Thrashing our Way to the Precipice

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Despite Trump’s business credentials, the most immediate dangers of his presidency have always been economic. The promotional hoopla around current unemployment numbers hasn’t changed that risk.  It is worth remembering that no one foresaw the last Republican disaster in 2008, and there are similarities to that situation now.

Our basic problem is that Trump has never stopped thinking of the Presidency as a business, and that is fundamentally at odds with the reality of running a country.

Trump’s approach as a businessman is easy to describe: get all you can get away with and kill the opposition.  It doesn’t matter who gets hurt as long as you don’t get caught and come out a winner.  Even in bankruptcy.

That sounds great (“he may be a crook, but he’s OUR crook”) but as President of the most economically powerful country in the world, you can’t ignore consequences.   That’s obvious in the case of bankruptcies, but it also affects how you deal with the rest of the world.  On the positive side the progress of the world economy since the second world war shows how shared prosperity has raised all boats.  The Marshall Plan was not just benevolence, it was good policy—helping others helped us.  However the reverse is also true—disasters propagate.  Beggar thy neighbor policies have a way of biting back.

The EU, Canada, and Mexico each account for $250B in US exports—downturns in any of them affect us.  Corporate supply chains now link many countries.  China’s cheap hardware has been the basis for Apple’s profits and even for software service companies such as Google and Facebook.  We’ve already seen with the steel and aluminum tariffs that it’s easy to lose more jobs than you save.  The web of relationships can be so complicated that it’s hard even to identify all the consequences of tariffs or other such actions.  Unanticipated consequences are the order of the day.

That doesn’t mean we’re powerless to deal with problems, but “trade wars are easy” is a good way to lose big.  In the trade war with China where we just gave up half our leverage to try to get a special deal and drove China into the arms of the EU.

And there’s one more factor to keep in mind. As the IMF has warned, the world has become increasingly awash in debt, a concern for global stability.  It’s easy to be playing with fire.

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To understand the risks, it’s worth looking back at the George W. Bush administration.  There were a number of unanticipated consequences.

– Deregulation of the economy worked great for a while until it undermined the banking system and produced the worst recession since 1929.   No one saw it coming, as they didn’t know where to look.

– The collapse of the Russian economy produced abject misery.   The Bush administration refused to offer assistance (Dick Cheney’s position was “they’re the enemy, let them starve.”) The unexpected consequence was the return to authoritarianism under Putin and the rise of Russian nationalism.

– The attacks of 9/11 led to the invasions of Afghanistan and Iraq.  No one foresaw the consequences for political instability in both countries.  That in turn led to $3T wars with at most very limited benefits.  The financial consequences are still felt here today in the lack of money for education and infrastructure.

 

The risks of today’s policies are at least as bad.  We’re thrashing around inconsistently and in all directions.  We’re obsessed with trade imbalances, incorrectly treating them as a kind of scorecard with our competitors. (China sure doesn’t think they’re winners for giving us cheap iPhones that we sell worldwide at huge markup.)   We institute tariffs supposedly to protect workers but lose more jobs overall and fight unions to depress wages.  We have no plans for dealing with consequences of automation.  We’re unaccountably limiting spending on both education and basic research.

The current strong US economic position is based on technology, innovation, and the associated value chains.  We’ve now decided the current order is stupid and we’re going to fix it—without restraint.  We don’t even bother to see if we’re doing what the protected industries want.

There are explicit parallels with the Bush issues:

– We’ve gone even more gung-ho for the private sector.   They’re going to fix everything, and it’s perfectly fine to overstimulate the economy at full employment, so that they can get going.  And run a deficit to do it.  And we just don’t have to care.

The charts below show where we are in the business cycle (one could also add the yield curve), so chances are we’ll care sooner rather than later.  Maybe we’ll undermine the EU (Trump offered France a special deal to leave the EU), maybe we’ll cripple our own supply chains in China, or maybe we can’t just keep prolonging our 10-year-old business cycle with deficit-funded tax cuts.  With all the thrashing around there are just too many chances.  Giddiness about economic success didn’t work for 2008.

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– China not Russia is the issue this time around.  They’re a tough customer, but they’ve gotten to the stage where their continued prosperity depends on ours.  We need a working relationship with them in order to develop a system of shared prosperity.   Throwing our weight around with tariffs before negotiation and insisting on our inherent right to supremacy will only make the real issues tougher.

Further we need to work through the WTO for maximum leverage.  Insisting on unilateral deals just hurts us.

– With all the generalized belligerence it’s hard not to worry about war now too.   Perhaps with Iran, perhaps not.  Perhaps Bolton is only in the administration to shut him up.  But perhaps not… With history as evidence this is the ultimate for unpleasant unanticipated consequences.

 

The world is more leveraged and more interconnected than in 2008.  We’re going off the rails in the same ways as before.  Time to stop this train.

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