World – thinking liberal

Liberation Day 2: American turmoil

Trying to write a considered commentary on events in America is a hazardous business. Things will change even as you write. In the middle of preparing this article President Donald Trump executed a screeching handbrake turn on his tariff policy, having paused the higher tariffs for 90 days. This leaves it as a universal 10% tariff, with massive mutual tariffs remaining with China. Stock and bond prices bounced back sharply with a huge sigh of relief. The political pressure on Mr Trump evaporated. But the dust hasn’t settled, and on any other day the remaining tariffs would have constituted a major escalation; bond market troubles may well be more deeply sourced; questions remain over the direction of tariffs in future. Disaster still beckons.

The economist Paul Krugman, whose Substack I recommend, warns against the “sanewashing” of Mr Trump’s policies – the projection of a rational strategy when none is there. This will lead to disappointment. There is not a coherent strategy behind his tariff policy – it has conflicting goals, for a start – but it flows from strongly-held beliefs, and some of his advisers have a more coherent take on it. The most important of these is Peter Navarro, who wrote an article for the Financial Times recently; I would recommend reading it if you want an insight into the administration’s outlook.

Mr Navarro presents a long list of grievances: of unfair trading practices from America’s trading partners, which are leading to a hollowing out of the United States, and a system that is tilted against it. That has led to a substantial overall deficit, and huge individual deficits with many countries. Europe bans America’s chlorinated chicken; China manipulates its currency; Vietnam acts as a conduit for Chines goods; and so on. The “reciprocal tariffs” – now in suspended animation – are a quantification of these trade barriers; he does not explain that they are simply half the ratio of trade deficits to imports, subject to a minimum of 10%. This picks up on two ideas explained in my previous post. First is the “victim narrative” of trade deficits: domestic production has been suppressed by unfair competition, meaning that it cannot fulfil domestic demand, which is in turn sustained by capital transfers from abroad. These transfers are being used to buy up American assets, ceding control to overseas interests. The second idea he picks up on is that fair trade implies that there should be no deficit at at all between countries; any imbalance is therefore evidence of trade distortion – and so as the proposed tariff is proportional to the deficit – the fewer the distortions the lower the tariff. Lost in that is the fact that 10% is still a high tariff by current international standards, and that it applies even to countries with whom America is in surplus. Mr Navarro shows that there is enough evidence for his narrative out there if you really want to believe it. I don’t know enough about the man to understand why this is – just that he has held these views for a long time. Other narratives and supporting evidence is available. After all, if America is being ripped off, why does it have the most successful economy in the world?

Mr Trump’s thinking is broadly consistent with this, though without its intellectual gymnastics. His view is more akin the idea of Mercantilism. This idea was developed by the 17th-Century French statesman Jean-Baptiste Colbert, who was first minister to Louis XIV. Colbert was a brilliant administrator, and his ideas set the tone for European statecraft for a century. He suggested that trade was about maximising exports and minimising imports so that the country would accumulate wealth, which at the time could be equated to “treasure”, the banking system being pretty crude. This was the set of ideas that were unpicked by Adam Smith and David Riccardo more than a century later. The French economy at the time consisted of a state dominated by a substantial war machine (there was barely a year when Louis was not at war) financed by excise duties and taxes on the poor. An export surplus would have implied suppressed consumption by the aristocracy (the poor had nothing left to give), which I suppose was not really a hardship. So far as Mr Trump is concerned, exports imply money coming in; imports represent money going out – so surpluses are power, while deficits mean you are being ripped off. His business philosophy is very much that if you not ripping somebody else off, you are being ripped off yourself; the idea of mutual benefit does not compute.

But Mr Trump’s love of tariffs goes further than countering perceived trade distortions. He also wants an extra source of tax revenue that he can tell his supporters that foreigners are paying rather than them. In his wilder moments he dreams of this replacing income tax. After all, income tax was brought in at first, both in America and in Britain, to compensate for the loss of tariff revenue from free trade. Of course to generate substantial revenue then the US must continue to import lots of goods. His supporters suggest this might come about through the strengthening of the US dollar, as happened to some extent in his first term, to offset the cost of the tariff. The tension between this and reducing deficits and protecting US industry is obvious.

Another aspect of tariffs for Mr Trump is that he hopes it will turn the clock back to a time when America had a lot of manufacturing jobs. Many Americans have fond memories of when many working class people had reasonably well-paid and stable (and unionised…) jobs in manufacturing. According to the MAGA mythology these were the jobs destroyed by unfair foreign competition, so rebalancing means that they jobs can come back.

And yet another reason to like tariffs is that it allows Mr Trump to throw his weight around on the global stage and make deals. He gets high on what he sees as grovelling by foreign governments to reduce tariffs by dismantling trade barriers; he makes sure that his fellow Americans see their humiliation. Many of Mr Trump’s cheerleaders from the business world thought that this was the main point of his tariff talk, and that they were just a negotiating tactic. Just like Russia’s military buildup on the Ukrainian border in early 2022 was supposed to be something called “power diplomacy”. But the Liberation Day system is so comprehensive that it appears negotiation will be just around the edges. Anyway you can’t do 70 highly personalised bilateral deals at once. It is now unclear what future negotiations will be about. Will some countries be allowed to escape the 10% lower limit? Is it about modifying the suspended “reciprocal” scheme? Or will the focus be on the special regimes for cars and steel – as the British government appears to believe. Nobody, including Mr Trump, knows.

But problems are coming in multitudes. The first is that, whatever Mr Trumps says, tariffs are a tax on American consumers. Americans cannot avoid buying imported goods (often as components of more complicated things like cars), and prices will rise across a wide range of goods. America is less dependant on trade than many economies, but even so they will have a significant impact. There will be a temporary bump to inflation. The Federal Reserve might be induced to raise interest rates. I think that risk is overdone; it is a temporary adjustment, and unless a wage-price spiral is threatened, there is no longer term threat. Weakness in the wider economy reduces that risk. The main problem is political: Mr Trump suggested that he would cut prices rather than raise them. The MAGA faithful will accept that this is a short-term adjustment and that better times are around the corner; many other Trump voters will feel let down, or even betrayed.

Next the economy will weaken, perhaps to the point of recession. The problem here is less the extremity of this particular policy (which has been softened after all), but the perception of instability across the whole of American public policy, which has become dependent on one mercurial individual with little grasp on reality. Mr Trump talks of vast amounts of inward investment, as firms promise factories in America to avoid the tariffs. But long term investments require a stable economic outlook; companies will delay doing much until things settle down – which could take some time. Exports are likely to suffer too, from retaliatory action by foreign governments (and especially China) and from a loss of confidence in America generally. Foreign visitors, especially students, are alarmed by the arbitrary application of policy that can see visas revoked on a whim, and detention at the border. This might help reduce the current account deficit – but through making Americans poorer.

The questions really start to arise when trying to picture the American economy the Trump administration is trying to create. He wants to shield US businesses from competition. That means that inefficient businesses are given a lifeline, and more efficient businesses don’t need to try as hard. That is not a recipe for economic dynamism – and thus has been the experience of most highly protected economies in history. A partial exception has been Asian economies that have used protectionism as part of an industrial strategy to allow the build-up of new industries. There is no such strategy in America. To be fair, America is a naturally competitive economy, and large enough not to need foreign trade as much as others to keep it so. But still, high tariffs will make America less efficient and wealthy, not more.

And it is hard to see those old industrial jobs returning. Technology, more than foreign trade, was responsible for their demise, and there has been a Baumol shift towards services, as Americans see to bank productivity gains in manufacturing by consuming more services. A more rational expectation is that America becomes a powerhouse of modern manufacturing business, in highly automated businesses, which export much of their output. But that entails a level of investment that will not happen in the current chaotic policy environment – and tariff barriers are not a particularly good way to achieve it. President Joe Biden’s use of subsidies was a more realistic idea.

But am I overdoing it? Will it be a matter of disappointment rather than disaster? Well, maybe. But that will entail the Trump regime rowing back on its revolutionary mission. Anything is possible in Trump World.

First published on Substack 12 April 2025

Liberation Day 1: the economics of trade

It is hard to overstate the significance of President Donald Trump’s Liberation Day US tariff plan, announced last week. It is a rewriting of the world order – and America’s place in it. It’s going to take more than one article from me to explore its significance. This time I want to look at the general context – as this is essential to understanding how things might develop from here – and it is very widely misunderstood by even expert commentators. The president’s action looks like one of the most colossal acts of self-harm in history – but the impact on the rest of the world may not be as bad as many suggest.

Any discussion of the economics of trade must start with the idea of comparative advantage – first articulated by David Riccardo 200 years ago. It is one of the most powerful economic ideas out there, and it is also one of the most neglected. I don’t want to go back to Economics 101 here. Suffice to say that the theory shows that trade is driven by opportunity costs and not productivity. There is a limit to how much each country can produce – and if each one specialises where it is relatively the most efficient (but not necessarily in absolute terms) then production across the world is maximised and everybody should benefit. Differences in actual productivity are taken care of by exchange rate differentials. It is why equilibrium exchange rates do not conform to purchasing power parity. “Comparative Advantage” may sound rather like “Competitive Advantage”, and we may often make an analogy between a country and a firm (“UK plc”) – but they are very different things. In economics firms compete but countries do not – they optimise. Tariffs, meanwhile, distort pricing signals and lead countries to sub-optimise.

This theory does a wonderful job of explaining the world we see today – why there is so much trade, and why and how exchange rates differ from purchasing power parity (i.e. currencies buy different amounts of goods and services in different countries). What it doesn’t do is help with the sort of fine-grained predictions needed for economic models. That requires a very detailed understanding of economies and what the opportunity costs are – way beyond the capabilities of current economic data and analysis. Attempts to model it at an intermediate level, by looking at broad factors of production (land, human capital, etc.), have failed. In modern economics, if you can’t put it into a model, it’s no use at all. So while most economists have a general idea about comparative advantage, it’s a distant memory from their undergraduate days. They haven’t thought about it very much. Politicians and political commentators pick up on the general idea but garble it – falling into a fallacy of composition (assuming that the production side of an economy is analogous to a firm) and muddling competitive and comparative advantage.

Two insights get lost in all this. The first is that the theory has nothing to say about trade deficits and surpluses. In the standard exposition, exchange rates should adjust so there are no deficits or surpluses – though whether this applies country to country, or to countries across all their trading relationships is an interesting question that I’m unable to answer. I will come back to that. The second is that the benefits of trade are driven by difference – and that the more similar economies become the fewer gains from trade there will be. Let’s take a closer look at that in the context of the US and China.

In 1990, when trade between the two countries started to open up, the US was one of the world’s most advanced economies and China one of the least developed, after the failure of Maoist Communism. Most of China’s workforce was tied up in massively unproductive agriculture. Only a tiny proportion of America’s was in its hyperproductive productive agriculture. America had a massive comparative advantage in agriculture; China therefore had a comparative advantage in pretty much everything else that was tradable, apart from technologically advanced goods that were beyond its capability. To put this another way, China’s hideously unproductive agriculture sector meant that Chinese wages were tiny compared to America’s, which meant that even very inefficient manufacturing businesses were highly competitive. And so they had the basis of massively beneficial gains from trade. America exported agricultural products and advanced goods, while importing cheap manufactured goods. Both countries benefited from cheaper inputs.

So far, so good. But the situation was dynamic. Rural workers in China responded to the demand for extra manufacturing jobs; rural productivity improved. Chinese manufacturing invested; infrastructure was improved; productivity and wages rose. America and China converged. It follows that the gains from trade diminished. This has mostly been at America’s expense. Chinese goods became more expensive relative to domestically produced ones. Meanwhile, because productivity was advancing rapidly, in China the lost gains from trade were compensated for by gains from productivity. This has been replicated on a global scale as the dynamic between developed and less-developed countries. There were massive gains from trade in the early days, and a convergence between the two sides that has seen the biggest ever eradication of extreme poverty. But the gains from trade are now much less. This is one of the reasons that living standards in the developed world have struggled since the mid-2000s; access to ultra-cheap goods from the less developed world has drastically diminished. This development is almost unacknowledged by economists; the late great Paul Samuelson has been to the only one that I have seen to point this dynamic out – largely before it happened. Instead people are bewailing the loss of a system of global trade that delivered so much benefit in the past.

The world has progressed in another way. Manufacturing productivity has advanced steadily, mainly through automation, but also through better process management. This has tilted the balance of developed economies towards services that are largely untradable. This means that the impact of trade on developed economies is steadily diminishing.

This doesn’t mean that gains from trade have disappeared. Surely it still makes sense for Apple to make its iPhones in intermediate economies? But it does mean that strategic considerations are weighing more heavily than commercial ones. In particular both America and China are worrying about what would happen if war broke out between them – an increasing risk given China’s ambitions to absorb Taiwan. It also doesn’t mean that the reordering of manufacturing supply lines that the Trump administration seeks won’t be painful and disruptive for both America and its trading partners – especially those in East Asia. But it does mean that ultimately it will almost certainly be worse for America than anywhere else. I want to talk about the impact on America in more detail in my next post.

But what about trade deficits and surpluses? A current account deficit represents an excess of demand (consumption plus investment) over supply; a trade deficit has a slightly narrower definition – it applies to goods – but it is much the same thing. If demand can’t be met by local supply, you need to imports to make up. This, however, tells you nothing about what caused it. The victim narrative suggests that the surplus of demand arises because domestic supply is being driven out of business by competition from abroad. The economy then runs up debt (or sells its assets to foreigners) in order to maintain demand, which has to be supported by imports, and it all ends in ruin. An alternative, boomtime narrative is that consumers are on a demand binge which domestic supply cannot meet. Foreigners are happy to finance this because this booming economy provides opportunities to make returns. Trump supporters are scarred by the sight of business closures with the excuse of foreign completion being given, or outsourcing to cheaper suppliers abroad, and point to victim narrative. Trump critics point to low US unemployment and a healthy economy, and say that there is no obvious case that the supply side is being suppressed – and so lean to the boomtime narrative.

But there is a further dynamic. Some countries, including Germany and China, enjoy trade and current account surpluses as a matter of policy. They achieve this by, one way or another, suppressing demand so that the supply side can generate a surplus to export. This might be by underpaying their workers and letting businesses accumulate profits; it can be through governments over-taxing and leaving an unspent government surplus; or it can be through a conservative public forever saving for a rainy day. Why do governments let this happen? A surplus means that the country does not require foreign finance, and that generally makes the national finances easier to manage; for dictatorships, like China, that can be especially important. If some countries run a surplus, then others must run a counterpart deficit. This pattern can help fuel the victim narrative of deficits. The alternative view is that surplus countries are selling themselves short – they could charge more for their exports and/or allow their citizens to consume more – and that deficit countries are beneficiaries of this generosity – and should be sending the surplus countries thank you notes. Which narrative (and others are available) better fits the facts depends on the circumstances. One the one hand you might have a colony being exploited by its ruling power; on the other you could have an industrial powerhouse using foreign capital to build up its infrastructure and industrial base. You need to get beyond the raw statistics to work out what is going on.

There is an argument that all trade should be in balance, and persistent surpluses and deficits show distortions from “fair” trade. This comes up quite a bit for people trying to “sanewash” Mr Trump’s actions. He himself seems to have a much cruder understanding: a surplus means you are getting one over on the other side and building up wealth; a deficit means you are being ripped off and seeing your wealth disappear into foreign pockets. The idea that surpluses and deficits may simply be a reflection of supply and demand being out of kilter runs counter to this.

What role do exchange rates play in all this? Exchange rates should adjust to an equilibrium that allows trade and capital flows between countries to balance – letting the market decide. Countries can try to lean on the market by buying or selling reserves – but this only really works to manage short-term blips where governments think the markets are temporarily distorted. Monetary policy, fiscal policy and capital controls all affect the exchange rate, and can be used to fix exchange rates – but ultimately because these policies work because they affect supply and demand, and the capital flows required to finance them. You can get too hung up on asking what a “fair” exchange rate is.

What is the impact of the Trump tariffs on the world economy? In the short term there will be a lot of disruption, and we have only seen the start of it. There are two pressure points that will need close attention. The first is less developed economies that have been slammed with high tariffs: notably Vietnam, Thailand and Bangladesh. These do not have the resilience (or negotiating power) of bigger economies, such as China, Japan or South Korea. They may be able to divert to other markets, but long term damage looks likely. The second is in the financial system; this has been delivered a series of shocks by the Trump administration, of which Liberation Day is merely the biggest. A lot of bets made by intermediaries have gone sour and these could have ripple effects that start to endanger bigger institutions – this is what happened to Liz Truss’s government in the UK in 2023, causing its demise. A danger sign is that the price of safe haven assets, such as US Treasuries, has been sinking alongside riskier ones. An added risk is if China starts to dump its some of its substantial holdings of US Treasuries – which it might need to do to counter the disruption of trade. A new financial crisis might develop.

But this crisis is not the end of globalisation: it simply marks exit, or intended exit, of the US as a global trading power. The rest of the world can carry on trading more or less freely with itself – and that seems to be what they want to do. And in some respects America will continue as a global commercial power: Google, Meta, Apple, Microsoft and even Amazon will be disrupted but there is no fundamental threat to their business models. The globalisation of information will go on. The big question is who, if anybody, will take up America’s leadership role? China could curb its own tendency to bully; the European Union could have its moment.

In due course, however, I expect the Trump tariff regime will collapse, and America will come back into the world system as a diminished player. But that’s another story.

First published on Substack on 9 April 2025

Meanwhile, how is the Ukraine peace process going?

Donald Trump’s Liberation Day tariffs shocked even me. I want to respond to it in two ways – first to examine the economics, since I think that the understanding of comparative advantage, the driver of global trade, is weak amongst most commentators; second, the politics of it, and whether the backlash could lead to an early termination of the Trump presidency. But I think both commentaries would benefit from a little more time passing to clarify things. Before that, I want to look at the Ukraine peace process started by Mr Trump’s administration – about which I have commented here previously.

In those comments I suggested that the process would encompass three things: a ceasefire on something close to current front lines; ending sanctions on Russia; and ending US aid to Ukraine. Only a token effort would be made to tackling a longer-term peace treaty. The strategy was first to pressure Ukraine into going along with this broad strategy and then to tackle Russia. The pressuring of Ukraine has gone more-or-less to plan. The second step has got absolutely nowhere.

There was always a puzzle about this process. Why wasn’t the Trump regime placing any pressure on Russia? Instead Mr Trump and his allies repeatedly parroted Russian talking points about who started the war (Ukraine/NATO); the impact of US aid (overwhelming); the legitimacy of the Zelensky government (elections overdue); how the war was going (Russia dominant); and who was the main obstacle to peace (Volodymyr Zelensky) . Russia, meanwhile, made plain their objection to the ceasefire idea unless the settlement “dealt with the root causes” of the conflict. This is code for an effective capitulation of Ukraine. Those experienced in negotiating wondered by Mr Trump was being so soft on Russia when it was so clear that a lot of pressure was going to be needed on them in due course. Instead, Mr Trump suggested that Russia would be easier to handle than Ukraine, and that they would be compliant for reasons that only he understood.

Just what was going on? One well-rehearsed conspiracy theory is that Russia has private information on Mr Trump and that they were blackmailing him. I find this hard to accept: surely there really isn’t anything out there that could harm him? Corruption; illicit sex – you name it, Trump can shrug that kind of thing off. There is an ideological overlap between hardline MAGA Americans and Vladimir Putin’s stated ideology – the stuff about white-supremacy, “Christian” civilisation and so on – but I’m not sure this has much sway on Mr Trump himself – he’s a narcissist not an ideologue. I’m left with the conclusion that it is sheer stupidity. I would call it naivity except that Mr Trump has four years experience of the highest office. The Putin regime has sugar-coated its hard line with flattery, talk of its desire for peace and the promise of exciting business deals; Mr Trump doesn’t seem to have got beyond the sugar coating to the bitter kernel what Russia is actually saying. You would have thought that a New York property magnate would have an ear for bullshit – but apparently not.

Still, this is a bit of a gamble for the Russians. They are hoping that the Trump regime will lose patience, blame the lack of progress on Ukraine, and suspend aid and sanctions without a ceasefire. But I think Mr Trump is expecting serious engagement with the ceasefire idea, and will eventually notice that he’s not getting it. The Russians might then end up with nothing. There are some early signs of frustration from Mr Trump. Interestingly, he was especially annoyed by the Russian suggestion that the Ukrainian government should make way for a UN-led interim regime while elections were held. This seems to break one of the principles of Mr Trump’s negotiating approach – after investing so much into bullying Mr Zelensky, removing him would destroy that investment. And yet it’s all of a piece with those Russian talking points.

But I can’t be too optimistic. The Trump regime has an America-first attitude to Europe, in stark contrast to its attitude to the Middle East. There are benefits to the US, as they see it, from ending aid to Ukraine and the sanctions – and so they may very well be tempted to do this without a ceasefire. But the plaudits as a peacemaker that Mr Trump seeks would disappear. Mr Zelensky realises all this and is now playing his weak hand well. He has to give way to American bullying in order not to be seen as the problem party; and this he is doing without being too craven.

Meanwhile the war itself has slowed down. Russia made a strong bid to recapture the territory in the Kursk region it lost to a surprise Ukrainian offensive. They have pretty much succeeded – but casualties were high and progress elsewhere largely stalled. They are doubtless regrouping – but then so are the Ukrainians. A decisive military breakthrough seems a long way off. Two questions lurk. The first is how close is the Russian war effort close to failing from its losses? Some western commentary suggests that it is much closer than most seem to think. Still, the resilience of despotic regimes under pressure can be surprising. The second is how well could Ukraine hang on without US support? It would clearly struggle – but would not fold as quickly as Russia is suggesting, and the Trump regime seems to believe. But both Ukraine and the European powers are desperate not to put this to the test.

What of the European powers? These are being treated with contempt by America and Russia alike. But in a long game their influence is growing. They are putting a remarkable amount of effort into developing the idea of an armed+ presence in Ukraine to secure any ceasefire. This seems odd, as it is categorically unacceptable to the Russians, and the Americans seem uninterested; militarily it doesn’t make much sense either. It seems to be a way of reminding both that Europe has some weight to pull in this affair.

The biggest question of all is whether Mr Putin will break free of the Russian stated position, and agree to a ceasefire without major concessions, in exchange for lifted sanctions (including those from Europe) and a suspension of US aid. It is possible, even if it doesn’t look very likely from where I’m sitting.

First published on Substack

American winter – calamity awaits the once-great country

I was wrong. Before last year’s US presidential election I said that it wasn’t the most consequential in a generation (or such longer period offered by breathless commentators); it would be no more so that the elections of 2016 (which could have done for Trump altogether) or 2020 (a weaker argument there…). A new Trump administration would soon sink into chaos and drift – a bit like Boris Johnson’s British government following the December 2019 election. In fact the new US administration is revolutionary; it is changing things as radically as the Roosevelt presidency of 1933. The election of Kamala Harris would have stopped this, and probably done for Trump for good – though who knows what would have been cooked up for 2024.

Even after the election I compared the new regime to Mr Johnson’s, though I also offered Hitler’s 1933 ascension into the chancellery as a comparison. This latter is now looking the stronger parallel. Hitler was no details man, but set a vision in which groups of underlings competed with each other to destroy the old regime, with varying levels of competence, though with more violence than the current US regime has shown so far. The chaos that I predicted has indeed come to pass, but it has not stopped the destruction. And the checks to presidential power that I had thought might come into play seem to have been neutralised. Congress has been bypassed, and the Republican majorities seem to be shrugging this off, and offering little challenge. The courts have been stacked in the new regime’s favour – as evidenced by the shocking extension to presidential immunity made by the Supreme Court last year. A doctrine of unchecked presidential authority is taking hold. Even states’ power, a cornerstone of the Republican anti-establishment rhetoric until now, is being undermined. Mr Trump’s underlings, up to the level of Vice President, openly talk of ignoring court rulings anyway; it isn’t clear what could stop them. It will be no surprise if moves are made to further undermine the democratic standards of elections.

Pretty much all of this was predicted before the election, with plenty of evidential support. While I was broadly right on the administration’s economic policies, unlike many who really should have known better, I failed to understand what was coming for the reordering of the state itself. Not all that is happening is necessarily bad. Many aspects of the state work poorly, and sometimes shock treatment – “move fast and break things”- is the best way to achieve radical change. The problem is I have no confidence in the good faith or competence of this revolution’s leaders. This is the contrast with Roosevelt. They are leading their country to a bad place.

It starts with a complete failure to understand how a modern economy works. The country’s large trade deficit is not a sign of failure – of being ripped-off by foreigners – but a sign of economic success. As Americans become more wealthy, demand for non-tradable goods and especially services grows; to make room for extra supply of these things the country must import more tradable goods and export less. This is easy to fund as the country is attractive to foreign capital. It follows that trying to reverse this, by balancing trade and bringing more manufacturing “home”, the gains will be reversed. America becomes poorer. It’s worse than that, because the government is trying to put the toothpaste back into the tube, and its policies, notably punitive tariffs, are likely to to cause economic harm with doing much corresponding good. Whether this is leading to recession is an open question, but inflation and stagnation are a stronger bet. It is not what so many Trump voters thought they were going to get.

Then there is foreign relations, though this may be less of a concern to most voters. The abrupt tearing up of treaties and promises is destroying trust, which will ultimately make things harder for America. Bullying works by picking weaker subjects off; it doesn’t work when you are trying to bully the whole world. The regime might achieve a ceasefire in Ukraine, and at least a temporary halt to the killing. But its bullying of Ukraine while soft-pedalling Russia boads ill for longer term results. Likewise the regime is giving succour to the Israeli hard right, whose ultimate aim is ethnic cleansing. That does not bode well for long term peace. It will also ultimately undermine dealing with other Middle Eastern regimes. In the Far East things are unclear. The Trump regime is full of China hawks, but Trump himself is more ambiguous. The China hawks are useful for the securing of better relations with Russia, something Mr Trump clearly wants. But he can discard them when it comes to Taiwan, and China may get its opportunity to make the island into its control, which would be a disaster for America.

And what of Americans welfare (pensions and healthcare) and government services? These are being run down, and run by Trump loyalists rather than people with competence. These will surely be weakened. Corruption is likely to take hold.

Meanwhile Mr Trump has a solid base of fanatical support. These are a combination of frustrated conservatives who love that their side is doling it out to the hated liberals, and crooks and chancers who spy opportunities to turn a profit. They will not acknowledge failure, blaming things that go wrong on an array of conspiracies and usual suspects. There seem to be enough of them to keep the regime going. Others will be afraid to speak out or act out of line. Freedom of speech may have been a conservative rallying cry, but, likes states’ rights and rule of law, they don’t mean it.

The question now is whether things will go badly or very badly. In the latter case democracy is subverted and the current regime retains and extends power beyond Trump’s four year term. A successor is found – and there are clearly a number of candidates. I don’t think this is likely. The regime will increasingly be hobbled by infighting, made more vicious by a record of failure. Mr Trump’s charisma will start to fail. Opposition will cling on in many states, and even the judiciary might draw a line.

But a winter approaches. This is not a good time to be an American.

First published on Substack

The populists are looking forward to 2025, but they will be disappointed

Happy New Year to my readers! These few days are thick with journalists making predictions for the year ahead. This is probably a good discipline for them – and even better if they revisit them at the end of the year to see how they did. But it makes less attractive reading, and I don’t tend to do it myself. Mostly the fare is gloomy stuff. But one group abounds with optimism: the political populists, and supporters of Donald Trump in particular. I want to reflect on that.

As usual my starting point is Matt Goodwin. I rarely read more than a couple of paragraphs of his Substack – and since I’m not a paid subscriber that is often all I’m offered. The writing is high on rant and low on content. It’s only good reading if you want to be wound up, one way or the other. His New Year post offered a note of optimism: “things are moving our way” he said, with the hated “elites” getting their comeuppance. The main driver for this was that he anticipated that the Trump administration would prove that radical-right solutions would work, contrary to the heaps of scepticism from the liberal elite. And this success would strengthen the growing populist movements around the world.

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This rather captures the zeitgeist of populists. Extreme pessimism about how the world is going to hell in a handcart is combined with excessive optimism about what their favoured leaders and policies can achieve. Optimism from Trump supporters, and corresponding pessimism from their liberal critics, is currently rampant. It is behind the strong performance of US shares (I have just dumped the two funds most exposed to this effect in my pension pot – but the profits have been welcome). The idea behind this is that tax cuts and deregulation will drive up corporate profits, while tariffs are either a negotiating bluff or will favour big American companies.

There are two big problems with this outlook. The first is that the politics is much trickier than most people seem to realise. The second is that the policies won’t work either. Consider the politics. In spite of Mr Goodwin describing Mr Trump’s victory as a “landslide”, it was actually very close. He secured slightly under half the popular vote, with a margin of about 1.5% over Kamala Harris. This is a big victory by recent Republican standards, and gave him a comfortable majority in the electoral college, but hardly overwhelming. More to the point, the Republican majorities in both houses of Congress are very tight; it even shrank in the House of Representatives. This will not make getting controversial legislation through easy – and especially from an administration whose political negotiating skills are pretty weak (especially compared to Joe Biden, the outgoing president). Some aspects of Mr Trump’s policy don’t require congressional approval – but the tax cuts, such a central part of the business optimism for Trump, do require this. It will be more than hard going. The response of many liberal commentators is “pass the popcorn” as they seek to get some entertainment from the Republican infighting. Meanwhile the flurry of executive orders will doubtless be subject to a blizzard of legal challenges. That is the American way.

And the policies themselves are bound to disappoint. Mr Goodwin confidently expects mass deportations to take place rapidly, as promised by Mr Trump. This will be much harder and slower going than he expects, and will have adverse short-term economic consequences, as it will throw uncertainty into the labour market. Tariffs cannot possibly meet the expectations placed on them by the policy’s supporters. And so it goes on. There is no great pool of untapped economic potential waiting to be unleashed (as there was in the 1930s, say). Just how the economy will play out is very uncertain, however, largely because the politics is so difficult that it is hard to predict which policies will be enacted and when. A common view, which I have put forward myself, is that tax cuts and tariffs will drive inflation up. An alternative is that the economy stagnates as these policies fail to get started, and uncertainty undermines investment.

The Trump administration may achieve some good things. There is bound to be a lot of nonsense going on in the current regime. Funnily enough, I think the prospects for Mr Trump’s foreign policy are better than for domestic policy. His highly transactional approach is easy to grasp, and accords with how many foreign governments like to do business. I am really hoping he can force a peace in Ukraine that does not neutralise that country. Mr Biden seems to have run out of ideas (incidentally it is entirely possible that a President Harris would have accomplished a peace settlement too). My hopes for the Middle East are weaker – it looks as if Mr Trump will give Israel free rein. But that is pretty much what Mr Biden was doing. There is talk of a deal on Iran, but I’m not sure if the leaders of that country have enough to offer to make any deal look good. The Trump administration may simply play a long game for regime change. In the longer term my main fear is that the muddle and confusion of Trump’s Taiwan policy will encourage China to launch a military attack while the window of opportunity persists.

Overall, though, I see that the populist movement be disappointed, and the politics among Republicans will turn toxic. This will take some wind out of the sails for populists elsewhere. But the long term drivers of populism remain. Demographics and the changed working of the global economy are forcing difficult choices on governments, on tax, on spending and on immigration policy. The public as yet shows no sign of facing up to these difficulties – so the populist message that this is all the fault of an out-of-touch elite still has potential. The floundering of Britain’s new Labour government; the political impasse in France; and the prospect of something similar in Germany – these all show that the mainstream political parties have no answers either.

Something has to give. As yet I don’t have a feel for what this will be. But populists don’t have any workable answers and populist-led governments are likely to fail. Or if they don’t fail, it will be because they will adapt to reality and manage to sell it to the public and reduce their expectations to something more realistic. Some governments might succeed (Georgia Meloni; perhaps even Marine Le Pen); but not Donald Trump.

This post has been published on Substack

Reasons to be cheerful

Copilot does “Light at the end of the tunnel”

The human brain seems hard-wired to pessimism – often called realism. There is indeed much to gloomy or worried about at the moment. Quite a bit of it is talked up here: don’t get me started on the subject of economic growth! But it is always helpful to challenge oneself, and in this season of good cheer, I thought I would give it a go. So here are five things that give me hope.

1. Solar Power

Solar panels are a truly transformative technology, in ways that we are only slowly starting to appreciate. It is a distributed technology, which requires little infrastructure of itself (though of course to transport its output large distances does require substantial investment). It doesn’t require much maintenance once installed, as there are few moving parts. It reduces marginal costs of energy to very little. And advances in battery technology make its one major drawback – that it only produces when there is sunlight – much more manageable. It is an economic proposition that fossils fuels are finding it harder and harder to compete with. Thanks to these technologies China is already ahead of its decarbonisation goals. It is indeed thanks to China that the technological advance has been so swift. It is the underlying economics of solar power that makes decarbonisation a feasible proposition, and one that is developing its own momentum. Wind power has some of the same features, but many more difficulties. We should not be placing tariffs on Chinese exports of solar panels or batteries, but saying “thank you very much” and importing all that they can produce. Domestic production will catch up in time.

2. The bad guys can’t deliver

Our modern era is sometimes compared to the 1920s and 1930s, which saw the rise of the Nazis, Fascists and Stalinism. The rise of the far-right today is often compared to these movements. But the context is very different. Then there was much unused economic potential, thanks to misguided (as we now see it) conservative economic policies, and industrial technology that provided a ready and highly productive use for relatively unskilled labour – and much untapped demand for that technology’s output. Fascist regimes could readily produce dramatic economic results by unleashing infrastructure investment programmes – and even by building up armed forces. This would come to be called “Keynesian economics”. The results gave these regimes popular legitimacy. This was especially dramatic in Germany and helped Naziism to become an embedded ideology. No such opportunity exists in the 2020s. Advanced technology does not produce lots of new jobs – or not of the right sort. Labour markets are already quite tight, so that expansionary fiscal policies, and excessive military spending, produces inflation, and not lower unemployment. Instead, the policies of today’s near-fascists result in cronyism, corruption, inflation and general underperformance. That undermines their legitimacy.

Playing for the biggest fall is Vladimir Putin’s Russia, however much he manages to achieve in Ukraine. Russia has a massive demographic problem, with a very low birth rate. The war is making that much worse. Mr Putin’s obsession with pollical control is resulting in cronyism and the suppression of initiative: this is not good for economic efficiency – while sanctions arising from the war reduce Russia’s options. Instead, Russia is heavily dependent on hydrocarbons. See 1. above. Events in Syria show how quickly an excessively tyrannical regime can crumble – and shares elements with the fall of the Soviet regime.

I hesitate to call China evil in the same way as Russia. Its leadership is much more able, and recognises the need to keep corruption in check and for economic efficiency. It has some impressive achievements to its name (see 1. above). But it remains an imperialist power, and actively tries to undermine the West. It too has a demographic problem, and it is finding that an obsession with political control comes with increasing costs. It does not present a shining alternative to western ways, as it once thought it did.

3. Information technology

I am thoroughly sick of the hyping of artificial intelligence (AI), and the way it is crowbarred into any topic you care to name. But it is part of an astonishing development of information technology that will transform our lives in ways that we barely understand. I don’t think it translates into increased productivity in the smooth way that some talk of. As with most technologies it will have to change the way we work and think about things before it will have a real impact. But it should improve economic efficiency and human wellbeing in the longer run. My hope is that it will make some of the public service challenges developed countries face more tractable, reducing the pressure on government finances.

4. The developing world

A lot of the progress made by the developed world in the later part of the 20^th Century and the first years of the 21^st comes down to the opportunities provided by less developed countries in East Asia. As these countries developed their economies, they presented trading opportunities and gains from trade with the developed world. This has run its course, and has actually gone into reverse, as East Asian economies converge with developed world ones (and in some cases have joined that developed world), reducing trade gains (a process which, of course, has been enormously beneficial to those East Asian economies). This has been a regular hobby horse of mine as this piece of basic economics is so widely under-appreciated, even by economists who should know better. And yet there remain two large areas of the less developed world which have yet to advance properly: South Asia (notably India) and Africa. Might not the development of these economies provide further opportunities for mutual benefit?

This is far from straightforward. The East Asian model saw the transfer of workers from subsistence agriculture to manufacturing industry, mass producing consumer products for export, in exchange for a different suite of products and services from the developed world. That model is surely done. Manufacturing technology is so advanced that there are too few jobs at stake, and the developed world’s appetite for “stuff” is surely approaching saturation – although we should remember that potential markets include those East Asian economies, including China, too. To advance, the South Asian and African economies must move the workforce out of agriculture. India has made important strides, but has yet to seriously tackle agricultural reform. But what should surplus agricultural workers do? Here I’m struggling a bit, but I’m sure that 1. and 3. above are part of the solution. It may be that their development will be less dependent on exports. At the moment, their biggest economic impact arises from the export of labour though emigration, affecting Europe and the Middle East in particular (also America, where immigrants also come from Latin America – which is less of a development opportunity). This has mutual benefits but the stresses in host countries are showing, and this is not sustainable in the longer term.

Of course this effort must be led by the developing countries themselves, and not as part of a paternalist relationship with the developed world – as the East Asian progress owed little to the West except in the cold, hard mutual benefits of trade. There is a lot of baggage here but it is in the developed countries’ interests if they are to take their people out of poverty.

5. Liberal values become world values

I’m on fairly safe ground on the first three of my choices; number 4 is a bit shaky. This one is a bit of outrageous optimism. The later 20th Century was a post-colonialist age. Colonialism by the big European powers was pretty much over, though colonialism in Asia by Russia and China lived on. But the pall of colonialism hung over those European powers and still dominated political narratives. Newly independent nations blamed all their ills on their colonial past, and sought compensation in some form or other from the former colonists. They adapted the narrative somewhat to put pressure on the USA too as some sort of “neo-imperialist”. Meanwhile the developed world – the Western powers, consisting largely of those ex-colonisers, espoused liberal values as being universal ones, and criticised others when they fell short. These two narratives got tangled up, and many less developed countries accused developed countries of imposing alien values to their own advantage, and accused them of racism on top.

This all has another narrative: the West remained extremely powerful after decolonisation, and even more so once it had seen off its Communist rival the Soviet Union. Developing countries needed to plead their case to get aid and assistance; the Western powers never let their liberal values get in the way of self-interest, leading to accusations of hypocrisy that were often justified. Then some of these developing nations became more powerful. China worked its way into superpower status (in large part through trade with the West); other countries, like Iran, became more assertive. The anti-liberal movement gained momentum. Liberal values were Western values, and were a new way of promoting a kind of moral colonialism.

The result was ugly. The number of oppressive regimes grew. Medium-sized powers felt free to interfere in regional affairs, allowing a series of awful civil wars to take root. Western liberals feel beleaguered. And they are criticised at home, by conservatives who are fed up with what they see as the trashing of their countries’ history and culture; and by the left who promote anti-colonialist attitudes, and indulge in identity policies among minority communities that would not be tolerated by those minorities if they were in the majority..

And yet the West’s critics still look to the West for leadership in such matters as combatting climate change. “It’s your fault,” they suggest, “so you fix it.” China, by now the biggest contributor to world pollution and climate change sits idly by, though at least they are developing post-carbon technologies – see 1. above. India persists in its victim mentality, apparently unable to see that with a billion people they can’t just complain from the sidelines.

But this is breaking down. The rise of the populists, and especially Donald Trump, means that the West is retreating from its leadership role. And yet the West still looks to be one of the best places to live in the world. Few would say that of China – and especially if you don’t happen to be Han Chinese. And problems such as climate change change and civil wars rage on, with less developed countries as their main victims. This is creating something of a leadership vacuum, which the less developed countries need to fill. And their favoured narratives are losing traction. East Asian countries that have transitioned to developed status did this largely through their own efforts, assisted by free trade with the developed world. They had to move on from the victim mentality and take on proper agency of their own. It is not that African and south Asian countries are necessarily wrong about the damage of colonialism and slavery, but that their obsessing about this is no basis for building a prosperous future.

Meanwhile Western values and the moral high ground don’t look so bad. Capitalism has proved to be the only viable route to prosperity. The cynicism of non-Western powers, like China and Iran, to say nothing of Russia, is very evident, and has hardly promoted world peace. They are not creating great places to live (even if China’s progress must be acknowledged, it compares unfavourably with places like Taiwan). China may be free of Western hypocrisy, but that just leaves its naked self-interest unvarnished – as it develops its very own brand of hypocrisy. Western values really do have a universal application.

This would be good news because if we see a better quality of leadership from non-Western countries, then global problems will become more tractable. They will push forward harder on de-carbonisation, starting at home; they will be less free about arming rebel movements among their neighbours. A bit more humility on the part of Western countries would certainly be appropriate, but people being what they are, that will not be forthcoming.

When reflecting on this I am reminded of one of the courses I studied in my final year at Cambridge, when I was studying history. It was on the philosophy of international relations and led by Professor Harry Hinsley. How do you achieve peaceful international relations? One line of argument suggested that you needed a dominant power to act as a sort of policeman. Another suggested that you needed an empowered supra-national authority. The first is an uninviting prospect, the second is clearly infeasible, and leads to the problem of how that world authority is to be accountable. A more hopeful idea is that if the world was divided into autonomous nations, whose sovereignty ended at agreed borders, then those countries would learn to live with each other out of self-interest. This was in effect the system that Europe developed after the Seven Years War in 1763. Europe didn’t banish war, but the periods of peaceful relations lasted longer than before. The problem was that wars become harder to stop once started. I would like to think that the medium-sized nations of the world – Turkey, Saudi Arabia, United Arab Emirates, Iran, Israel in particular – will start to learn this lesson. Also that the newer great powers – China and India – will realise that they must play a bigger leadership role if world problems are to be tractable. And that neo-imperialist powers, Russia and to a lesser extent China, realise the futility of their enterprise and start to focus on the real needs of their populations. None of this necessarily involves embracing liberalism – but somehow I feel that it leads there.

Hope springs eternal

Good news tends to happen slowly and it isn’t newsworthy. But there is no denying that the world is entering a rough patch. Economic growth has run out of road in the developed world – as at last even the FT’s Martin Wolf is starting to appreciate. He says that this is causing the current political dysfunction, but it’s worse than that. The US is widely admired for delivering the best growth story, and yet the dysfunction is as bad there as anywhere. Actually the changes required to generate growth are as painful as trying to live without it. But the march of technology and scientific understanding goes on – and we don’t need conventionally understood economic growth for the world to become a better place. Think of a place where people don’t consume any more on average in developed countries (though with a more equal distribution), but who live longer, healthier lives, and where there is much less crime. A world where greenhouse gases in the atmosphere are steadily being reduced, where extreme poverty is being pushed back, and which is not so blighted by armed conflict. Apart from the beating back of poverty, none of these things needs economic growth – and the growth required to combat poverty is required only in less developed countries. This advance can be ecologically sustainable. I have not lost hope that the world can get much closer to such a vision.

Is America having a Brexit moment?

In my last post on the US election, I forecast victory for Donald Trump. That was just before Joe Biden stood down – which happened within hours. In a postscript I suggested that the economy and immigration would still swing the election for Mr Trump. So it proved, though as I watched Mr Trump melt down in the first months of Kamala Harris’s candidacy, I thought she might do it – even comfortably. But then Mr Trump’s campaign stabilised, and returned to consistently hammering the points that would swing voters, and he won comfortably. I thought Ms Harris fought a good campaign in the circumstances, but she had no answer on those two critical themes.

And so an earthquake has hit US politics. Mr Trump is much better organised than he was in 2016, and his personnel changes in the American state will be more sweeping. Meanwhile the complacency of the Democrats after beating him in 2020 has been badly exposed: there will surely be something of a clearout on their side. I don’t go along with the idea that this is the most consequential election of our times (which could be applied to 2016, 2020 or 2028 with equal merit) – but the changes will be drastic. To me it evokes nothing more than that what we experienced in Britain after the Brexit referendum in 2016.

Of course 2016 was when Mr Trump was first elected, and we thought that was a Brexit moment too. But his first administration descended into muddle and was reversed in 2020. The equivalent of the first phase of Brexit happened – the chaos after the referendum result as the country turned rudderless, but not the second – which started with Boris Johnson’s landslide election victory in December 2019. It is the equivalent of that second phase that is starting now in America. At first Mr Johnson’s election victory overawed everybody. His supporters projected their favoured outcomes onto the result, and there was much hubris, as his opponents retreated to lick their wounds.

The similarities between Mr Johnson and Mr Trump are striking. Both won by making a series of impossible promises and relying on humour and bluster to persuade voters to give them the benefit of the doubt. Both are personally quite transparent – what you see is what you get – giving a feeling of authenticity compared to other politicians. Both favour loyalty among their choices for political office over competence. They even both have brought in highly intelligent mavericks to spice up their administrations (Dominic Cummings in Britain, Elon Musk in America). It did not go well for Mr Johnson: his chaotic regime collapsed in not much over two years, getting himself replaced by an ideologue who destroyed what was left of his party’s reputation (Liz Truss) – a mess that his eventual successor, the lightweight Rishi Sunak could do nothing to reverse. It was the most spectacular reversal of political fortunes in British history. Will this history repeat? A chaotic regime which results in Mr Trump bowing out prematurely, followed by an even more disastrous lightweight ideologue (JD Vance)?

Maybe. But we need to think about the differences between the two situations. Firstly the two men. Mr Johnson is by far Mr Trump’s intellectual superior, but he had little organisational experience. He couldn’t run a whelk stall, in the British expression. Mr Trump is an experienced businessman, who certainly could run a whelk stall (“the best whelk stall in all the world”), even if his track record is nothing like as good as he says it is. He may not be particularly intelligent in the normally accepted (left-brained) sense, but he has drive, stamina, confidence and intuition that make him very effective in his own way. His management style is chaotic, but there is more method to his chaos than with Mr Johnson, and he is more adept at blaming others if anything goes wrong (Mr Johnson did this too, but without the same chutzpah). And America’s president is far more entrenched constitutionally than Britain’s prime minister, who is at the mercy of parliament. Mr Trump thrives on attention and status, which the job of US president delivers more than any other – it is hard to see him voluntarily letting go. This would take some sort of physical health issue – though this is a clear risk at his age.

But there are going to be problems. His administration will be peopled by chancers and mavericks, who will under-deliver. That happened last time, though in a different way to what is likely to happen this. In the short term I see this as doing little political damage to him though. There will be ethical issues galore – but (unlike for Mr Johnson) these have little capacity to damage him. Failure to deliver on practically anything doomed Mr Johnson and his successors (even Brexit had a big flaw in Northern Ireland); Mr Trump’s downfall is likely to be over-delivery. Mr Trump has made three major policy promises: the mass deportation of irregular immigrants; the raising of tariffs; and reducing taxes. Even partial delivery on these promises will make America worse off. They might have longer term economic benefits (though I’m a sceptic) but these will not come through in time.

It is very hard to see how Mr Trump’s deportation strategy will unfold – it is so unprecedented. But he has laid huge store on it. At a minimum it will create huge uncertainty in the country’s labour markets, and surely many labour shortages. He may try to releive the shortages by relaxing legal immigration, though this looks politically suicidal, but that won’t happen without massive disruption. This disruption will lead to inflation – with the highly sensitive area of food prices looking especially vulnerable. Inflation was the economic event that did most damage to Mr Biden’s reputation, and it will upset many of those that voted for him on the basis of his supposed economic competence.

Something similar will happen on tariffs. These are so obviously harmful that many of Mr Trump’s business backers assume that his policy is simply a negotiating tactic. Nothing, it seems, will dampen their wild optimism, reflected in a stock market rally. But tariffs are central to Mr Trump’s economic outlook. He appears to think that they will be costless to consumers, and raise revenue with which he can cut income taxes. Besides, it is surely hard to negotiate the kind of change to the terms in trade that he so wants. High tariffs will raise the prices of imported products and so inflation. This may not be as disastrous for America as it would be for some others, like Britain, who depend more on trade. But if prices are already going up because his migrant policy has disrupted labour markets, it doesn’t look good.

And then there are tax cuts. Many of Mr Trump’s business supporters set huge store on these, but there is a real problem with the country’s already-huge budget deficit. Adding to this deficit will be inflationary – one of the things that undid Mr Biden. His regime may want to balance this through drastic cuts to public spending (though not to defence), but there is not enough beureaucratics waste, wokery and foreign aid to deliver anything like enough – which would find him cutting into entitlements such as pensions (social security) and medical schemes. That won’t be an easy sell.

All three of Mr Trump’s main economic policy ideas point to inflation and administrative chaos. This will create stormy seas quite unlike his first administration. This is another difference from Brexit, which has proved to be a slow bleed rather than the big dislocation that some predicted. With his regime’s reputation for economic competence shattered there is liable to be a big backlash.

That should be an opportunity for the Democrats – just as Mr Johnson’s collapse was an opportunity for Labour in Britain. It is also possible that a different strand of populist radicalism emerges from the Republican side to take over. Meanwhile in the wider world, the retreat of America from its leadership position will force others to step up. There will be too much collateral damage for this to be a nice thing to watch – but it will be fascinating if you can see beyond that.

Coverage of America’s unpredictable election displays the usual bias

I asked Copilot for a picture of a squabbling crowd in America and this is the result. I suspect political guardrails prevent them including the US flag…

One of my rules here is that I don’t like to comment on elections before they happen. Most news reporting on elections happens before the results are known, because, I suppose, it is more newsworthy. And that’s fair enough if your audience are voters in that election – they have a decision to make. But for others the most important thing about an election is its outcome, the point at which most newsmen seem to drift away, for foreign elections anyway. But the coverage of the United States’ general election tomorrow has become a massive thing in itself. And I want to comment on that before we know the outcome.

The first thing to say is that the coverage here in Britain is massive. My main source of daily news is the BBC, and they are throwing huge resources at it. Alas they often don’t have much new to report. It is quite interesting to see in pictures, or hear real voices, to illustrate what I have read about in more substantial reporting in The Economist and elsewhere – but it has become repetitive. This is typical of the BBC’s “headless chicken” editorial policy. They let their agenda be set by other news outlets (as they see themselves as reporters of the news, not makers of it), set a time budget and fill it even if they have nothing to say – meanwhile suppressing coverage all sorts of important news in areas they consider less newsworthy. Things are not quite as bad as they are when there is a death in the Royal Family, but I’m getting some of the same feeling.

For somebody like me, endless repetition of messages by the BBC and others makes we want to challenge them. These include: this is a very close election; it will be decided in the seven swing states; it is the most consequential election in a generation (or more); American politics is toxic and dysfunctional (to be fair the BBC does not push such an opinionated view – though it is very widely held). All of these contentions have plenty of evidential support, but none of them should be regarded as established facts, as most coverage seems to imply.

Is the election close? Yes, all the respectable polling says so, and the campaigns are acting that way. But accurate polling is very hard to do. In the last two elections Donald Trump’s support was significantly underestimated. There are many unique characteristics about this election, and that is going to make it just as hard to predict: learning from past mistakes can simply lead you to new ones. You can make a case that there will be a comfortable Trump win (a repeat of previous polling error, resulting from a broadening of his appeal across ethnic groups, etc.) or a comfortable Harris one (more motivation from outraged female voters, etc.). We don’t know.

Will it be decided in the seven swing states, or perhaps just the biggest of them, Pennsylvania? A recent poll showing Kamala Harris ahead in Iowa (due to predicted high turnout among women voters) raised eyebrows as this is a regarded as safe for Trump, and may well be one of those polling outliers. But it is entirely possible that the intensive attention both campaigns have been paying to Pennsylvania make this an atypical state, and the winner there loses the overall election. Meanwhile it is possible that one of the parties will flip one or more states outside one of those seven and this could prove decisive.

This is the most consequential election in a generation? That is what both campaigns are saying, and it is what a lot of others were saying too. But it’s what they always say – and especially last time. A Harris win is not going to stop the backlash against “elites” from middle America, even if it means the end of the road from Mr Trump himself. She will not put into action the sort of radical programme that Joe Biden did – as she has not prepared a long for the job as he had, and she will be more constrained politically – she is likely to face a Republican-controlled Senate. And as for Trump, he may in some ways be much better prepared for power than he was in 2016, with many more loyalists ready for the call to assist his administration – but he himself is more erratic and even less focused – and as narcissistic as ever. We could well get a chaotic regime that achieves little and quickly becomes constrained by its unpopularity. Yes, the election will be highly consequential – but so was the last one, and the one before – and well you make the case for earlier elections too.

American politics is toxic and dysfunctional. Actually the first of those is pretty much incontestable – toxicity is a Trump and Republican strategy to help motivate their voters. Ms Harris is trying to break with that, which is welcome, but not necessarily a winning strategy. But dysfunctional? There is dysfunction – most notably with the failure of bi-partisan border legislation purely to make a political point. But The Economist Lexington column makes a good case that democracy is actually in quite good shape. The candidates are moving to the middle ground; party support is breaking out of its ethnic silos. And in today’s Financial Times Rana Faroohar points out that there is dysfunction in wider American society, with too much inequality and with governing elites obsessing about the wrong things. But there is widespread recognition of this wider dysfunction in American society, and perhaps the raucous debate, and highly contested nature of its politics will start to produce the sorts of changes it needs for renewal – and has a far better chance of doing so than if a more stable and controlled politics prevailed.

Humans are far from the rational creatures that many like to think they are. Our predictions for the future are too heavily influenced by our experience of the past. We think that our battles of the moment dwarf those of the past and future in their importance. Both biases are running rampant in the news coverage of this US election.

The American economy’s success is driving the toxicity of its politics

“Don’t bet against the American economy,” says The Economist in a recent special report. I understand where that sentiment is coming from. Over the years I have read many prophesies of doom, or at least of decline, for that economy, and often found them persuasive. On each occasion they have proved false. Two thoughts have struck me from this report: first that America’s success can’t be replicated by Europe, and that Europeans shouldn’t try; and second that America’s economic success, paradoxically, lies at the heart of its toxic politics. It is that last paradox which might cause the American success to unravel, as, to be fair, the report acknowledges.

My first insight flows from the principle of comparative advantage – a core economic insight originally articulated by David Riccardo in the 18th/19th Century. It is part of Economics 101, and is the critical idea about what drives international trade, and why such trade is mutually beneficial even if one economy imports stuff that it could make more efficiently for itself. It’s all about opportunity costs, as more modern language than Riccardo’s would have it. At a strategic level the theory of comparative advantage has massive predictive power – explaining so much of the world economy as we see it, including, for example, why exchange rates don’t match purchasing power parity. But as you try to get into more detailed, and tactically useful, predictions, economists have been unable to turn it into anything more precise, in spite of one or two attempts. Therefore it is left out the economic models that drive so much of the work of economists, and it does not progress beyond Economics 101. That is why so many economists, not least writers at The Economist, often forget that it is there and seem ignorant of how it actually plays out. So far as I can see, the great (and late) economist Paul Samuelson is one of the very few economists of modern times to properly have internalised its implications. He it was who pointed out that as undeveloped economies converged with advanced ones, the gains from trade between them would diminish, at the expense of the advanced economies. This does much to explain the relative economic stagnation of advanced economies since the financial crash of 2007-09, compared with the era of rampant globalisation before it (which happened after Samuelson died, having forecast it) – though there are other factors, not least demographics. And yet this is never mentioned amid the wringing of hands about the backlash against global trade, which is generally blamed on politics alone. And yet the invisible hand is so often behind the politics.

I have a another insight arising from Riccardo’s thesis. America’s recent success compared to Europe, as The Economist‘s report points out, is based on high-tech industries, where productivity has soared, while it has plodded elsewhere. This success is surely based on the scale of America’s market, and the relatively lack of legal and cultural barriers to trade and the movement of labour. This is clearly a source of comparative advantage over Europe – though not to China, which has a very similar advantage. This means that the relative productivity of the tech sector compared to others (making aircraft, for example) is always going to be greater in America than in Europe, apart from a few specialist niches. That will drive America to specialise in hi-tech industry, while Europe’s direct competitors will diminish – to the benefit of both, as an Economics 101 student can readily explain. If this the way of the invisible hand, then why does The Economist (and such luminaries as Mario Draghi the EU éminence grise with an economics training) spend so much time bemoaning Europe’s lagging hi-tech industry and urging it to to try harder? Economically literate politicians, like Mr Draghi, often do this sort of thing because it is a convenient argument for policies that are actually about economic efficiency in general . Journalists in more sophisticated publications have no such excuse. Europe is never going to match America, or China for that matter, in some areas and it will be a waste of effort trying. Meanwhile they are doing well enough exporting the many products where they do have comparative advantage – Europe does not operate with a large trade deficit, after all. Of course European leaders must keep trying to improve economic efficiency, and perhaps watching America will act as a spur, but a clearer understanding of the workings of comparative advantage would mean better-directed public investment.

Back to America. The Economist does not fail to attribute some of America’s success to an entrepreneurial zeitgeist – but it points to more solid factors too. First is that it has comparative advantage in industries that happen to be highly productive – not just in hi-tech, but also oil and gas. The former advantage stems from the size and flexibility of America’s product and labour markets – something that only China matches (India seems to be closer to Europe in this respect); the latter from a geological endowment. That’s all very well, but it creates tensions. The successful industries take off, but the corollary is that many others are left behind – and through the laws of comparative advantage – become less internationally competitive (as the dollar strengthens, and as they have to pay workers more to compete with the more productive sectors). This creates what Donald Trump calls “American carnage” – the flip side to economic flexibility, as factories close and more productive workers flee to the booming parts of the country. How much the imbalance between globally successful industries and the mainstream is driving high inequality is an interesting question. The Economist suggests that the poorest quintile has seen significant income growth in recent years with tighter labour markets – but in the middle of the income distribution there may be more stagnation – as the higher income groups continue to do fabulously. But if things happen quickly in America, the human cost is going to be high. Rapid growth breeds “carnage”.

A further source of advantage, according to The Economist, is access to large numbers of immigrants, and not least those flooding across the southern border. This seems to act as a lubricant: jobs get filled more quickly in the growing parts of the economy. Europe has immigrants too (though not China) but finds these harder to integrate. And yet this is a central driver to the country’s toxic politics.

And so the rapid change to the structure of the US economy, and the flood of immigrants that its success attracts, are driving a sense of dislocation among Americans, which in turn is driving the highly destructive direction of US politics. This is placing all its critical institutions under threat. Four dangers lurk in particular: the capture of US institutions by a big business elite (“rent-seeking” in economic jargon); rolling back international trade through tariffs and other measures; clamping down on immigration; and finally macroeconomic instability arising from public finances going out of control.

The concentration of big business, leading to capture of the political system and the corruption of institutions to protect established business from competition (often in the name of social stability), is a familiar process. We see variations of it in many places (although sometimes, as in Russia and Hungary, the relationship between political leader and business elite is more complex) – and , indeed, it is alleged to have happened in America in the late 19th Century. The concentration is happening in America now, as is the business elite’s dabbling in politics (most egregiously by Elon Musk) – but The Economist does not think it is leading to significant anti-competitive practices. Competition between the major hi-tech companies remains intense and the pace of innovative product development is hardly slowing. We might raise eyebrows about the way money buys influence in the US, but it does not appear to be a big threat to the US economy.

The backlash against foreign trade is a more substantive concern and especially the advocacy of tariffs. This seems to be mainly driven by Donald Trump – and as such it is one of his most distinctive contributions to economic policy – but the Democrats are copying him. It is hard to see how such policies will do much to help the American public – their main effect will be to raise costs. However it may not do much damage to the main drivers of US economic health: the technology giants and the oil and gas industries. It is not good news for the rest of the world, however, especially Europe.

Anti-immigration will also probably not hurt as much as it could – unless Mr Trump is actually tries to fulfil his campaign rhetoric about mass deportation. The Economist is also quite sanguine about the impact of public budget deficits, which few politicians seem to be taking seriously. There remains little threat to the US Dollar as the world’s preeminent currency, and hence the ease with which dollar finance can be obtained.

Still, there does seem to be an unhealthy cycle here. Growth in the American economy remains robust, but it is driving US society apart. Politicians and commentators alike focus on the choices at the next election, always described as the most important in modern times. But neither side is able to deliver a killer blow to the other. If Mr Trump wins next week’s election, his movement will have to find ways to survive his departure, amid the inevitable chaos of his administration. If Kamala Harris wins it is hard to see that she can convince Trump supporters that she is taking America along the right course, continuing to fuel the destructive radicalism of the right. One way or another this political toxicity will surely affect the astonishing robustness and resilience of the US economy that is one of its main drivers.

Time to get used to the idea of Trump’s return

Back in 2021 it had seemed impossible for Donald Trump to return to the White House. Even in 2022 it seemed that his brand was diminished – as candidates he endorsed did badly in Congressional elections. But we should have known better. For the first time in his political career, the man looks unstoppable. We must now think what many of us liberals had thought unthinkable: he will be President again.

Pretty much everybody I know regards the prospect of a repeat Trump presidency with horror, including a handful of Americans. Some Britons do like Trump, but most treat him as a bit of a joke – a caricature of the worst American stereotypes, and transparently narcissistic. This country has had enough of un-serious politicians after the chaotic period of Boris Johnson’s ministry, and his successors’ indulgence in gesture politics. It is one reason that Sir Keir Starmer’s popularity ratings are now high – seriousness is his most demonstrable virtue. You don’t have to be a liberal here in order to dislike Trump.

But it is clearly different in America. The first way that Mr Trump has been able to make a comeback is that he has fired up a supporter base that has enabled him to take over the Republican Party. He has made short work of his rivals, and any Republican law-maker that doesn’t pay homage to him will have their careers quickly terminated. Mr Trump has been able to forge a special bond with this supporters. He plays on their sense of grievance, and the feeling that the political establishment despises them (which they often do…). This seems is intuitive – I have called him a right-brained genius – following the once-fashionable idea that people are a product of a rational left brain and an emotional and instinctive right one. The irony is that this idea was promoted by liberal types to suggest that Western culture was excessively left-brained and destroying the world – and that the world needed more right-brained thinking. Alas this analysis turned out to be too left-brained.

The interesting thing about Mr Trump’s genius is that other conservative politicians have been unable to replicate it. Ultimately they are too calculating and they can’t hide it, and that undermines their authenticity. That fate has befallen Florida Governor Ron De Santis, once billed as being more dangerous, because more rational. We will have to see how Mr Trump’s Vice Presidential pick JD Vance works out. He is clearly a calculating man, but he gets much closer to his boss’s rhetoric than Mr De Santis did – and his empathy with white working class Americans is authentic.

The second reason for Mr Trump’s comeback lies with the current President, Joe Biden. He did well to beat Mr Trump in 2020 – and he has been highly effective in office. Too effective, perhaps. A narrow victory in a campaign that was mainly about the fitness for office of his opponent was not a mandate for many of the radical measures that he brought forward. There were two particular problems. The first was that inflation got out of hand on his watch. Some of the blame may lie with the fiscal generosity of his predecessor, and some arose from international events – but Mr Biden threw in plenty of fiscal generosity of his own. Inflation is now back under control (apparently) but it has left deep scars in its wake, notably with interest rates still high, and petrol prices over 20% higher than in his first year of office. Mr Biden’s supporters like to paint a rosy picture of their man’s economic achievements – but no amount of aggregrate economic statistics can mitigate the pain that many American people have gone through. The second major problem is the chaotic scenes on the border. Now I haven’t been following that particular issue closely, and it is clearly being hyped up by the Republicans – but there does seem to have been a lack of focus by the Biden administration in its attempts to play a number of competing interests.

And then there was the question of Mr Biden’s lack of physical fitness for office. His disastrous debate performance with Mr trump only confirmed what many people had suspected. As I write, he has now thankfully bowed out – but only after an obstinate period of denial. His likely replacement candidate is the Vice President, Kamala Harris. She doesn’t get a very good press (though how justified that is I find hard to assess). My feeling is that she would do a better job than Biden of mobilising the Democrat base, especially younger voters, but will struggle with neutral voters. But the Democrats campaign has lost momentum, and will need to be completely reset.

I don’t think Mr Trump’s survival of the assassination attempt will make more than a marginal difference. It gave him some momentum at a useful time, which doubtless helped bring some donations in. But he and his party reverted to type so quickly afterwards that surely few voters will be swayed.

Mr Trump still has those two big points in his favour: the economy and the border. For some reason many American voters, even those who are otherwise sceptical of Mr Trump, think that he is a better bet for managing both issues than whoever the Democrats throw up. In the case of the economy, that’s a bit bizarre. He plans to raise prices for ordinary Americans by imposing tariffs, while reducing taxes for the better off by adding to the national debt. Reducing immigration, if he succeeds, may make things worse by raising inflation – though it could help lower-paid workers. Still, the idea that a businessman is well-placed to manage the economy a strong one in America. And if Mr Trump’s record as a businessman is a flawed one, years of starring in The Apprentice have clearly impressed many Americans.

And as for the threat Mr Trump poses to American institutions, many Americans clearly don’t think he will be that bad in practice – and perhaps those institutions have been corrupted anyway. The only criminal convictions that Mr Trump has so far suffered were from a distinctly dubious case legally, giving some substance to Mr Trump’s accusations of “lawfare” against him. Other cases may be stronger but the American judiciary has played along with his efforts to kick them into the long grass. Mr Trump has never made himself out to be a saint, even if he sometimes claims to be an instrument of God.

So what are the consequences for us Europeans if Mr Trump succeeds? The most serious is the war in Ukraine. Most European leaders want wear the Russians down, and force them to conclude the war on terms that they cannot paint as victory – and so weakening their threat. They hope that Mr Trump can be manoeuvred into supporting this – but they know it is unlikely. More likely is that he will force Ukraine into a ceasefire. Russia is then likely to regroup and rearm – although it is possible that the enormous cost of the war will start to rebound on Vladimir Putin’s regime. The European powers will have to reorganise their defences, and reduce their dependence on US weaponry.

Economically the main threat is Mr Trump’s proposed tariff regime – but the main economic damage is likely to be wrought on the Americans themselves, and then their neighbours in the Americas and Asia. But it is unlikely to help Europe’s struggling economies – hastening the awkward political choices that permanent low growth will entail.

A difficult four years beckon. It may not come to that, of course. The last month or so have already shown how fast politics can move. Mr Trump seems to have taken his recent successes as as justifying his continued focus on his base – rather than softening his image to appeal to uncommitted votes. If his opponents can succeed in making the threat of a Trump regime look less abstract – by focusing on concrete issues like abortion, rather abstract ones like “democracy” and “the rule of law”, and if their candidate looks properly presidential, more sceptical voters can be persuaded to vote him down. Perhaps, even, he will go too far and look start looking more dangerously deranged, even to some of his erstwhile supporters. We have been hoping for that for eight years, though, and nothing he does seems to faze his base.

Americans will do what Americans will do. We in Europe will just have to live with whatever they choose to do. That’s democracy, I’m afraid.

Postscript: 23 July

The news that Joe Biden was withdrawing broke while I was finishing the article. Anxious to publish, I edited it without changing the overall thrust. But the whole dynamic of the contest seems to have changed. Kamala Harris has launched her campaign built up real momentum – it looks as if she will be chosen without contest. The Trump campaign seems to have been wrong-footed. They have no shortage of attack lines on Ms Harris, whom they despise as much as her boss. But the main ones look weaker than the focus on mr Biden’s capacity, while the Democrats have some attack opportunities of their own: capacity issues can be turned back on Trump, and maybe they will even get a chance to attack some of Mr Trump’s policies – like his disastrous looking economic ideas. Alas Ms Harris’s early attack lines seem to focus on Mr Trump’s criminality and lack of moral fibre. That’s old news and won’t sway many, surely. Matt Goodwin, who had been predicting a Trump landslide, meanwhile rushed out an article suggesting that Ms Harris is an even more hopeless candidate than Mr Biden.

It will be a couple of weeks before we see if Ms Harris is making a serious impact on Mr Tump’s lead. American voters have a way of bringing me down to earth, so my wiser self is saying that the main thrust of my article still stands – even if my optimistic self thinks that the spring in the step that Ms Harris is showing must have some sort of positive effect.