You can’t be both a populist and a free-market conservative

By Buttonwood

IT WOULD be hard to find two more different characters than Theresa May and Donald Trump; the former a suburban vicar's daughter, the latter a brash reality TV star. But they face similar problems—how to keep both the markets and their supporters satisfied.

For Mrs May, the problem is her dissonant rhetoric. On the one hand, she has used what was once known as “one nation” Tory rhetoric, arguing against the worst excesses of capitalism and the need to help those who are “just about managing”. So here she is in her Davos speech saying of her new approach that

It means businesses paying their fair share of tax, recognising their obligations and duties to their employees and supply chains, and trading in the right way;
Companies genuinely investing in—and becoming part of—the communities and nations in which they operate, and abiding by the responsibilities that implies;
And all of us taking steps towards addressing executive pay and accountability to shareholders.

In practice, however, she has already retreated from a proposal to put workers on boards, plans to push ahead with cuts in corporation and inheritance taxes, and to squeeze welfare benefits; in her domestic speech, she said that, in the event of a bad deal with the EU,

We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world's best companies and biggest investors to Britain. And—if we were excluded from accessing the Single Market—we would be free to change the basis of Britain’s economic model.

So which model is Britain going for? A corporatist state in which capitalism is tightly controlled or a European vision of Singapore? It can’t be both. The markets might like the latter but it seems doubtful that voters would.

The issue with Mr Trump is less to do with his rhetoric which is quite clearly interventionist—reticence is not his style. Many of those who voted for him are counting on him to create new jobs and push up real wages. The former will be difficult after 75 straight months of jobs growth but the latter might be possible. But if real wages rise, it will most likely be at the expense of profits (hardly anyone believes in the forecasts of consistent 3-4% GDP growth that his team has been trumpeting). The markets are clearly hoping that the small government, tax-cutting policies of Paul Ryan, the House speaker, will win through; they have also observed how many billionaires have joined the cabinet.

What about the Reagan revolution, you might cry? Breaking off the shackles of excessive regulation can be good for both profits and wages. Yes, there was a boom in the 1980s. But actually the profit share of GDP fell under Reagan. Markets did very well because there was a huge fall in interest rates; the T-bond yield fell 6 points over his two terms). Now profits are close to a record high as a share of GDP and T-bond yields are not far off their historic lows. The prospects of a repeat of the 1980s boom are slim.

In short, the markets think both May and Trump will be Thatcherite/Reaganite conservatives; their core vote hopes they won’t. One of the big battles of the next four years will be squaring that circle.