Making America small again. Trump’s victory marks the decline of the USA

“Make America Great Again.” That was the slogan of Donald Trump’s insurgent campaign to take the US presidency. It resonated with many Americans. They felt that the US had been subject to serial humiliations in its international dealings, and that Mr Trump’s more robust and confrontational leadership would help to reverse it.

But politics is full of paradox. To exercise power is to diminish it. Power accumulates to those who understand restraint. In Britain English and Welsh voters took to heart the slogan of “Take Back Control” and voted for Brexit. The country is now basking in the thrill of exercising direct power in its relations with its fellow European neighbours. And yet the result will be a medium-sized power adrift in a friendless world, seeking to trade freely when everybody else is becoming more protectionist It will be more rather than less subject to the whims of foreign powers. Britons may prefer it that way, but they will come to understand that the keys to “taking back control” actually lie in Westminster and their local council chambers, rather than in Brussels.

So it is in America. Mr Trump’s supporters will revel in the assertion their country’s direct power. And yet he will exercise this assertiveness in order to carry out a retreat. The result can only be diminishment, relegating the US to the middle part of a medium-sized continent.

Let’s look at some specifics. Consider the Trans Pacific Partnership (TPP): the multinational trade deal put together by President Obama. This was a central element of his Asian diplomatic strategy, designed to collect a number of Asian countries into America’s orbit in trading terms, conspicuously excluding China. Mr Trump (along with many Democrats) denounces this as a bad deal and will scrap it. That leaves a vacuum into which China is ready to pounce. It plans its own version of a free trade area, involving most of the same countries. Mr Trump has also questioned the value of America’s military alliances in the region. The clear message to countries there is that they must acquiesce with China’s increasingly imperial ambitions. The Philippines’ President Duterte looks a little less eccentric in his pivot to China. The USA is suddenly a much less important country.

Mr Trump’s promised assertiveness in trade relations with China makes little sense either. It comes at an important moment in the evolution of China as a nation. It has built its economy on international integration, especially with the US, and developed a large trade surplus in the process. But there is nothing particularly beneficial in a trade surplus – it implies that a country’s citizens are consuming less than they could – an act of self-denial. A trade surplus has political advantages – it makes you less beholden to foreign creditors – but China is already powerful enough for this not to matter much. So it is in the process of carrying out an economic pivot to  develop its consumer economy, and away from integration with developed economies – though the scope for integration with less developed economies remains. An economic model where it exports less to America and integrates more with other Asian countries, and even African ones, suits it just fine strategically. Mr Trump means to hurry it along, but it will disrupt the US economy more than the Chinese one.

In Europe the issue is not so much trade. The proposed trade deal between the US and the European Union, TTIP, looks dead in the water without any help from Mr Trump. The main issue for Europeans is military and diplomatic support for the European countries against Russia in particular. Mr Trump has said that the current balance involves America in a disproportionate level of commitment. He has a point. If America steps back from its military commitments, and caves in to pressure from Vladimir Putin to create and extend a Russian sphere of influence, then it will put European countries in a very tough position. It is not very clear where this will lead – but one thing is very clear: America will be less important to Europe. This is not necessarily a bad thing for Europe, but it will be very uncomfortable.

And then there is economics. We are still guessing what will emerge from Mr Trump’s presidency – but there could well be a short-term lift for America. Some form of fiscal stimulus is in the offing. Mr Trump and his advisers hope to lure in US corporate profits that are stacked offshore for tax reasons, and to use the proceeds to fund infrastructure investment. Unlike many of his Republican colleagues, Mr Trump will be reluctant to cut state handouts, like pensions or healthcare – though health insurance is under threat. This could give a short term lift to the US economy . And, as this week’s Economist points out, much of this gain will be at the cost of other world economies.

That should please Mr Trump’s supporters. But the problems will start quickly. The stimulus is badly timed. In many aspects the US economy is running at close to potential output. All the stimulus might do is suck in imports and push up prices. But there may well be a lot of hidden potential in the US economy – more workers could be drawn into the workforce, and other workers could be made to work more productively. But if Mr Trump is serious about rolling back free trade and driving out foreign workers, then he will cut the capacity of the US economy when it needs to be increased. A financial crisis is in the offing.

The truth about the American economy is that, far from being taken for a ride and funding lavish lifestyles of foreigners, American consumption is being supported from abroad. This is what a trade deficit means. A transition to a more self-sufficient economy, as wished for by Mr Trump’s supporters, will entail economic shrinkage. Americans may rail at the loss of jobs in many industries, but they exchanged these for cheaper products, made abroad or with automated technologies, or both. Reversing that means reducing living standards.

Except that most Americans could still end up better off. If the country can share out income more evenly, with lower profits and higher wages, and more of those wages paid to middle and lower level employees and less to the top layer, then this shrinkage need not be painful to the majority. But what chance is there of a Republican administration, run by senior businessmen, achieving that? To Mr Trump exploitation is simply good business practice, and profits are reward for enterprise. There is no sign of a mindset that wants a different distribution of the fruits of economic success.

America and the world is in for a rough ride. But strategically it has been clear for a long time that American power, relative to the rest of the world, is in decline. That is not such a bad thing  – it results from a fairer distribution of the world’s wealth. After the diminishment of Europe, it is now America’s turn. Mr Trump’s victory marks a big step along that journey. But it should surprise no follower of politics that he is claiming to do the opposite.

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15 thoughts on “Making America small again. Trump’s victory marks the decline of the USA”

  1. An excellent piece. I think Trump’s electionheralds the beginning of the end of 70-plus years of Pax Americana. It is more important than ever that liberal-minded people work hard to present a viable alternative so that the voting public have someone to turn to when the consequences of voting for the simplistic solutions touted by Trump and the Brexiteers becomes painfully apparent. — Tom Arms

  2. I remember thinking the same thing when Ronald Reagan was elected. But although I didn’t agree with his politics his economic policies were quite successful.

    But, they were successful because he was right for the wrong reasons! He was persuaded by an economist, one Arthur Laffer, that the way to maximise tax revenue and therefore (in their thinking) reduce the deficit was to lower taxes. That can work for a single tax. We might smoke more, for example, if tobacco taxation was lower which would have the effect that total revenue from tobacco taxation might increase. But it is not going to work in general. If we spend more on cigarettes we’ll spend less on something else, so VAT revenue, and also total revenue could fall.

    But, in any case Reagan, after his 1980 victory over Jimmy Carter, cut a whole range of taxes and the economy picked up well from its previous recessed state. No doubt that poor previous performance contributed to Carter’s defeat.

    This comes as no surprise to those of us who tend to think in Keynesian terms. The way to stimulate a recessed economy is to either increase Government spending or provide tax cuts so that everyone else can increase their spending.

    The deficit didn’t “improve” though! Why would it? The deficit is always equal, to the cent, of what everyone else wants to save. A government deficit is the same as everyone else’s surplus.

    We’ll have wait and see just how Trump goes about it, but from the noises he’s making so far, he sounds very like Reagan. He too could end up doing the right thing, at least in economic terms, for the wrong reasons.

    1. The trouble is that any stimulus will be a deal between President and Congress. Congress likes tax cuts but hasn’t bought the Keynesian narrative. They will demand at least some spending cuts.

  3. ” But there is nothing particularly beneficial in a trade surplus – it implies that a country’s citizens are consuming less than they could – an act of self-denial.”

    Yeah! Are my economic views having some influence, perhaps?

    In many aspects the US economy is running at close to potential output.

    If we look at US unemployment the rate is 4.9%. Margaret Thatcher won her 1979 election on the slogan of Britain isn’t Working on about the same level. So even on that official figure there is quite a bit of scope for potential output to be higher

    The situation there is very similar to what it is here in the UK. The problem isn’t so much unemployment – its underemployment and too many workers working in inefficient low-pay industries. It’s much more difficult to be counted as unemployed than it used to be. If you have an hour of work per week, or you’re too young or too old then there’s always a way that you can be reclassified as something else.

    All the stimulus might do is suck in imports and push up prices.

    So what if the stimulus sucks in imports? Cheap imports will have a depressing effect on prices. That means the stimulus can be even bigger without inflation being a problem. Inflation is all that matters. It can be a sign that an economy is being pushed beyond its capacity.

    It’s also, important that the stimulus be directed to where it’s needed. So if we have more spending (either government or private) in Chicago, for example, we are unlikely to see inflationary effects any time soon. On the other hand we probably would if that spending were to occur in New York.

    That’s more difficult (but not impossible) to achieve if the stimulus relies on tax cuts rather than increased govt spending.

    1. Yes I acknowledge that stimulus could draw more people into the economy and/or increase productivity. But if Trump’s other policies (trade and immigration especially) create supply bottlenecks, then it will be undone. There was a lot of slack in the 1970s according to all the conventional macro measures, but stimulus just led to inflation. The microeconomics can trump the macro.

      If the stimulus drags in imports, it creates jobs in China and Germany and not the USA, so you are eating away at creditworthiness with no benefit. Yes it will also cause the dollar to strengthen (as is already happening in anticipation) and so make imports cheaper, but domestic inflation could dominate, especially if the whole thing leads to trade tensions. Trump has vowed to restore trade balance after all.

      There is a good case for a well-designed stimulus package, but I have no confidence that Mr trump and his friends are capable of enacting it.

      1. Reagan was just the same but in the end he was the subject of a famous quote by VP Dick Cheney “Reagan showed us that deficits don’t matter”.

        Dick Cheney was no leftie, in case anyone has any doubts on that. It’s just an appreciation of how the economy actually works, which I don’t think you’ve quite grasped yet which you show when you say:

        “If the stimulus drags in imports, it creates jobs in China and Germany and not the USA, so you are eating away at creditworthiness with no benefit.”

        If the stimulus creates “drags in” more imports then all it means is that China and Germany want to save more in US dollars than previously. That’s all there is to it.

        If you raise sheep and I raise pigs, and they are equally valuable, we can swap sheep for pigs. If you want to swap 9 of your sheep for 10 of my pigs you’ll get my IOU to make up the difference. I’m now saving money with you!

        If you want to swap 8 of your sheep, for 10 of my pigs you’ll get 2 IOUs. I’ve increased my surplus and you’ve now got even more of my IOUs. What’s the problem? If I don’t like the arrangement I can’t bankrupt you. All I can do is buy more of your sheep. Isn’t that supposed to be a good thing?

        1. Just realised I have got the transfer of IOUs the wrong way around! Never mind I’m sure you can sort it out!

        2. Yes – shades of Nixon’s “Our dollar, your problem” after he broke Bretton Woods. Still persistent trade deficits usually end badly eventually – though I grant you the US has never had a serious problem. Though it may do little harm, it won’t do much good either, especially if trade balances become a political football and a driver for protectionist policies.

          1. The US has the confidence to hold its nerve with the US dollar because supposedly it’s a reserve currency. But there’s no reason why Japan and the UK, both have large deficits, couldn’t do exactly the same thing.

            Someone in the deficit country has to do the borrowing and someone else outside that country has to do the lending. No lending means no deficit. That’s all. No deficit for us means no surplus for Germany! So if they want a surplus they have to lend us the money. They are caught in a trap of their own making.

            Another way of looking at it is to ask what would happen if holders of gilts wanted cash. Well that’s no problem. We swap their gilt IOUs for cash IOUs. What are they going to do then? They’ll have to spend them on goods and services on just hang on to the cash and get less interest.

          2. The Germans love of their surplus will soon evaporate if they don’t think they will be paid. Zimbabwe isn’t awash with newly made BMWs exported from Germany. At some point between the extremes of exporting to a shaky developing world economy, and dealing with the country that prints the most liquid currency in the world, there is an inflection when importing goods for a country gets harder. The trade deficit falls through a crunch in consumption, with lots of collateral damage. You are probably right that Britain could push its luck harder, or to continue its run of deficits for a lot longer, but it can’t be forever. Japan could do so but resists for different reasons. It will fear lots of foreigners with their pockets bulging with Yen proceeding to buy up all of Japanese industry. They will not be encouraged by Britain’s example in that regard. Still, as their demographic crunch takes hold they may modify their stance.

    2. Yeah! Are my economic views having some influence, perhaps?

      Your views are certainly not without influence! But economists at least since Adam Smith have been pointing this one out! It’s why mercantilism doesn’t make sense. And I could point to some early writings of mine making this point. Still one needs to understand why so many governments do it. The reasons why modern and economically sophisticated governments favour trade surpluses has to do with power politics and managing the financial system. Asian governments felt they learnt that one the hard way in the late 1990s, for example.

  4. The Asian currency crisis started in Thailand. The Baht was pegged (unnecessarily) to the US$. Speculators decided that it was overvalued and mounted an attack. The central bank ran out of US dollars and the Baht had to be devalued. The private sector in Thailand had also made the mistake of borrowing in US$ thinking the peg would hold. When it didn’t they were in big trouble too.

    So don’t peg your currencies! Why do that? It just makes the speculators rich!

    ……………………………

    Mercantilism may have made more sense in Adam Smith’s day because currencies then were pegged to gold. So an accumulation of money was, then, an accumulation of gold reserves too.

    Now in the age of fiat currencies, all mercantalism achieves is an accumulation of IOUs.

    It strikes me that economists haven’t at all adjusted their thinking since gold was removed from the picture. Previously, a significant constraint on policy was a requirement to either guarantee one’s currency to an amount of gold or against another currency that was linked to gold.

    That’s all gone now. The only constraint is to not have too much inflation on the one hand and too little economic activity on the other

    1. I think even in the days of gold adam Smith thought it was barmy. Though a gold surplus could be quite handy at time of war.

      Not borrowing in USD is certainly one of the lessons Asians learnt – though the local currency terms would have been pretty poor, and many foreign banks would probably have declined to do business at all. Asians are warier of fully floating currencies however. They don’t want to follow Britain’s example of capital flows pushing up the currency and wiping out manufacturing industry. They are much readier to institute capital controls; that is (or was) against Western orthodoxy, but they are probably right. With the exception of Myanmar Asian finance ministries tend to be run by very smart people – typically better qualified than in the West.

  5. “They don’t want to follow Britain’s example of capital flows pushing up the currency and wiping out manufacturing industry. ”

    Yes I’d agree that this has happened in the UK, and the USA too. And we’ve seen Brexit and the rise of Trump as a direct consequence. But it isn’t really a western vs eastern difference. Germany has always been protective of its manufacturing industry.

    The question is “How should the world regulate its trade?” The current orthodoxy is that it shouldn’t. This is fine, but how do we prevent the working classes in the deficit countries (and there has to be deficit countries if we allow surplus countries) becoming so pissed off that they help elect the likes of Trump?

    The answer has to be to allow those deficits to be recycled through deficit spending of governments. In other words neoliberal thinking has to be completely exterminated!

    I’ll volunteer to be a Dalek for a while to help complete that task!

    1. I’d accept that must be at least part of the answer. Trying to drive down the trade deficit through austerity is not the right way for where most developed economies stand now – though there will always be a point when that is what is required. I also think that free movement of capital (within as well as between countries) needs as much scrutiny as free trade and free movement of people. Another pillar of neoliberal thought – though I often feel the need to play devil’s advocate for neoliberalism.

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