Global markets were rocked by the stunning news from the US presidential election. The Mexican peso was down 12% at one point. The US dollar fell 2.5% against the yen. Markets have been hedging a Trump win with gold, which was up by $40 an ounce, or 3.2%. Uncertainty is in the air.

It must be said that this has been a disastrous decade for professional forecasters of the economic and political varieties. Donald Trump was behind in the daily poll average published by Real Clear Politics every one of the past 95 days and won. On Monday 7t November, of the 10 national polls that were issued, nine had Trump behind. A couple of polling organisations did have it right but were ignored. It turns out that a Trump victory wasn’t a total surprise. The IBD/TIPP tracking poll, which was the most accurate in the previous three elections, 2004, 2008 and 2012, in its final poll on 8 November had Trump two points ahead. The LA Times tracking poll had Trump consistently ahead since the end of October and in its latest poll on Monday he was ahead by three. The biggest difference apparently involved weighting – that is, the process of adjusting a poll’s data to make sure it properly represents the diversity of the population.

Twenty-seven years ago to the day, the Berlin Wall fell. The field of international relations failed to spot it. In 2008, the advanced countries all fell into a recession that the field of economics, and every government and central bank, had failed to anticipate. It is clear from the minutes of its meeting of 16 September, two days after the failure of Lehman Brothers, the Federal Reserve still had not spotted that the US economy had entered a major recession nine months earlier in December 2007.

The inflation report by the Bank of England’s monetary policy committee in August 2008 did not even contain the word “recession”. As the Queen said at the London School of Economics in November 2009, why did no one see this coming? Ex-Bank of England deputy governor Charlie Bean astonishingly argued in a speech in October 2010 that “no one should expect to be able to predict the timing and scale of these sorts of events with any precision”. We all should actually. If you can’t spot the big one why should the British people pay the salaries of the hundreds of economists employed at the Bank of England? The country would have been better off if, instead, all these economists had been employed delivering pizza.

The Fed has continued to argue that the US economy is close to full employment and it is time to raise rates. At its last meeting a week ago members suggested that there would also be at least a couple more rate rises in 2017. The markets until Tuesday expected a rate rise in December but no more for another year. The Fed mistakenly raised rates in December 2015 with an expectation it would raise four times in 2016 but it hasn’t. At the time, I called the decision “fingers crossed and hoping economics” and predicted the next move would be a cut as it has been at every other central bank that raised rates since 2009. More people are coming round to that view – indeed, on a lighter note, since September I have a $5 bet with Mohamed El-Erian that a cut is coming. A few hours ago he sent me this message: “Good morning. It looks like you will win your Fed rate bet.” The future of Fed chair Janet Yellen now looks seriously in doubt.

US employment rate, 2000 to present. Illustration: David Blanchflower

The Obama administration and Fed officials kept insisting that the US was close to full employment, but I for one didn’t believe them. There remains lots of labour market slack in the US labour market. Blue-collar workers who voted for Trump in droves in the battleground states of Pennsylvania, Iowa, Ohio, Michigan and Wisconsin apparently didn’t believe them either. The chart above, which plots the employment rate, ie the proportion of the 16+ population in jobs, shows why. At the onset of recession in December 2007 62.7% were employed; in October 2016 only 59.7% were. If the old rate applied now the number of jobs would be 7.6 million higher. Real weekly earnings in the US are only 8% higher than they were a decade ago. Trump promised to fix all that, by “making America great again”, creating lots of good jobs – and voters bought it.

Trump’s stunning victory and the Brexit vote in the UK are the inevitable responses to the weak recovery from recession. The one positive take for me is that in both countries austerity is dead and buried. Keynes was right. Fiscal stimulus here we come. No wonder experts have been getting such a hard time.





