think everybody would be very poor, because without this thinking, you would see — you would see numbers that you wouldn't believe in reverse."
Is Trump right?
Salon enlisted four economic experts to discuss the economic impact of a Trump impeachment. And, as you might expect, they all agreed that without America’s stable genius in the Oval Office, the markets would indeed crash, everybody would indeed be very poor, and … kidding! We’ll be fine.
In a general sense, divorced from Trump, what's the effect of an impeachment on markets?
Peter Atwater is an adjunct lecturer of economics at the College of William & Mary. He is the author of the book “Moods and Markets,” which details how investors can improve returns by using non-market indicators of confidence.
Impeachment, to me, is likely to be a climaxing, capitulatory event. So typically it's the kind of thing that you see at a major low in confidence. It is for a political figure what the ousting of a CEO is in the corporate environment. To me, it's akin to a bankrupting of something like Lehman Brothers. It's an ending event, not a beginning event.
As a behavioral scientist, I believe that impeachment is the consequence, not the cause. So what happens is confidence starts to fall, politicians are in the business of responding, and as confidence falls they would ultimately be put in the position of having to act, as opposed to wanting to act.
Having watched the Republican members of Congress, they respond to mood just like everybody else. So to the extent that they believe that President Trump is hurting their party, that Trump has lost the confidence of the party's voters, they would respond.
What typically happens when there is impeachment is that the perceptions of uncertainty really starts to take off, and there's a sense that things are only going to get worse. So what you need is people within the party extrapolating that he is a problem that is only going to get bigger and bigger.
I think that could come out of the perception that Trump is compromised — the question of whether he is deeply involved with the Russian state, that he has been treasonous. And there are admittedly enormous challenges for that perception to occur. Having said that, what you would normally expect to see is the backdrop of a failing economy, people becoming open to those ideas as a way of blaming the president for their other hardships. So, the reasons become secondary to "I'm in a really bad mood and a really bad place.I need someone to blame and the president is an easy target."
Lee E. Ohanian is a professor of economics at UCLA, and also a senior fellow at the Hoover Institution at Stanford. He previously advised the presidential campaigns of John McCain, Mitt Romney and Jeb Bush.
I expect substantial market turbulence for several days, perhaps weeks, immediately following an impeachment, with lower stock prices and higher interest rates. Longer-term, I expect markets to return to their previous levels. Ideologically, [Mike] Pence is similar to Trump in some respects, though more sympathetic with economic openness.
Ajay Shenoy is an assistant professor at the University of California, Santa Cruz, who studies the impact of contemporary politics on the economy.
Based on our tiny set of historical examples, the lead-up to impeachment is more important than the act itself. Impeachment (much less departure from office) is never a surprise. The impeachment articles against Nixon came after many months of scandal, and Ken Starr was investigating the Monica Lewinsky affair for almost a year before the actual impeachment proceedings [against Bill Clinton] were filed.
Since markets react immediately to information, they usually price in the possibility of impeachment long before it happens. For example, there was an 8 percent decline in the S&P 500 index between the Supreme Court's ruling that Richard Nixon had to turn over his tapes, and the release of the "smoking gun" tape that made his departure inevitable. On the date of his resignation speech the reaction was muted. In the case of Clinton, there was a big increase in volatility on the day of the opening statements in the Senate trial. But over the course of the trial [that volatility] edged downward. The pattern in the S&P was similar.
It's worth noting that for the two cases above, at least, the market movements are tiny compared to major economic events. The 8 percent decline in the S&P after Nixon's tapes were released is nothing compared to the 25 percent decline after Lehman Brothers declared bankruptcy. For both Nixon and Clinton all movements returned to trend within a few months. The markets seem more concerned with the risk of political instability than the identity of the president.
Joann Weiner is director of the applied economics graduate program at George Washington University.
Markets tend to move because of economics, not politics. Looking at historical episodes that are similar, we see this fact. When Spiro Agnew quit in October 1973, followed shortly thereafter by the "Saturday Night Massacre" when Nixon fired special prosecutor Archibald Cox and forced the resignations of his attorney general and deputy attorney general, the economy was about to tip into a recession that lasted until March 1975. The Yom Kippur war was underway and oil prices were spiking. Due to the OPEC oil embargo that restricted sales to the U.S. over the Americans' support for Israel, Nixon had severed the last links to the gold standard in 1971, which led to inflation, and had put into place wage and price controls as well as surcharges on imports (they were removed).
Though not an impeachment, by the time Nixon resigned in August 1974, the economic news was no better than it had been months earlier. It was essentially economics, not politics, that drove markets down. While the markets did fall for several weeks immediately following his resignation and the economic recession didn't end until March 1975, the resignation was not the cause of the sustained downturn.
During Clinton's impeachment process, which started in late 1998 and ended with acquittal in February 1999, the market actually went up. The economy had been growing since March 1991 and only fell into recession when Clinton was out of office. The dot-com bubble burst.
More specifically, what do you expect to happen if Donald Trump were impeached? (Both in the short and long term.)
Atwater: Typically, you would expect that by the time we get to the point of impeachment, the market has already fallen because the economy is weakening. Again, impeachment is the consequence of falling confidence. So we should see things beyond just the impeachment that suggest confidence has fallen already. So, the stock markets should have fallen, and you'd see some sort of growing concern about the growing economy.
One of the things you see in terms of confidence during periods of authoritarianism is that "I am powerful because my guy is in charge running things and your guy isn't. That does complicate this. I think impeachment becomes very, very difficult. It will have to be associated with other conditions that make people angry and make them want to blame the president.
In a normal situation, you would see post-impeachment policies aimed at stimulating the economy because confidence is low, people are feeling uncertain and there's a desire to get things back headed in the right direction.
Shenoy: Needless to say, any prediction is uncertain at best. But based on past impeachments, I'd guess much of the movement will come in the lead-up to the trial and removal, and its extent will depend largely on how the president handles the situation. Based on his past behavior, I expect he would actively increase the political risk. He has described the Mueller probe as a "witch hunt," and his lawyer [Rudy Giuliani] has said he believes the "American people would revolt" if the president were impeached. If he escalates such rhetoric, investors could perceive a risk that impeachment and removal might cause the president's supporters to protest or engage in violence. In that case, markets might decline and volatility might increase between major revelations (e.g., firing the special counsel) and the trial. In other words, my guess is that markets would react much as they did in the lead-up to the 2016 election when it was widely expected that Clinton would win but candidate Trump might contest the outcome.
Assuming any protests prove short-lived and relatively peaceful, markets would recover lost ground after the president is removed.
What's the best case scenario for the economy if Donald Trump were successfully impeached? Worst case?
Atwater: Impeachment ends the uncertainty. It's one of those contradictory things. When I talk to groups, I often put up charts with the confidence associated with the failure of Lehman Brothers, because Lehman Brothers marked the low in confidence in 2008. And confidence rose immediately after the fall. And that's just so counterintuitive to people. People would be like, "No, no, no. I felt worse because of Lehman Brothers." And it's like, "No, actually you didn't. It's objective and I can show you."
Ohanian: Best case is even higher economic growth than we currently have, as Pence is more politically effective in Washington and his economic policies would be at least as pro-growth as Trump’s.
Worst-case scenario for growth is if there was divided government following the November elections, in which the divisions between the parties may be so large that it becomes difficult to implement policy. This could lead to lower business investment and hiring, both of which have been very healthy as of late.
Shenoy: Best case: The president calls for calm in the lead-up to impeachment and, once the process begins, urges his supporters to accept the outcome whatever it may be. (Alternatively, he resigns before the trial if he thinks the outcome inevitable.) After he resigns or is removed, he calls for a peaceful transition of power and broadcasts his support for now-President Pence. In this case, I'd expect movements in the lead-up to impeachment to be small. (There might be declines that would be reversed upon the release of the president's reassuring statements.)
Worst case: The president actively calls on supporters to demonstrate or "revolt" throughout the process. Upon removal, these protests turn violent until the police are able to restore order. Markets would decline and volatility would rise in the lead-up to the trial. The first reports of violence might trigger a sharp decline in prices and a spike in volatility.
But in both cases I expect all movements to be short-lived. Markets would probably return to trend in the weeks after the trial.
Weiner: Best-case scenario is that markets believe that economic prospects are good, and they continue to go great guns, as they have been in the past few months. Growth might even accelerate, as a new president might move away from the economically damaging tariff and non-tariff barriers that the president is imposing. That would help the economy grow.
The worst case would be if Trump decided that if he was going to be tossed out of office, he would "take the economy down" with him. That scenario doesn't seem likely, but it is a worst-case scenario. A new president would hopefully undo those policies as soon as possible.
If Trump left office in the next year, what lingering effects would the American and world economy feel from his policies?
Shenoy: Most of his policies were made through executive order and could be reversed fairly easily. For example, I would expect a President Pence to start reversing his tariffs. Pence or a future president might take steps for the U.S. to rejoin the Trans-Pacific Partnership. The EPA's new pollution regulations are unlikely to be reversed by Pence but could be reversed by a future president. (The new policy in any case is likely to be snared in courts for some years.)
The tax cut, by contrast, could not be reversed until 2020 at the earliest, and might be hard to reverse even then. It will cause the deficit to expand more quickly than it would have otherwise, potentially forcing a new policy to increase taxes or cut spending in the future.
There might be a more subtle lingering effect on the perceived uncertainty of U.S. policy. Foreign governments [might] be more wary of making trade deals (or might demand legislation rather than executive order backing the deal) now that there is precedent for the U.S. to pull out of trade deals or unilaterally raise tariffs. The Trump administration has also undermined the World Trade Organization, leaving it less able to mediate future trade disputes. That might make disputes more likely and less quickly resolved.
Weiner: The American economy would still have the tax cuts, because apart from the tax cuts for the upper income, the Democrats, if they have the opportunity, won't take away the beneficial policies. For example, President Obama extended the Bush tax cuts for everyone except the top income earners. As a tax expert, I'd like to see the tax breaks for pass-through entities scaled back, since they are clear giveaways to the topmost income levels and it is difficult to put strong enough "guardrails" in place to prevent abuse of this provision.
The deregulation of business might be turned back, leading to greater controls on things like CAFE fuel standards, drilling on federal land and so forth. Businesses tend to not like regulations, so reintroducing regulation would tend to slow down economic growth. In the long term, the world is better off without these environmental degradations, but it's hard for today's politicians to care about tomorrow’s citizens.
On the deficit, not much is likely to happen. The federal government will have trillion-dollar deficits for a while and Congress is not likely to raise taxes or cut spending to reduce the deficit. The Fed may decide to increase interest rates if inflation starts to grow. But at least for now, inflationary forces are low. Despite record profits, wages are not budging much. And inflation, while at just under 3 percent, is up a bit from the 0.7 and 0.8 percent annual rates of a few years ago, but still is nowhere near the double-digit levels of the 1980s, when the slogan was "WIN" -- Whip Inflation Now.
The world economy would benefit from the elimination of the trade barriers that Trump has erected. A recent study showed that international trade would cause the U.S. economy to be from 2 to 8 percent larger than it would otherwise be. There are lots of assumptions behind those estimates, but they give you an idea of how damaging trade barriers are to economic growth. The world economy would simultaneously also benefit from free trade.
How might President Mike Pence be better or worse for the American economy, in the short and long term?
Atwater: I believe that markets measure mood. They are a barometer of investor confidence, and American sentiment more broadly. Behaviorally, impeachments only occur at major lows in confidence. They represent capitulation and a desire to end extreme uncertainty. As a result, it is highly likely that mood and market values will have already dropped dramatically before impeachment takes place. The net result of all this is that if impeachment marks a capitulatory low in confidence, the economy and the markets should rise no matter Trump's successor.
Ohanian: Pence is a more effective politician and could have a better chance of bringing the two parties together. He is more sympathetic to economic openness and thus we could have lower tariffs, which would benefit the American economy.
Shenoy: I don't have any special insight into Pence's policy positions, but he seems close to the congressional leadership and receives donations from many of the same groups as Paul Ryan. That suggests he would hew closely to the policies favored by Republicans in Congress. Trump himself has only diverged from those policies on trade and immigration. Pence probably would hew to the traditional Republican position even on those issues.
In the short run, Pence would probably move to lift the tariffs imposed by Trump and would avoid introducing legislation that would divide the Republican caucus (e.g., caps on legal immigration). I doubt President Pence would be able to enact any new laws, as the impeachment of a Republican president would probably leave Democrats in control of at least one chamber of Congress (assuming they did not already control it).
Nearly all economists agree that restrictions on trade and immigration are harmful to the economy. If they are less likely under President Pence I'd expect the long-run outlook to be slightly better under him.
Weiner: I don't have a view on Pence and how his policies would affect the U.S. economy. He's likely to appoint members to his Cabinet that have the expertise to do the job. Maybe he'll put an IRS commissioner in place and focus on enforcing the tax law. (The assistant secretary for tax policy at the Treasury is the acting IRS commissioner.) I'd like to think that Pence would take advantage of the expertise from the career federal employees to implement policies that benefit all Americans.
What kinds of global reverberations might a Trump impeachment have economically?
Atwater: You would expect that on a relative basis you would see U.S. currency weakness, that investors would choose to put money elsewhere.
Ohanian: I would expect better international diplomatic relationships, which in turn could promote more coordination of economic openness and lower tariffs.
Shenoy: For the most part I expect they would be echoes of whatever happens to U.S. markets. The U.S. economy is so big that it effectively exports its booms and busts to the global economy. In some countries, most notably China and Europe, Trump's departure might be seen as an end to trade tensions. Their markets and currencies would probably strengthen. By contrast, I would not expect a better outlook for countries like Turkey or Iran, as U.S. policy towards them is unlikely to change.
Weiner: I lived in Belgium during much of the George W. Bush presidency. And while the Europeans didn't like Bush's policies, they didn't really understand America's politics. They thought that the person who won the popular vote should be president.
I would think that most of the world's economic agents would enjoy the stability of a non-Trump U.S. presidency. Instability makes it difficult to plan, and when American policy jumps from one point to another without much rationality, it makes it difficult for companies in any country to make plans for expansion.
Economic growth happens for a lot of reasons. People want to buy more things, companies want to make more things, inflation and interest rates are manageable (or low). To the extent removing Trump from office makes people feel more confident about making plans for the future, then the economy will benefit. The world doesn't care much about our judges and justices, nor about our immigration policy, for the most part.