(Bloomberg Opinion) -- It’s still possible the November election will go off without a hitch and be settled the way most elections are settled -- by simply counting the votes, assigning electors based on statewide majorities and letting the constitutional rules decide who won. But this outcome is looking less likely by the day. It’s an open question what effect a contested election and a constitutional crisis would have on the U.S. economy — but it probably won’t be good.
President Donald Trump has increasingly signaled he won’t accept an election that doesn’t result in his own victory. Due to the coronavirus pandemic, many voters are reluctant to go to crowded polling places and want to vote by mail. Supporters of Joe Biden appear far more likely to mail in their votes. But Trump has claimed (without evidence) that mail-in votes are widely fraudulent. And he has suggested he won’t accept an outcome in which Biden’s margin of victory comes via the mail.
There are other ways Trump could reject the verdict of democracy. Some sources suggest he has been discussing ways to circumvent the results of state elections and have Republican-controlled state legislatures appoint electors who won’t cast their votes for Biden. A few Trump allies, such as political provocateur Roger Stone, are even urging the president to declare martial law, seize ballots, and make widespread arrests of political opponents.
If Trump either refuses to recognize the legitimacy of mail-in votes or uses a technicality of the electoral system to circumvent the will of the voters, it will represent at least a temporary cancellation of American democracy. The country may join the ranks of Turkey, Hungary, and other formerly democratic, quasi-authoritarian states.
What effect will this have on the economy? Plenty of research shows political instability is correlated with lower future economic growth. Coup attempts in Sub-Saharan Africa, for example, tend to inhibit growth in the following years (interestingly, the effect is even worse when the coups fail). Coups that overthrow democratically elected leaders seem to be especially harmful.
Asset markets have shrugged off other huge recent disruptions — COVID-19, the George Floyd protests — with remarkable resilience. It’s possible they’ll take the suspension of American democracy in stride as well. An unelected Trump administration may feel the need to replace lost democratic legitimacy with economic prosperity and pour on the stimulus. In the long term, political mismanagement could result in sharp economic decline, as in Venezuela, but that might not come for years. Growth in Turkey, for example, continued for several years after the massive 2013 protests against President Recep Tayyip Erdogan.
A more serious economic impact could occur if a disputed election sends the country spiraling into chaos and civil conflict. The George Floyd protests in June were probably the largest in U.S. history. If a Trump rejection of the election result provokes an even larger surge of demonstrations, it could lead to a spiral of violence, with leftist and rightist militias shooting each other in the street, if not worse. The result would be, if not a civil war, then a protracted sectarian conflict akin to the Troubles in Northern Ireland.
Such unrest would certainly be bad for economic growth. It would make future policy highly uncertain, as policy depends on maintaining stable control of the nation. Such uncertainty is believed to have a deleterious effect on investment and economic output, and some measures of uncertainty have already spiked to unprecedented levels:
Urban chaos, violent conflict and uncertainty over who will control the country in the coming years make for a very bad business environment. In a worst-case scenario, businesses and investors could decide the U.S. is a failing state and that their money is best kept elsewhere, at least until things quiet down. The result could be an unprecedented capital flight — money stampeding out of one of the world’s largest economies and abandoning the reserve currency at the same time. That would probably mean a dollar crash, a surge of U.S. inflation and destabilizing flows of hot money into Europe, Japan, Canada, Australia, South Korea and other, more stable developed nations. Bitcoin and gold would probably surge, but other assets would incur catastrophic losses, adding to the spiral of unrest.
Capital flight, investment exodus, and loss of reserve currency status would bring long-lasting economic devastation. The U.S. would probably never again regain its position as the center of global wealth and technology. As when Russia lost the Cold War and fell into chaos in the 1990s, the collapse would be deep and long — but perhaps even worse, as the U.S. has so much further to fall.
That’s a worst-case scenario, but we must consider it. In general, a contested election and social unrest can’t be regarded as a net positive for the economy. Republican senators, Supreme Court justices, and other powerful figures should think very hard about the potentially enormous costs of allowing Trump to dispute the verdict of the electoral system.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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