I'm not sure what to call the new era we seem to be entering. But I'm sure it will make people poorer.
Let's start with some basics. Imagine you inherit a thriving department store chain. Instead of listening to experts on consumer trends, supply chain logistics, human resources, etc., you choose to follow your gut. Instead of doing market research or anything like that, you'd rather just hire your friends and do business with vendors who compliment you or sell things you think are cool. Under such a “system,” you might make some good trading decisions, but the chances are very high that you will more often make bad ones. The representative of Pet Rock's supplier who gives him the “World's Best Businessman” award displays his products in the store window.
I chose a department store for this analogy because that is precisely how President Trump thinks about international trade and the American economy in general. He go america like “a department store and we set the price. I meet with the companies and then I set a fair price, what I consider a fair price.” In Trump's view, those are tariffs, although they are mostly paid by American consumers.
The problem, beyond the basic economic illiteracy inherent in the analogy, is that Trump keeps changing the “price” based on non-economic considerations. To name just the most recent example (of many), over the weekend the president declared that he will tear up trade deals he made with eight European allies and slap tariffs on their products until they agree to his demands for Greenland.
Now, in almost every business there is a bit of favoritism: giving a job or promotion to a nephew, offering a lucrative contract to a friend. But it is understood that these are deviations from good commercial practices. For Trump, good business practices are the departure from his policy of favoritism.
I should point out that there are other forms of more explicit ideological favoritism. For decades, many on the left have advocated policies that prioritize social or political goals over a sound economy. They have gone through different labels, including “social responsibility,” which morphed into things like environmental, social and governance investing and diversity, equity and inclusion. But the idea is always the same: the government should impose standards and policies based on more than the pursuit of profits and shareholder value. This is not always bad either. Child labor and worker safety laws, for example, are worth the costs they impose.
These examples are outnumbered by countless other laws and regulations that replace economic decision-making with political expediency. Historically, populism has been one of the main drivers of such distortions. So it should come as no surprise to anyone that Trump and Sen. Elizabeth Warren (D-Mass.) agree to cap credit card interest rates.
What sets Warren apart from Trump is that she is a traditional progressive populist ideologue who argues from a body of thought that exists both on her bookshelf and in her own head. Trump's approach lies entirely in his gut.
As a free marketer, I don't trust Warren's shelf or Trump's instincts.
Which leads us to understand why this new era (let's call it post-globalist era) will make us poorer.
Around the world, corporations large and small are making business decisions based on simple, old-fashioned geopolitical and political calculations. Nowhere is this more obvious than in international trade. If you think tariffs could rise at any moment because the president of the United States woke up on the wrong side of the bed, you'll protect yourself against that risk. Companies around the world are reorganizing their supply chains to become less dependent on the US market (and in some cases the Russian and Chinese markets). Almost by definition, these movements are not maximally efficient. Less efficiency equals less productivity. Less productivity equals less wealth creation and growth.
But it is also true in other ways. If you know the new department store boss likes gold, you'll paint more Pet Rocks gold. If management insists on taking partial ownership of your company, something Triumph has made more than any president in modern history: you're going to make defensive decisions aimed at not angering them. Like the economist informationEverywhere you look, multinational companies are making decisions based on geopolitical considerations. “When companies are forced to allocate capital according to geopolitical criteria, they become less productive, reducing prosperity for everyone.”
For almost my entire adult life, American conservatives understood this basic point and argued against excessive political or ideological distortions of markets. Remember all that talk about “picking winners and losers” and “crony capitalism” in the Obama era?
But for some reason, many conservatives think it's okay to outsource economic decision-making to one man. And most of us will be poorer for it.
UNKNOWN: @JonahDispatch
