May 4, 2016
Donald Trump was propelled to the GOP nomination by the soaring tide of voter opposition to our national bipartisan policies on trade and immigration. Most likely he will be propelled to the presidency of the United States by the same relentless, popular (both Republican and Democratic) opposition to those same policies.
These bipartisan policies, in force without interruption since the 1989 inauguration of President George H.W. Bush, unleashed unilateral free access to US markets for foreign goods, services and workers, while simultaneously permitting our trading partners to preserve and augment their protectionism against US goods and services and to engage in wholesale theft of intellectual property and industrial espionage.
Our bipartisan political establishment defended these policies on the grounds that sound economic theory shows beyond doubt that free trade results in higher GDP growth rates and therefore higher general welfare. If so, they need to answer to the graph below:
The 224 dots in this scatter diagram represent pairs of GDP growth rates and current account deficit to GDP ratios for each of the 224 quarters from 1960 to the end of 2015. The graph clearly shows that in the case of the US economy from 1960 to date, higher current account deficits resulting from these bipartisan policies have led to lower GDP growth. This means that either our trade policies have not been consistent with sound free trade theory or that free trade theory is not sound. In either case, the victims of these policies have been the working population of the US – i.e., the voters, who are not in the mood for resolving this brain teaser behind the data of our graph but are only interested in putting an end to the policies that produced it.
Well-meaning conservative and liberal free traders may extol the merits of free trade until they are blue in the face as they attempt to turn voters away from Trump. So long as voters believe that Trump means what he says about trade and immigration they will propel him to the presidency.
Only for the sake of convenient reference may we call this phenomenon “the Trump insurgency.” In reality it is a full-blown popular revolt against a quarter century of bipartisan policies that predates the Trump candidacy and that would have found another standard bearer had Trump not volunteered to take up its cause.
The policies against which this revolt takes aim were well-meaning enough when launched by the United States in 1989, but were so systematically perverted by our trading partners as to become a suicide pact for their originator and sponsor. The object of this revolt – or insurgency, if you prefer – is to nullify the suicide pact.
The original idea – the 1989 “Washington Consensus” – called for a global economic order based on agreement among nations to liberalize international trade and capital flows, to deregulate market access in order to encourage domestic competition, to reduce public debt and taxes, and to secure property rights by law.
It was on this Washington Consensus basis that the process of NAFTA’s creation from 1990 to 1994, the founding of the World Trade Organization in 1995, and China’s entry into the WTO in 2002 were all pursued and achieved by both Democratic and Republican administrations. Until 2008 the US faithfully implemented this program, even when its trading partners raised obstacles, invoked exemptions, pleaded special hardship and, when all else failed, cheated and stole (especially intellectual property and trade secrets).
The result of this asymmetry in implementation was persistent global imbalances, with the US accumulating enormous deficits and its partners flooding US financial markets with their equally enormous surplus savings in search of yield.
These imbalances caused the financial crisis of 2007-8, which led the G-20 Summit of April 2009 in London to proclaim, in the words of British Prime Minister Gordon Brown, that “the Washington Consensus is dead.” From then on the trading partners of the United States would be able to continue violating the terms of the Washington Consensus without having to pay any attention to US complaints.
Moreover, since the 2007-8 crisis the US itself would join these partners in abandoning at least three central provisions of the Washington Consensus: re-regulating domestic markets, increasing tax burdens and propelling public debt to unimaginable heights. Pious pledges to deal with trade imbalances and the enormous current account deficits produced no results. The cumulative trade deficit of the US from 2007 to date is $6.3 trillion which is equal to the amount of US Treasure securities held by foreigners, mostly foreign governments.
To preserve the existing international trading and investment order from the threat of collapse posed by the 2007-8 debt crisis, the US government and the Federal Reserve joined with the central banks and governments of all our major trading partners in issuing more debt. Since the beginning of the debt crisis in 2007, the originating cause of the crisis (global debt) exploded by $60 trillion (40%) or more, depending on source of data.
The fiscal, monetary and regulatory policies in place in the United States in the last 8 years since the outbreak of the debt crisis are intended to preserve the valuations of financial assets – mostly debt instruments – that were created by and in the service of the international trading and investment order that imploded in 2007-8. This is what has killed American growth, middle class jobs and incomes and the political parties that failed to protect them.
In recent years, economists have debated fruitlessly over the importance or lack thereof of financial imbalances and excessive debt. To no avail, they have sought answers to the question of what happens if these problems are not addressed by policymakers. Now we know: Voter insurgencies happen; revolts happen that topple the established policymaking elites.
Such developments have the effect of terminating, ultimately, the offending policies. But they do not necessarily provide alternative solutions nor do they always redress the abuses that gave rise to these revolts. Such salutary outcomes will require that common ground be found between the insurgents and at least some portions of the established policymaking elites.