The Following three pieces, published in Project Syndicate, bring the insights of three high caliber scholars on the global economic challenges of this Trumpian era we are now entering.
Trumpian Uncertainty
JOSEPH E. STIGLITZ*
NEW YORK – Every January, I try to craft a forecast for the coming year. Economic forecasting is notoriously difficult; but, notwithstanding the truth expressed in Harry Truman’s request for a one-armed economist (who wouldn’t be able to say “on the other hand”), my record has been credible.
In recent years, I correctly foresaw that, in the absence of stronger fiscal stimulus (which was not forthcoming in either Europe or the United States), recovery from the Great Recession of 2008 would be slow. In making these forecasts, I have relied more on analysis of underlying economic forces than on complex econometric models.
For example, at the beginning of 2016, it seemed clear that the deficiencies of global aggregate demand that have been manifest for the last several years were unlikely to change dramatically. Thus, I thought that forecasters of a stronger recovery were looking at the world through rose-tinted glasses. Economic developments unfolded much as I anticipated.
Not so the political events of 2016. I had been writing for years that unless growing inequality – especially in the US, but also in many countries throughout the world – was addressed, there would be political consequences. But inequality continued to worsen – with striking data showing that average life expectancy in the US was on the decline.
These results were foreshadowed by a study last year, by Anne Case and Angus Deaton, which showed that life expectancy was on the decline for large segments of the population – including America’s so-called angry men of the Rust Belt.
But, with the incomes of the bottom 90% having stagnated for close to a third of a century (and declining for a significant proportion), the health data simply confirmed that things were not going well for very large swaths of the country. And while America might be at the extreme of this trend, things were little better elsewhere.
But, if it seemed clear that there would be political consequences, their form and timing were far less obvious. Why did the backlash in the US come just when the economy seemed to be on the mend, rather than earlier? And why did it manifest itself in a lurch to the right? After all, it was the Republicans who had blocked assistance to those losing their jobs as a result of the globalization they pushed assiduously. It was the Republicans who, in 26 states, refused to allow the expansion of Medicaid, thereby denying health insurance to those at the bottom. And why was the victor somebody who made his living from taking advantage of others, openly admitted not paying his fair share of taxes, and made tax avoidance a point of pride?
Donald Trump grasped the spirit of the time: things weren’t going well, and many voters wanted change. Now they will get it: there will be no business as usual. But seldom has there been more uncertainty. Which policies Trump will pursue remains unknown, to say nothing of which will succeed or what the consequences will be.
Trump seems hell-bent on having a trade war. But how will China and Mexico respond? Trump may well understand that what he proposes will violate World Trade Organization rules, but he may also know that it will take a long time for the WTO to rule against him. And by then, America’s trade account may have been rebalanced.
But two can play that game: China can take similar actions, though its response is likely to be more subtle. If a trade war were to break out, what would happen?
Trump may have reason to think he could win; after all, China is more dependent on exports to the US than the US is on exports to China, which gives the US an advantage. But a trade war is not a zero-sum game. The US stands to lose as well. China may be more effective in targeting its retaliation to cause acute political pain. And the Chinese may be in a better position to respond to US attempts to inflict pain on them than the US is to respond to the pain that China might inflict on Americans. It’s anybody’s guess who can stand the pain better. Will it be the US, where ordinary citizens have already suffered for so long, or China, which, despite troubled times, has managed to generate growth in excess of 6%?
More broadly, the Republican/Trump agenda, with its tax cuts even more weighted toward the rich than the standard GOP recipe would imply, is based on the idea of trickle-down prosperity – a continuation of the Reagan era’s supply-side economics, which never actually worked. Fire-breathing rhetoric, or raving three a.m. tweets, may assuage the anger of those left behind by the Reagan revolution, at least for a while. But for how long? And what happens then?
Trump might like to repeal the ordinary laws of economics, as he goes about his version of voodoo economics. But he can’t. Still, as the world’s largest economy leads the way into uncharted political waters in 2017 and beyond, it would be foolhardy for a mere mortal to attempt a forecast, other than to state the obvious: the waters will almost certainly be choppy, and many – if not most – pundit ships will sink long the way
*Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief Economist of the Roosevelt Institute. A former senior vice president and chief economist of the World Bank and chair of the US president’s Council of Economic Advisers under Bill Clinton, in 2000 he founded the Initiative for Policy Dialogue, a think tank on international development based at Columbia University. His most recent book is The Euro: How a Common Currency Threatens the Future of Europe.
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Trump’s Defective Industrial Policy
DANI RODRIK*
CAMBRIDGE – US President-elect Donald Trump has yet to take office, but his brand of flawed industrial policy has been on full display since his surprise win in November.
Within weeks of the election, Trump had already claimed a victory. Through a mix of inducements and intimidation, he prevailed on the heating and cooling firm Carrier to keep some of its operations in Indiana, “saving” around 1,000 American jobs. Touring the Carrier plant subsequently, he warned other US firms that he would impose stiff tariffs on them if they moved plants overseas and shipped products back home.
His Twitter account has produced a stream of commentary in the same vein. He has taken credit for Ford’s decision keep a Lincoln plant in Kentucky, rather than move it to Mexico. He has threatened General Motors with import tariffs if it continues to import Chevrolet Cruzes from Mexico instead of making them in the United States.
Trump has also hounded defense contractors for cost overruns, berating the aerospace giants Boeing and Lockheed Martin on separate occasions for producing planes that are too expensive.
Trump’s policy style represents a sharp break from that of his predecessors. It is highly personalized and temperamental. It relies on threats and bullying. It is prone to boasting, exaggeration, and lies about actual successes. It is a type of public spectacle, staged on Twitter. And it is deeply corrosive of democratic norms.
Economists tend to advocate an arm’s-length relationship between government and business. Public officials are supposed to insulate themselves from private firms, lest they be corrupted and engage in favoritism. This is a prized principle in the US – but one that is more often breached than observed. An obvious example is the undeniable influence over US government policy exercised by finance moguls during the last three decades.
Yet close business-government interactions also lie behind many of America’s successes. The history of US economic development is one of pragmatic partnerships and collaboration between the public and private sector, rather than arm’s-length relationships and rigid rules. As historically minded economists and policy analysts such as Michael Lind, Stephen Cohen, and Brad DeLong have reminded us, the US is heir to a Hamiltonian tradition in which the federal government provides the investment, infrastructure, finance, and other support that private enterprise needs.
US technological innovation owes as much to specific government programs, such as loan assistance or government purchases as it does to American entrepreneurs’ and inventors’ ingenuity. As Harvard Business School professor Josh Lerner notes, some of the most dynamic technology companies in the US, including Apple and Intel, received financial support from the government before going public. The electric carmaker Tesla was a beneficiary of the same public loan guarantee program as Solyndra, the solar cell company that went bust in 2011 in a spectacular public collapse.
As the Solyndra example illustrates, many public initiatives fail. But the ultimate test is whether the social return on the portfolio as a whole is positive, taking successes together with the flops. Such broad evaluations tend to be rare. But one analysis found that US programs to boost energy efficiency had produced positive net benefits. Interestingly, the bulk of the benefits were attributable to three relatively modest projects.
Sociologists Fred Block and Matthew Keller have provided perhaps the best analysis of the US “developmental state” – a reality that they say the reigning market-fundamentalist ideology has obscured. Block and Keller describe how a “decentralized network of publicly funded laboratories” and an “alphabet soup” of financing initiatives, such as the Small Business Innovation Research (SBIR) program, work with private firms and help them commercialize their products. They and their colleagues have documented the extensive role of both federal and state governments in supporting the collaborative networks on which innovation rests – whether in biotech, green technologies, or nanotech.
Such industrial policies, based on close collaboration and coordination between the public and private sectors, have of course been the hallmark of East Asian economic policymaking. It is difficult to imagine China’s transformation into a manufacturing powerhouse – and the attendant success of its export-oriented model – without the Chinese government’s helping and guiding hand. It is ironic that the same people who extol Chinese gains from globalization are often alarmed that a US administration may copy the Chinese approach and explicitly endorse industrial policies.
Unlike China, of course, the US purports to be a democracy. And industrial policy in a democracy requires transparency, accountability, and institutionalization. The relationship between the government and private firms has to be calibrated carefully. Government agencies need to be close enough to private enterprises to elicit the requisite information about the technological and market realities on the ground. For example, what are the fundamental reasons for the loss of manufacturing jobs in, say, automobile production, and how can the government help, if at all? But they cannot get so close to private firms that they end up in companies’ pocket, or, at the other extreme, simply order them around.
This means that we can expect the Trump administration’s industrial policy to vacillate between cronyism and bullying. That may benefit some; but it will do little good for the overwhelming majority of American workers or the economy as a wholeAnd that is where industrial policy à la Trump fails to pass the test. On one hand, his appointments to key economic positions indicate he has little intention of severing government ties to Wall Street and big finance. On the other hand, his policymaking-by-tweet suggests he doesn’t have much interest in building the institutionalized dialogue, with all the required safeguards, that sound industrial policy requires.
*Dani Rodrik is Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy and, most recently, Economics Rules: The Rights and Wrongs of the Dismal Science.
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The Kindleberger Trap
Joseph Nye*
CAMBRIDGE – As US President-elect Donald Trump prepares his administration’s policy toward China, he should be wary of two major traps that history has set for him. The “Thucydides Trap,” cited by Chinese President Xi Jinping, refers to the warning by the ancient Greek historian that cataclysmic war can erupt if an established power (like the United States) becomes too fearful of a rising power (like China). But Trump also has to worry about the “Kindleberger Trap”: a China that seems too weak rather than too strong.
Charles Kindleberger, an intellectual architect of the Marshall Plan who later taught at MIT, argued that the disastrous decade of the 1930s was caused when the US replaced Britain as the largest global power but failed to take on Britain’s role in providing global public goods. The result was the collapse of the global system into depression, genocide, and world war. Today, as China’s power grows, will it help provide global public goods?
In domestic politics, governments produce public goods such as policing or a clean environment, from which all citizens can benefit and none are excluded. At the global level, public goods – such as a stable climate, financial stability, or freedom of the seas – are provided by coalitions led by the largest powers.
Small countries have little incentive to pay for such global public goods. Because their small contributions make little difference to whether they benefit or not, it is rational for them to ride for free. But the largest powers can see the effect and feel the benefit of their contributions. So it is rational for the largest countries to lead. When they do not, global public goods are under-produced. When Britain became too weak to play that role after World War I, an isolationist US continued to be a free rider, with disastrous results.
Some observers worry that as China’s power grows, it will free ride rather than contribute to an international order that it did not create. So far, the record is mixed. China benefits from the United Nations system, where it has a veto in the Security Council. It is now the second-largest funder of UN peacekeeping forces, and it participated in UN programs related to Ebola and climate change.
China has also benefited greatly from multilateral economic institutions like the World Trade Organization, the World Bank, and the International Monetary Fund. In 2015, China launched the Asian Infrastructure Investment Bank, which some saw as an alternative to the World Bank; but the new institution adheres to international rules and cooperates with the World Bank.
On the other hand, China’s rejection of a Permanent Court of Arbitration judgment last year against its territorial claims in the South China Sea raises troublesome questions. Thus far, however, Chinese behavior has sought not to overthrow the liberal world order from which it benefits, but to increase its influence within it. If pressed and isolated by Trump’s policy, however, will China become a disruptive free rider that pushes the world into a Kindleberger Trap?
Trump must also worry about the better-known Thucydides Trap: a China that seems too strong rather than too weak. There is nothing inevitable about this trap, and its effects are often exaggerated. For example, the political scientist Graham Allison has argued that in 12 of 16 cases since 1500 when an established power has confronted a rising power, the result has been a major war.
But these numbers are not accurate, because it is not clear what constitutes a “case.” For example, Britain was the dominant world power in the mid-nineteenth century, but it let Prussia create a powerful new German empire in the heart of the European continent. Of course, Britain did fight Germany a half-century later, in 1914, but should that be counted as one case or two?
World War I was not simply a case of an established Britain responding to a rising Germany. In addition to the rise of Germany, WWI was caused by the fear in Germany of Russia’s growing power, the fear of rising Slavic nationalism in a declining Austria-Hungary, as well as myriad other factors that differed from ancient Greece.
As for current analogies, today’s power gap between the US and China is much greater than that between Germany and Britain in 1914. Metaphors can be useful as general precautions, but they become dangerous when they convey a sense of historical inexorableness.
Even the classical Greek case is not as straightforward as Thucydides made it seem. He claimed that the cause of the second Peloponnesian War was the growth of the power of Athens and the fear it caused in Sparta. But the Yale historian Donald Kagan has shown that Athenian power was in fact not growing. Before the war broke out in 431 BC, the balance of power had begun to stabilize. Athenian policy mistakes made the Spartans think that war might be worth the risk.
Athens’ growth caused the first Peloponnesian War earlier in the century, but then a Thirty-Year Truce doused the fire. Kagan argues that to start the second, disastrous war, a spark needed to land on one of the rare bits of kindling that had not been thoroughly drenched and then continually and vigorously fanned by poor policy choices. In other words, the war was caused not by impersonal forces, but by bad decisions in difficult circumstances.
That is the danger that Trump confronts with China today. He must worry about a China that is simultaneously too weak and too strong. To achieve his objectives, he must avoid the Kindleberger trap as well as the Thucydides trap. But, above all, he must avoid the miscalculations, misperceptions, and rash judgments that plague human history.
*Joseph S. Nye, Jr., a former US assistant secretary of defense and chairman of the US National Intelligence Council, is University Professor at Harvard University. He is the author of Is the American Century Over?
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