Ad Hoc Commentary – economists should embrace Trump to rebalance the world economy
One can’t help noticing that those who failed to predict that Trump would win the presidency are now channeling their energies into predicting that the world economy is doomed because of Trumponomics. Yours truly believes that those energies are better spent helping King Trump make the world a better place.
In times like this, when the world is losing faith in the current economic system, we remind ourselves that the best way forward is to be pragmatic like Deng Xiaoping:
“Improbable as it seemed after the fall of the Berlin Wall, faith in capitalism has been badly shaken by subsequent events.” Page 365, The End of Alchemy, Mervyn King, 2016
“From 1978 to 1989, Chinese leaders pursued market socialism, a mix of free enterprise, economic liberalization, and state controls that produced economic dynamism. This pragmatic approach, unlike Mao’s, was more concerned with economic results than socialist values. Twice purged for opposing Mao, Deng was fond of a Chinese proverb: “It doesn’t matter whether a cat is black of white, only if it catches mice.” Page 775, Societies, Networks, and Transitions: A Global History, Craig Lockard, 2010
It is also useful to remind ourselves that paradigm shifts in the markets requires us to be pragmatic to avoid being slaves of some defunct economist. Just as John Maynard Keynes put it succinctly in the closing paragraph of the General Theory:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” The General Theory of Employment, Interest, and Money, John Maynard Keynes
Lest we fear the demise of capitalism in its current form, let us remind ourselves that death of extremism is not a bad thing. Both capitalism and communism are extremist positions:
“There are two parts to every human job, the subjective part and the objective part. The subjective part is simply the recognition that the person doing the work is a human. The objective part is the output of the job, be it mere services or high tech goods. Communism is an extremist position of rewarding only the subjective part regardless of the objective part. On the other hand, capitalism is an extremist position of rewarding only the objective part with no regard to the subjective part. Yes, from a human job perspective, both communism and unfettered capitalism are extremist positions.”
Capitalism in its current form had given us large disequilibrium between spending and saving between, and within, major economies. This disequilibrium is the main driver of the debt problems, which in turn is responsible for fragility of our current system. The question today is not: “How to prevent such disequilibrium between major economies?” That was a question for the Bretton Woods conference 72 years ago. John Maynard Keynes’ bancor is a relic of history that was supplanted at Bretton Woods. The bancor should not be revived because it will only lead to crushing austerity in formerly deficit countries, and deep recessions in formerly surplus countries.
The pertinent question today is how to rebalance the world economy. On one hand, countries like China and Germany needs investment to produce goods and services to meet domestic consumer demand. On the other hand, countries like America, Britain and parts of Europe needs investment to support the export sector. Unfortunately, monetary stimulus will not help us achieve the rebalancing. On the contrary, monetary stimulus will likely reinforce the previous misallocation of investment between sectors of the economy, further exacerbating the disequilibrium. In addition, many pundits like El-Erian believes that the monetary stimulus arrow had lost its sting.
Fiscal stimulus will not help us achieve the rebalancing too. However, the fiscal stimulus arrow would be a useful short-term measure to create demand, while we pursue long-term rebalancing:
“To be sure, it is hard to argue against a well-designed program of public infrastructure spending, financed by government borrowing, especially when you are travelling through New York’s airports. But the difficulty of organizing quickly a coherent plan for expanding public investment, while maintaining confidence in long-term fiscal sustainability, makes this option one for the future rather than today, albeit one worthy of careful preparation.” Page 358, The End of Alchemy, Mervyn King, 2016
Before we talk about how Trumponomics can help us do the long-term rebalancing, yours truly want to remind ourselves that “maintaining confidence in long-term fiscal sustainability” is not as difficult if we are willing to move from unsecured borrowing to secured borrowings. As Adam Smith noted in the Wealth of Nations:
“Nations, like private men, have generally begun to borrow upon what may be called personal credit, without assigning or mortgaging any particular fund for the payment of the debt; and when this resource has failed them, they have gone on to borrow upon assignments or mortgages of particular funds.” V.3.10. Wealth of Nations, Adam Smith, http://www.econlib.org/library/Smith/smWN22.html#B.V
That is also why secured borrowings is the backbone of our Supranational Window:
“Effectively, the supranational is building a relatively safe demand deposit account for institutional cash collateralized by sustainable development bonds.” https://tradehaven.net/2016/12/20/ad-hoc-commentary-shadow-banking-will-help-development-banking-move-from-billions-to-trillions/
Now, how does Trumponomics help us rebalance?
First, boost productivity through ‘huuge tax cuts’.
Today, we have low productivity since the crisis. This is mainly a symptom of pessimism on future demand. Since it is generally cheaper to adjust production by firing temporary labor, it is no surprise that businesses took the route of hiring rather than investing into permanent capital stock. Trump’s tax cuts and 100% asset depreciation policy would likely bring robotic manufacturing to America. The productivity boost from robots will make America’s export competitive again:
“…Perhaps, many years from now, President Trump would be fondly remembered by technocrats as the catalyst of The Second Machine Age…”
Second, promote symmetric trade through ‘big border tax’.
Ideally there should be symmetric obligations on both trade deficit and trade surplus nations. Ideally, we should rely on the free floating exchange rate to provide us with the price mechanism to avoid persistent trade imbalances. However, in cases when certain bilateral parties encounter persistent disequilibrium in their import and export balance, Trump’s ‘big border tax’ should be the ‘stick of last resort’.
We need to remember that no individual is an island to itself. Thus cooperation is the only way for us to move forward and to prevent the accumulated sovereign debts to be worthless pieces of papers, or even worse, justification for gunboat diplomacy. No country can do it alone. Even surplus countries like China ended up overinvesting when she tried to kick-start the world economy. America cannot keep on to be the consumer of last resort. The world should work with King Trump to make America and the world economy great again.
Good luck in the markets.