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For New York Times Trump is the madman of the year
If America’s president-elect delivers on his promises, the long-term costs – both domestic and international – are likely to outweigh any short-term gains. If he fails to deliver, the long-term costs will fall due much sooner.
“If Donald Trump’s victory in the United States’ presidential election was an earthquake, then the transition period leading up to his inauguration on January 20 feels like a tsunami warning,” says Spain’s former foreign minister, Ana Palacio. But the warnings have sounded the loudest across the Atlantic of late, with populists in Italy and Austria mounting fresh challenges to the stability of the European Union and its common currency.
Prime Minister Matteo Renzi’s defeat in the referendum he called to reform Italy’s creaking constitution had been anticipated, but the opposition’s margin of victory was unexpectedly large. While Renzi has submitted his resignation to Italy’s president, Sergio Mattarella, a caretaker administration is expected to be formed. That would leave the populist Five Star Movement – which led the “No” campaign in the run-up to the referendum – to wait until February 2018 to try to capitalize on its surging popularity in a general election. And time may yet prove the populists’ undoing: Alexander Van der Bellen’s victory over the far-right Norbert Hofer in the re-run of Austria’s presidential election (on the same day as Renzi’s defeat) suggests that greater familiarity with the populists may dilute their appeal.
Trump’s appeal is already wearing thin, at least among more orthodox congressional Republicans, who are openly questioning his threats to impose heavy taxes on businesses that move jobs overseas, or his promise to impose tariffs on Chinese imports. And hopes that the demands of office and America’s vaunted constitutional checks and balances would prove to be a sobering influence are being tested to the limit. By refusing to place his extensive assets in a blind trust, Trump could run afoul of the US Constitution’s emoluments clause. He has deliberately undermined decades-old bipartisan policies and protocols. He continues to use social media to mislead and incite. And, most important, his cabinet appointees hold some of the most extreme positions – on national security, social welfare, education, the environment, and much else – ever to be represented in a US administration.
For Project Syndicate commentators, however, the Trump transition should not be viewed solely in terms of its domestic implications. By serving as a catalyst and booster of populism worldwide (even expressing support for the Philippines’ populist president, Rodrigo Duterte, and his extrajudicial murders), Trump’s victory has initiated a period of uncertainty on a scale that the West has not witnessed since the dying days of World War II. But where there was hope then, today there is dread. Former German foreign minister Joschka Fischer is not alone in fearing the worst: “the end of what was heretofore termed the ‘West’ has become all but certain.”
The newest threat to the West has arisen in Italy where, once again, an ill-considered referendum has weakened the EU. Renzi’s determination to hold a plebiscite on constitutional reforms, in the face of today’s populist revolts, was perhaps an even more dubious political bet than David Cameron’s call for the Brexit referendum in the United Kingdom. Renzi’s failure, and his imminent departure from Italy’s leadership, has deprived the EU of one of its few remaining visionaries, and Italy of one the few national leaders offering a genuine reform program to bring the country out of its economic mire. As Philippe Legrain, a former economic adviser to the European Commission president, puts it: “Renzi was the pro-EU establishment’s best – and perhaps last – hope for delivering the growth-enhancing reforms needed to secure Italy’s long-term future in the eurozone.”
Legrain is probably right that “[m]uddling through with a weak technocratic-led government amounts to waiting for an accident to happen.” But the alternative could be worse. If the Five Star Movement, which is leading in opinion polls, comes to power, its government will hold another plebiscite – this time to take Italy out of the euro. Then again, the University of Vienna’s Philipp Ther doubts that Italy will still have the common currency when the caretaker administration’s term expires, in February 2018. “If Renzi steps down, Italy could become almost ungovernable, which will frighten financial markets,” Ther argues. “This, in turn, will make it difficult for Italy to remain in the eurozone, given the already high interest rates on its public debt, which amounts to 132% of its GDP.”
“The immediate problem,” notes Legrain, “is Italy’s zombie banks, which are inadequately capitalized, insufficiently profitable, and saddled with bad loans.” Recapitalizing them, he points out, “was already proving difficult before the referendum, and now may be impossible amid the heightened political uncertainty.” As a result, preventing an Italian banking crisis – which Legrain thinks could spread, given that “many eurozone banks remain weak” – will likely depend on the EU’s willingness to allow state aid, and to help Italy access the funds to provide it.
But the rising cost of servicing Italy’s debt was already ringing alarm bells before the referendum. “Although the monetary anesthetics administered by the ECB have reduced market tensions,” says Jean Pisani-Ferry of France Stratégie, “spreads between Italian and German ten-year bunds reached 200 basis points” by end-November, “a level not seen since 2014.”
And Harvard’s Carmen Reinhart says that because of capital flight, Italy’s borrowing is dangerously high, as evidenced by its balance in the Target2 settlement system for the euro: “If a country has run out of reserves, its central bank automatically borrows to maintain the intraeuro peg,” she explains. “Italy’s Target2 deficit is above 20% of GDP – its worst reading to date.” Indeed, they could be classified as “crisis-level reserve losses.”
For Hans-Werner Sinn, this holds out the prospect of a full-blown euro crisis. “The Target debt of the Southern European countries – Greece, Italy, Portugal, and Spain (GIPS) – amounted to €816.5 billion” at the end of September, he notes. “If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency.”
That is why Pisani-Ferry thinks that governments should start discussing how to manage the euro now, after four years of leaving the issue to the ECB. Unlike Sinn, however, he argues that “addressing the legacy problems” is not the ideal place to start. “Distributing a burden between creditors and debtors is inevitably acrimonious, because it is a purely zero-sum game,” he notes. So the “seemingly realistic option of starting with immediate problems before addressing longer-term issues is only superficially attractive.” Instead, “discussions should start with the features of the permanent regime to be established in the longer run.”
Daniel Gros, Director of the Centre for European Policy Studies, thinks a white knight may be about to arrive. “If the eurozone’s breakdown is to be avoided, Italy – indeed, the entire currency area – urgently needs an economic boost,” he says, and “Trump may be just the person to deliver it.” Given Trump’s “plans to subsidize infrastructure investment and increase military spending,” according to Gros, “it seems likely that the US will face rapidly rising fiscal deficits and a huge short-term increase in demand.” And, with “the US economy already operating at close to full capacity,” he adds, “higher imports – and a stronger US dollar – will be needed to meet that demand.”
Moreover, with the dollar already up significantly since Trump’s victory, “it is the peripheral countries that are likely to benefit the most,” Gros continues, noting that “the impact of a euro depreciation is about three times larger in Italy than it is in Germany, because demand for Germany’s exports of specialized capital goods is not very price elastic.” Thus, “rapid demand-fueled growth in the US, together with the strong dollar, could contribute to a much-needed rebalancing of the eurozone.”
In America, too, financial markets seem convinced that Trump’s program is bound to deliver stronger growth. “With an incoming Republican administration hell-bent on reflating an economy already near full employment, and with promised trade restrictions driving up the price of import-competing goods, and with central-bank independence likely to come under attack, higher inflation – likely exceeding 3% at times – is a near-certainty,” says Harvard’s Kenneth Rogoff. “And output growth could surprise as well, possibly reaching 4%, at least temporarily.”
You don’t have to like Trump to believe he can reinvigorate the economy, Rogoff says, especially “if one believes, as I do, that the slow growth of the last eight years was mainly due to the overhang of debt and fear from the 2008 crisis.” And, “[a]t the risk of hyperbole,” he continues, “in many ways, Germany was as successful as America at using stimulus to lift the economy out of the Great Depression.”
Indeed, by some measures, Germany did even better, as Joseph Goebbels was quick to point out in a January 1939 diatribe against US criticism of the Nazi regime following Kristallnacht, the anti-Jewish pogrom of the previous November. “It is enough to observe that although Germany is the poorest country in the world in terms of foreign currency reserves and raw materials, it has not only abolished unemployment, but has a labor shortage,” Goebbels claimed. “North America, meanwhile, has between eleven and twelve million unemployed, even though it is rich in foreign currency reserves and raw materials.”
Of course, unlike Hitler, Trump cannot be certain that he will get his plan through. Already, he’s been attacked even by allies like Sarah Palin, who condemned as “crony capitalism” the deal he recently struck with the air-conditioner manufacturer Carrier to keep it from moving 800 jobs to Mexico. And congressional Republicans furiously opposed plans for spending on infrastructure when they were put forward by President Barack Obama.
But Gavekal Dragonomics’ Anatole Kaletsky believes that most Republicans will, eventually, fall behind their populist standard-bearer. “The Republican aversion to public spending and debt applies only when a Democrat like Obama occupies the White House,” he notes. “With a Republican president, the party has always been glad to boost public spending and relax debt limits, as it was under Presidents Ronald Reagan and George W. Bush.” Given this history, Kaletsky is confident that “Trump will be able to implement the Keynesian fiscal stimulus that Obama often proposed but was unable to deliver.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, agrees, and sees plenty of opportunity for Trump to steal the Democrats’ clothes. “The good news is that the incoming administration can draw on measures that were formulated during Obama’s tenure, but which gained little traction because of the highly polarized and dysfunctional congressional politics that characterized most of Obama’s eight years in office.” And, because these “measures address imperatives such as infrastructure investment, tax reform, and job creation,” El-Erian believes, “Trump is in a position not just to help boost growth in the US, but also to make it more inclusive.”
If Trump is to deliver for the unemployed in the Rust Belt and the many whose incomes have stagnated since the crash of 2008 – precisely the voters who backed him in the election, or, more important, did not vote for Hillary Clinton – he will need more than a kick-start to an already growing economy. He will have to ensure that they reap the benefits of growth. “Trump’s victory clearly appears to stem from a sense of economic powerlessness, or a fear of losing power, among his supporters,” says the Nobel laureate economist Robert J. Shiller. “To them, his simple slogan, ‘Make America great again,’ sounds like ‘Make YOU great again’: economic power will be given to the multitudes, without taking anything away from the already successful.”
Reflecting on why supporters of liberal democracy underestimated the surge of populist sentiment in 2016, Kemal Derviş, Vice President of the Brookings Institution and a former administrator of the United Nations Development Program, says that genuine redistribution is the key. “Those who voted for Brexit or Trump did not simply fail to understand the true benefits of globalization; they lack the skills or opportunities to secure a piece of the pie.” For Derviş, the key is to dispense with the liberal-democratic illusion that all solutions are “win-win.” On the contrary, “[f]or economies to secure the ‘win’ of inclusive growth, the very rich may well have to submit to a form of regulation and taxation, including international rules, that cost them substantial wealth in the long run.”
But how likely is it that Trump, a wheeler-dealer proud of not paying taxes, will embrace measures that, as Derviş puts it, “compensate the losers through taxation, subsidies, and employment support”? Few would describe his cabinet appointments as champions of the poor and dispossessed. Steven Mnuchin, his proposed Treasury Secretary, is the second Goldman Sachs alumnus to join the Trump team, after Stephen Bannon, the Chief White House Strategist, better known for providing the white nationalist “alt-right” with a platform at Breitbart News, the extremist website he ran before taking over the Trump campaign.
Mnuchin is best known for his buyout of OneWest, then known as IndyMac, in the aftermath of the financial crisis. OneWest then became notorious for foreclosing on middle-class homeowners, the very sort of people who voted for Trump. Mnuchin’s nomination may yet cause Trump headaches at his nomination hearings in the Senate.
Yet Mnuchin, like other Republicans, appears to be backing away from some of Trump’s campaign proposals, which, according to the Tax Policy Center, would have redistributed more than $100,000 annually, on average, to the top 1% of income earners. “Any reductions we have in upper-income taxes will be offset by less deductions, so there will be no absolute tax cut for the upper class,” Mnuchin says. But, whereas he promises tax cuts for middle-income earners, what these voters expect is better jobs, not lower taxes.
Likewise, Harvard’s Martin Feldstein thinks that congressional Republicans may actually force Trump to finance all of his cuts in personal income tax by limiting deductions, and not just for the rich. Moreover, he cautions about reading too much into the spending side of Trump’s supposed fiscal boost. Trump’s campaign “was not proposing that the federal government should carry out the infrastructure investment,” Feldstein points out, or “calling for a Keynesian fiscal stimulus based on deficit spending.” Rather, his “campaign called for a ‘deficit-neutral system of infrastructure tax credits’ to provide incentives for private businesses to undertake projects to build roads, bridges, tunnels, airports, and so forth.”
If Feldstein is right, then Trump supporters as well as the markets are in for a disappointment. But even if he is wrong, because the US is already near full employment, pump-priming the economy “implies accelerating inflation, higher interest rates, or probably some combination of the two,” says Kaletsky, and that in turn could send the dollar soaring further. “Even though the dollar is already overvalued,” he warns, “it could move into a self-reinforcing upward spiral, as it did in the early 1980s and late 1990s.”
Trump, of course, blames the Chinese for hollowing out US manufacturing, by keeping the renminbi weak. But if his program does result in a soaring dollar, a renewed flood of imports could induce him to press harder for his protectionist agenda.
Some observers – and evidently the markets as well – took Trump’s near-silence on trade matters in the weeks after the election as a positive long-term signal. In El-Erian’s words, he was backing away from “his trade-protectionist campaign pledges, such as imposing punishing tariffs on China and Mexico, dismantling the North American Free Trade Agreement (NAFTA), and rescinding America’s bilateral trade agreement with South Korea.” And, though Trump “reiterated his pledge to withdraw from the Trans-Pacific Partnership, that deal had not yet been ratified, anyway.” This “shift in focus,” according to El-Erian, “has convinced markets that Trump may well decide not to follow through on the more growth-damaging measures he suggested during his campaign.”
Indeed, in the weeks following the election, even China’s leaders had seemed relaxed about the outcome, despite Trump’s campaign vow to impose a 45% tariff on Chinese imports. The reason, says the LSE’s Keyu Jin, is that America is simply too dependent of China. “If Chinese imports were blocked, prices would rise, undermining consumption, impeding economic growth, and exacerbating inequality.” Moreover, the effort would not halt the trade-induced erosion of US manufacturing employment, because “the jobs would just go to Vietnam or Bangladesh, where labor costs are even lower than in China nowadays.”
Just as important is China’s role in financing America’s deficits. “China is one of the biggest purchasers of US Treasuries, and continues to finance US consumption and investment,” Jin notes. Indeed, “China may even help to finance the large infrastructure projects that Trump has promised, thereby reducing pressure on the US budget.”
But Trump’s recent phone call with Taiwan’s President Tsai Ing-wen, the first conversation with a Taiwanese president by a US leader since 1979, and his subsequent anti-Chinese outbursts on social media, shattered this complacency. Facing criticism from China’s leaders for taking the call from Taipei, Trump responded with the puerile grandstanding that characterized his campaign. “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country (the US doesn’t tax them) or to build a massive military complex in the middle of the South China Sea?” he retorted via Facebook. “I don’t think so!”
But while Trump’s fans swoon at his belligerent rhetoric (his Facebook post has been liked, shared, or commented upon more than 200,000 times), former Greek finance minister Yanis Varoufakis believes that Trump’s get-tough approach toward China could jeopardize his entire program. “China’s credit boom is underpinned by collateral almost as bad as that on which Bear Stearns, Lehman Brothers, and the rest were relying in 2007,” Varoufakis points out. If Trump “plays hardball with China, pushing the Chinese to revalue the renminbi and employing threats of tariffs and the like, he may well end up pricking the bubble of China’s private debt – unleashing a deluge of nasty consequences that would overwhelm any domestic stimulus he introduces.”
Such risks underscore a more fundamental point. As Javier Solana, a former EU High Representative, says, “The world is past the point of closed borders and unilateral solutions.” There can be no turning back the clock: “We have already globalized; now we need global rules to underpin economic and financial stability, as well as peace and security.”
But is globalization really irreversible? Nobel laureate Michael Spence thinks that the Trump administration’s approach to trade negotiations will reflect the “America first” rhetoric on which the president-elect campaigned. “While Trump might pursue mutually beneficial bilateral agreements,” he argues, “one can expect that they will be subordinated to domestic priorities, especially distributional aims, and supported only insofar as they are consistent with these priorities.”
In Spence’s view, since the Brexit vote, the writing has been on the wall. “Achieving strong inclusive national-level growth to revive a declining middle class, kick-start stagnant incomes, and curtail high youth unemployment is now taking precedence.” As a result, “international arrangements governing flows of goods, capital, technology, and people” will be viewed as “appropriate only when they reinforce – or, at least, don’t undermine – progress on meeting the highest priority.”
And some are not grieving over the turn away from trade deals. Harvard’s Dani Rodrik notes that in the seven decades since World War II, “more than 500 bilateral and regional trade agreements were signed – the vast majority of them since the [World Trade Organization] replaced the [General Agreement on Tariffs and Trade] in 1995” But no one should regret that “[t]he populist revolts of 2016 will almost certainly put an end to this hectic deal-making” – no one, that is, except the powerful business lobbies that such deals (particularly those concluded over the last 20 years) have favored.
“Trade policies driven by domestic political lobbying and special interests,” Rodrik continues, “are beggar-thyself policies,” which “reflect power asymmetries and political failures within societies.” International trade agreements can contribute only in limited ways to solving such domestic political failures,” which “requires improving domestic governance rather than international rules.”
It is not just US policies on China and trade that Trump may upend. It is now increasingly clear that no US commitment, now matter how long established, can be taken at face value. Whether the issue is security guarantees for America’s NATO and Asian allies, a possible accommodation with Vladimir Putin’s revanchist Russia, or withdrawal from the Paris climate agreement, Trump seems to be putting everything on the table. “America’s global engagement, in all its forms, can be expected to suffer substantially, posing a serious challenge to the liberal international order,” says Palacio, who worries that geopolitical spheres of influence could replace the multilateral global arrangements that emerged in the wake of WWII. “As we know all too well,” she warns, “while spheres of influence can give the appearance of stability, they breed great power conflict.”
Likewise, Fischer believes that Trump, once in office, is unlikely to deviate from the ad hocapproach that brought him to power. “[W]e should not harbor any illusions” about the consequences, Fischer says. Without “US leadership, the West cannot survive.” While the US “will remain the world’s most powerful country by a wide margin,” an America “that moves toward isolationist nationalism,” he argues, “will no longer guarantee Western countries’ security or defend an international order based on free trade and globalization.”
One thing, at least, seems certain: the extent to which the US does turn its back on its global commitments will reflect Trump’s domestic economic and political imperatives. Viewed from this perspective, the fears expressed by Fischer and Palacio seem well warranted.
Consider, for example, US adherence to the Paris climate agreement, which officially entered into force four days before Trump’s victory. Trump’s ad hocapproach to the issue has been on full display ever since the election. Less than a week later, an anonymous source on Trump’s transition team saidthat the president-elect’s “advisers are considering ways to bypass” the procedure for quitting the accord, which stipulates a four-year period.
Barely a week later, Trump, who during his campaign had dismissed climate change as a Chinese “hoax” intended to undermine US competitiveness, promised to keep an “open mind” about it. And yet, despite a direct appeal to Trump by 365 major US companies and investors not to withdraw from the Paris agreement, he selected a high-profile climate-change denier with deep ties to the fossil-fuel industry to head the US Environmental Protection Agency.
Trump’s choice would not surprise Gros. “During the campaign,” he points out, “Trump pledged to ensure energy self-sufficiency – an effort that would probably entail new subsidies for domestic oil, gas, and possibly coal production.” And, while that may be good for Europe’s economy in the short term – as Gros says, it “would help to suppress oil prices, which would be “a boon for the eurozone’s energy-importing countries” – a US withdrawal from global efforts to combat climate change would have a significant impact on long-term sustainability.
The larger question is whether Trump’s “America first” approach will deliver on his promise of faster, more inclusive growth, and how his administration’s success or failure will affect domestic and international governance. As Kaletsky persuasively argues, realizing Trumpism’s promising short-term prospects – by way of significantly larger budget deficits, far-reaching industrial and financial deregulation, and an end to liberal interventionism abroad – would almost certainly entail high medium- and long-term costs in terms of domestic macroeconomic and global stability.
At that point – or sooner, if Trump’s policies fail to deliver on the demand side, as skeptics like Feldstein suggest – Trump is unlikely to embrace the “bold experimentation” that defined Franklin D. Roosevelt’s approach to domestic and international governance in the 1930s and after. His governing team – starting with Bannon, his chief adviser, a self-described “Leninist” who wants to “destroy the state” – seems built for a very different path.