Donald Trump is now talking about the U.S. pulling out of the World Trade Organization. Hillary Clinton is talking about instituting a $15 per hour minimum wage. These are clearly both lousy ideas (I’ll explain why.) But given the counterproductive stasis of the world economy currently, are we not better off moving the stasis, and maybe accidentally making an improvement, rather than letting nature take its course in the next downturn?
Trump’s and Hillary’s economic ideas are generally of poor quality. The world is heading steadily towards a greater level of protectionism, as forecast in this column as far back as 2009, with “anti-dumping” actions proliferating. The World Trade Organization is the one international organization fighting against that protectionism. It is thus the only international organization worth preserving, with the possible exception of NATO. The 1930s demonstrated what happens if protectionism runs rampant; not only did world trade volume drop by two thirds, but international relations became increasingly fraught, with mutual mistrust at a time when effective collective action could have achieved much. There is no reason to suppose a return to protectionism and an abandonment of the WTO would not have the same effect, both economically and politically.
Conversely Hillary Clinton’s $15 minimum wage is the worst news possible for people earning between the current $7.50 minimum wage and the new $15. With that kind of increase, the cost base for retailers and fast food outlets will be raised universally to the levels currently prevailing in Manhattan and San Francisco. Not only will robotization be enormously encouraged, as I discussed last week, but also fast food outlets and retailers in rural areas will be decimated, as the business volume available for those outlets would not be sufficient to allow them to survive, given their doubled cost base.
As I am very well aware, living in a relatively low-cost city 74 miles from New York, low costs of wages and real estate make all kinds of business activities possible that would not be feasible in the big cities. With a $15 minimum wage, Manhattan will not be greatly affected, except that local branches of retailers and fast food outlets will be largely robotized. However, really low-wage, impoverished areas like Binghamton NY will become even more deserted and hopeless, as the local retailers and fast food outlets, which had provided jobs at wages sufficient for a reasonable lifestyle in that low-cost area, disappear altogether. Thereby more and more of the rural areas of the U.S. will become like the worst parts of Appalachia, ruined havens of drug use and despair. Journalists and economists who live in big cities, where $15 an hour is barely a living wage, should have the grace to disqualify themselves on this issue.
At first sight, therefore, it is indeed depressing to witness two economic illiterates competing for the Presidency on economic policy platforms that have learned nothing in the last 350 years, since the days of Thomas Mun, Jean-Baptiste Colbert and the 1351 Statute of Laborers. (Mun believed in increasing national wealth by accumulating Treasure through exporting more than you imported. Colbert believed in state control of economic activity, setting up factories to manufacture domestically and block imports. The Statute of Laborers set a maximum wage for workers as labor had become scarce through the Black Death; it did not work, as statutes setting wage rates away from the market never do.) Adam Smith, David Ricardo and Ludwig von Mises might just as well never have existed, while the gloomy prognostications of Thomas Malthus will come painfully back into view as the benefits of industrialization are dissipated.
Nevertheless, there is no question new thinking is needed. The desirability of monetary stimulus, with sub-zero real interest rates, is now almost everywhere accepted, with Britain just having completed an inflation-linked bond issue at a real interest rate of minus 1.35% for a term of no less than 50 years. If providers of capital are prepared to lock in a negative real return for so long a period, the capitalist system is in the process of eating its seed-corn. Compared with this madness, Smoot-Hawley tariffs as proposed by Donald Trump seem positively rational, and are undoubtedly less damaging tin the long run. With tariffs, once world trade has declined and domestic higher-cost production has picked up the slack, economic growth would resume, albeit from a lower base. Conversely prolonged negative real interest rates destroy the capital base and permanently lower the productive capability of the system as a whole.
Very much the same applies with Keynesian insouciance about deficit finance. Contrary to policymakers’ current fond beliefs, racking up debt ad infinitum does indeed matter a lot. Japan today is in deep trouble, with no apparent way out of something like a 25% decline in living standards as the country’s savings base is destroyed by a government default. Following Japan’s road to perdition would do more damage to living standards than either a Trumpian Smoot-Hawley tariff or a Clintonian $15 minimum wage, which would have only a modest effect on the living standards of those already earning more than $15 an hour.
In short, economic policy is already so bad there seems little chance that the bad ideas of Trump and Clinton, even if implemented in full, would make it significantly worse. Conversely, the opening of the policy window to new ideas at least raises the possibility that some good ideas might sneak through, or current bad ideas be abandoned.
It is possible, for example, that Trump will impose tariffs that crash world trade, but provide revenues that finally pull the federal budget out of its current hole. That would be in the fine Republican tradition of Benjamin Harrison and William McKinley, who used high tariffs to bolster the government’s fiscal position. I am generally in favor of lower taxes and am an absolutist on the subject of lower government spending, but if we must have high taxes, I see no reason why they should not be tariffs, much of the burden of which falls on foreigners and people who spend more than their income, rather than in higher income taxes, which fall on the striving and provident. If we are to crash the economy, I would prefer it to be through a tariff, which can be lowered again when sanity returns, rather than through a long-term government deficit, which is likely to lead to a government default and produce permanent impoverishment.
Likewise, if Hillary Clinton raises the minimum wage to $15 an hour, this were to produce a burst of inflation, and the Fed then were to raise interest rates to combat the inflation, then I would consider us to be ahead of the game. Yes, it’s tough on those put out of work by Hillary’s policies and on those businesses in poor areas forced out of operation by higher wage costs, and on Great Plains residents who can’t find an operating McDonalds within 200 miles, because local restaurants have shut up shop. However, assuming the Fed took the job of countering inflation seriously and raised interest rates above the rate of inflation, the benefit on the economy’s capital stock would exceed the moderate but finite costs of shuttered fast food restaurant businesses. Of course, if the Fed failed to raise interest rates sufficiently, then inflation might set in at a pace that removed the effect of the $15 minimum wage; if prices doubled we would be back to where we started.
If we do nothing about current fiscal and monetary policies, they will eventually produce a deep recession, as the productivity shrinkage they are producing and the credit crunch as all the bad debt goes sour together cause the financial structure to collapse again, as it did in 2008. In that event, it is however unlikely that policies would be rectified; it’s much more likely that the crazed Keynesians in the permanent government would push interest rates below zero and indulge themselves in an even larger 2009-type fiscal “stimulus,” thus making the negative-return and deficit problems very much worse. Compared to that outcome, Trump and Clinton’s current proposals seem positively benign.
Of course, it would be greatly preferable if we were offered politicians who had some clue about the right policies to pursue. But in this primary cycle, we were not offered these by either side of the political spectrum. All the Republicans had tax cut plans that unbalanced the budget further, because the fiscal policies that are truly necessary involve the short-term pain of tax increases and spending cuts (preferably mostly the latter.) More surprising, unlike in 2012 on the Republican side, there were also no denunciations of the Fed’s utterly damaging monetary policies, even though the evidence for such denunciations is clearly visible. So it’s not simply the case that idiots won the two parties’ nominations; the entire primary process on both sides was idiotic from beginning to end.
Maybe in 2020 we will get some candidates with better policy ideas. Meanwhile, even Trump’s or Clinton’s bad ideas will shake the system up, which it badly needs.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)