While Trump will probably try to take credit for all the economic good news, it is unlikely that he deserves it. He is president of the United States, not the world. And the economic surprises in the rest of the world have been more favorable than those in America. The scale of upward revisions of growth forecasts for 2017 and 2018 has been higher in Europe, Japan, China and emerging markets broadly than for the United States. Many other stock markets have outperformed those here. If Trump's pro-business policies were driving the global economy, one would expect an increase in net capital flows into the United States, and so a stronger dollar. In fact, the dollar has weakened significantly in the past year, despite more Federal Reserve tightening than was anticipated at the beginning of 2017.
In the late 1990s and again in 2006, I remarked that "the main thing we have to fear is lack of fear itself." Today there is an undercurrent of geopolitical concern not present at those times. Yet, there are important similarities between the situations then and now, as households and businesses come to fear missing out on good things more than getting caught up in irrational exuberance. Complacency about the economy can be a self-denying prophecy when it leads to excessive valuations, lending and spending. We are surely closer to such a point than we were a year ago. Sooner or later, another downturn will come, perhaps because central banks overreact to what they perceive as inflationary threats, perhaps because elevated financial markets converge to more normal levels, or perhaps because of some geopolitical shock.
If and when recession comes, the world will have much less room than usual to maneuver. From a narrow economic perspective, there will be much less room than the usual 500 basis points of space to bring down interest rates. There will also be much less space for fiscal expansions than there was when countries were less indebted. At the political level, the kind of agreement forged in London in 2009 between the G20 group of most developed countries to keep markets open, support international institutions and cooperate to stimulate their economies seems much more difficult to achieve today. And there is the real risk in many countries that recession would reinforce tendencies toward authoritarian nationalist politics.
If the short-run concern of those gathered in Davos will be how the world will deal with the next recession, the long-run one has to be declining appeal of democratic global values. In countries as diverse as the United States, Britain, Turkey, Russia, Israel and China, it appears that the governmental platform that commands the most popular support is rooted in nativism, nationalism and negativism. Populist nationalism eventually produces bad economic results, leading to more pressures for antiestablishment leadership and extreme policies. It is far from obvious what re-equilibrates the system.
It is hard to predict whether the president will seek to reassure or provoke his audience in Davos. The president's speech will most probably be compared with President Xi Jinping of China's rousing defense of globalism at Davos last year. Trump will be further challenged by the suspicion that his rhetoric cannot be relied on to be consistent from speech to speech, let alone to be consistent with subsequent action.
What should he say? It depends crucially on what he believes, and that is far from clear. The world can accept a message that the United States wants a fairer allocation of the burden of upholding the global system, that after a period of weak economic performance America needs to concentrate more efforts at home, and that it will be guided by its economic and security interests, not the promotion of abstract values.
But such a message needs to be accompanied by clear signals that the United States will strive to be a reliable and predictable partner, that it understands its interest in strong effective global institutions and that it recognizes that even self-interested nations can benefit from thoughtful diplomacy. If this combination of messages comes out of Davos, a nervous world may become a bit less nervous, which would be a very good thing for those gathered in Davos — and everyone else as well.