Donald Trump has stolen the Democrats’ clothes in two key policy areas with huge political implications. One is the issue of budget deficits and economic growth. The other is trade, specifically China trade.
Recent Democratic presidents have only themselves to blame. Presidents Bill Clinton and Barack Obama embraced the idea that budget deficits were ruining the economy. Supposedly, budget balance would reassure financial markets, produce low interest rates, and higher growth would follow.
Clinton and Obama both delivered policies to match. Clinton actually moved the budget to surplus by 1999. Obama shifted the emphasis from stimulus to deficit reduction in his 2010 State of the Union address, long before the economy was in a strong recovery.
These policies reflected the advice of the orthodox economists around both presidents, and also of Federal Reserve chairs Alan Greenspan and Ben Bernanke, as well as other Wall Street notables who were phobic about the slightest risk of inflation and skeptical of deficit-financed public spending. The perverse policies reflected the excessive corporate influence on centrist Democrats.
But as Trump’s immense deficits, fueled by tax cuts mostly on the wealthy, have shown, this view turned out to be profoundly wrong. Thanks in large part to the immense macroeconomic stimulus of the Trump deficits, unemployment has declined to 3.6 percent, the lowest rate since 1969—and inflation is nowhere in sight.
Pity the poor Democrats. They could have used larger deficits to finance expanded health care, more college aid, affordable housing, and other good liberal Democratic things that the country needs and that voters tend to support, as well as the creation of new jobs. Instead, they got a deficit built on tax cuts tilted heavily to the wealthy—and Trump got the bragging rights to the higher growth.
What is especially galling is that key players like Larry Summers and Jason Furman, who were part of the austerity faction when they had the power to make policy, have now recanted long after they did the damage.
The trade story is, if anything, worse. Ever since China was considered for admission to the World Trade Organization in the late 1990s, Democratic trade advisers have been telling their presidents a comforting story that welcoming China into the global trading system would inexorably convert China into a liberal democracy and a market economy.
Of course, nothing of the sort happened. China was admitted to the WTO in 2001, and Beijing only doubled down on its state-led mercantilism. China’s state-owned enterprises and private companies closely coordinated with the ruling Communist Party continued to dominate. China subsidized exports, using capital provided at zero or negative interest rates, stole intellectual property, and edged out American competitors playing by free-market rules.
However, American multinationals playing on China’s terms could produce in China or source in China, and make a lot of money. Likewise Wall Street firms that underwrote deals. So there was no domestic elite constituency clamoring for a tougher China policy. In a weird inversion, the few critics of China’s flagrant protectionism were branded protectionist by the usual suspects.
Among the few highly knowledgeable critics was a trade lawyer named Robert Lighthizer, who had been a trade negotiator under Reagan. Lighthizer, as a voice in the wilderness, regularly testified to Congress about how Chinese protectionism actually worked and how it was damaging America.
Meanwhile, Democratic administrations went on indulging Beijing and sponsoring trade deals like NAFTA and the aborted Trans-Pacific Partnership. These deals were less about “free trade” and more about helping multinational corporations resist environmental or financial regulation. In the case of pharmaceutical regulation, Big Pharma got to write the rules in order to raise global prices for drugs.
When Trump ran for president, he declared that the trading system was undermining America. He named Robert Lighthizer his chief trade negotiator. And last week, Trump suspended the trade talks and raised tariffs on Chinese exports, on the accurate ground that Beijing was offering only token reforms of its own protectionist system and sucker-punching Uncle Sam yet again.
Once more, Trump garnered bragging rights that should have gone to Democrats. While press commentators who take their cue from the economic orthodoxy clucked that a “trade war with China” could be economically catastrophic, others pointed out that Trump’s tough stance with Beijing could be smart politics and not bad economics; that sooner or later the U.S. and China would likely work out a modus vivendi, and a more symmetrical one thanks to Trump’s harder line.
This win could also have belonged to Democrats—and it might have been coupled with a serious investment program to defend and reclaim American technological leadership and produce better-paid domestic jobs.
Why, incidentally, do large deficits no longer produce inflation? The answer is partly that labor’s bargaining power has been crushed—even low unemployment produces only modest pressure to boost wages—and partly that low-priced foreign competition (from China!) disciplines domestic producers and keeps prices in line.
If Trump does win re-election in 2020, it will partly be the result of his wreckage of the Constitution. But in no small part, his rebounding popularity despite the devastating findings of the Mueller report reflects crude versions of overdue policy changes long advocated by progressive Democrats and disdained by Democratic presidents.