In investing, risk requires compensation. Investors will expect a higher return from a risky bet, and — conversely — will pay for certainty. It’s why you pay double-digit rates on your credit cards, while the federal government can borrow for next to nothing.
Let’s apply this analysis to the election. A Hillary Clinton presidency is the safe bet. She offers, more or less, an extension of the Obama presidency. You might think that that’s a bad return, but at least you know almost exactly what it is.
Donald Trump, on the other hand, is a wild card. Who the hell knows what he would do if elected?
I put some of the possibilities on this helpful chart:
Because the distribution of possible Trump-presidency outcomes is wide, you’d have to expect him to be a better president than Clinton on average in order for him to merely be equally as good a pick as Clinton. That is, if Trump were a stock, then you’d be demanding a risk premium to buy him.
In fact, Trump calls for a huge risk premium because, while he probably wouldn’t be a disastrous president, the low-probability disasters that he might cause would be immensely costly. Some of them involve nuclear weapons and global mass deaths. Pricing those risks in properly should push his share price comfortably below Clinton’s, even if you think she is very bad.
One note on the word “risk”: Guy Cecil, who runs the pro-Hillary Clinton super PAC Priorities USA, says that you shouldn’t call Trump risky “because ‘risk’ entails potential upside.”
I disagree — it’s correct to call Trump “risky” because his potential presidency presents upside and downside risks, even if the downside ones are more important.
Let’s look at the upside risk first because it’s less depressing. Trump’s policy statements are so vague and malleable — and often contradictory — that it is possible to pick and choose among them and cobble together a vision of a Trump administration that looks acceptable from almost any ideological standpoint.
He’s for higher taxes on the rich, and lower ones. He’s for a ban on Muslim immigration, or maybe that’s just a suggestion. He considered running for president in 2000 as a pro-choice, pro-assault-weapons ban, pro-wealth tax candidate. Trump is a weather vane — with some luck, he could end up pointing in your direction. So when voters look at him and say, “He might not be so bad as president,” they’re right — he might not be so bad as president.
Personally, I give Trump about a 10% or 15% chance of being a good president from my preference set. Maybe he’d push the Fed to maintain a low interest-rate policy, borrow at those low rates to pursue an ambitious infrastructure-investment program, break the partisan logjam in Congress, and avoid getting the US involved in pointless wars. Maybe his impish anti-charisma that allows him to be a rude boor and likable at the same time will be as convincing to foreign leaders as it has been to many American voters.
That’s one tail of the distribution of possible Trump-presidency outcomes. But if we’re going to think about that tail, then we also need to consider the other tail. That is, we should consider the advice of Sen. Marco Rubio, who said in February that we should not hand “the nuclear codes of the United States to an erratic individual.”
Maybe President Trump would default on the national debt. Maybe Chinese officials wouldn’t love Trump’s insult-comic shtick as much as New York Republican primary voters do, and he’d manage to blow up a minor diplomatic incident into a nuclear war. Maybe he’d dissolve the military alliances that have helped keep Europe out of war for 70 years. Or maybe he’d just go ahead and nuke Europe.
I don’t think that these outcomes are terribly likely. I think Trump is probably sensible enough not to fire a nuclear weapon at Europe. But if he won’t rule it out himself, then why should I?
The most likely outcome is that Trump would be neither good nor disastrous as president, but simply bad. For example, he might mismanage the country’s finances, needlessly inflame racial tensions, undermine the rule of law, confuse and antagonize our allies, and hurt the economy through erratic policies that punish and reward investors based on his political whims.
This is the most likely outcome, and an undesirable one, but not the most important one to consider. America has survived bad presidents before, and we could survive a bad Trump presidency along these lines. What is more important — and less discussed, even by the Democrats — is the possibility of an outcome in the negative risk tail, like a nuclear war.
I understand the economic discontent in the US. People would like their wages to be higher and their economic fortunes to be more certain. They would like opportunities to be easier to grasp. The current malaise makes people eager for radical change.
But while things in this country could be better, they could also be so, so, so much worse. We have so much to lose.
People are failing to price in the small risk that a Trump presidency could cause us to lose everything we value, and that scares the hell out of me.
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