Australia’s economy is still booming, but politics is a cause for concern

Political infighting could harm the economy, says Edward McBride

THE LAST time Australia suffered a recession, the Soviet Union still existed and the internet did not. An American-led force had just liberated Kuwait, and almost half the world’s current population had not yet been born. Unlike most of its region, Australia was left unscathed by the Asian crash of 1997. Unlike most of the developed world, it shrugged off the global financial crisis, and unlike most commodity-exporting countries, it weathered the resources bust, too. No other rich country has ever managed to grow so steadily for so long (see chart 1). By that measure, at least, Australia boasts the world’s most successful economy.

Admittedly, as Guy Debelle of the Reserve Bank of Australia (RBA, the central bank) points out, this title rests on the statistical definition of a recession as two consecutive quarters of decline. Had the 0.5% shrinkage of the fourth quarter of 2008 been spread across half a year, he notes, there would be no record. Yet by other measures, Australia’s economic performance is more remarkable still. Whereas many other rich countries have seen wages stagnate for decades, Australia’s have grown strongly, albeit less steadily in recent years (see chart 2). In other words, a problem that has agitated policymakers—and voters—around the world, and has been blamed for all manner of political upheaval, from European populism to the election of Donald Trump, scarcely exists in Australia.

And that is not the only way in which Australia stands out from its peers. At a time when governments around the world are souring on immigration, and even seeking to send some foreigners home, Australia has been admitting as many as 190,000 newcomers a year—nearly three times as many, relative to population, as America. Over 28% of the population was born in another country, far more than in other rich countries. Half of all living Australians were born abroad or are the child of someone who was.

In part, this tolerance for outsiders may be a reflection of another remarkable feature of Australian society: the solvency of its welfare state. Complaints about foreign spongers are rare. Public debt amounts to just 41% of GDP (see chart 3)—one of the lowest levels in the rich world. That, in turn, is a function not just of Australia’s enviable record in terms of growth, but also of a history of shrewd policymaking. Nearly 30 years ago, the government of the day overhauled the pension system. Since then workers have been obliged to save for their retirement through private investment funds. The modest public pension covers only those without adequate savings.

Australia’s health-care system is also a public-private hybrid. The government provides coverage for all, by paying clinics and hospitals a set fee for every procedure they perform. Those who want more than the most basic service must pay a premium. The government encourages people to take out insurance to cover the gap between the reimbursement it provides practitioners and the rates most of them charge the public. As with pensions, everyone gets looked after, but the government bears only a relatively small proportion of the cost—an arrangement that remains a distant dream in most rich countries.

Not all is perfect, of course. A common concern is that the economy relies too heavily on China, which is the biggest buyer of Australian minerals, the biggest source of tourists and foreign students, even the biggest consumer of Australian wine. People worry that if the Chinese economy falters, it will drag Australia’s down with it. Another fear, somewhat at odds with the first, is that China might try to use its economic power to blackmail Australia into weakening its alliance with America.

There are glaring domestic problems, too. The appalling circumstances of many Aboriginals are a national embarrassment, and the failure to answer their political grievances compounds the rancour. Even more alarmingly, global warming is making an already gruelling climate harsher. Rainfall, never reliable, is scarcer and more erratic in many farming regions. Over the past two years unusually hot water has killed a third of the coral on the Great Barrier Reef, one of the country’s greatest natural treasures.

In theory both the governing Liberal-National coalition (which is right-of-centre) and the main opposition, the left-leaning Labor Party, are committed to cutting emissions of greenhouse gases. But in practice climate change has been the subject of a never-ending political knife-fight, in which any government that attempts to enact meaningful curbs is so pilloried that it either loses the next election or is toppled by a rebellion among its own MPs.

Some see the failure to settle on a coherent climate policy as a symptom of a deeper political malaise. Australia used to have long-lived governments. Between 1983 and 2007, just three prime ministers held office (Bob Hawke and Paul Keating of Labor, and John Howard of the Liberals). Yet, since then, the job has changed hands six times. A full term is only three years, but the last time a prime minister survived in office for a whole one was 2004-07. The assassins are usually not voters, but fellow MPs who dispatch their leader in hope of a boost in the polls. As part of the research for this special report, your correspondent interviewed Malcolm Turnbull, the prime minister at the time, who insisted his position was secure. He had been sacked by his fellow Liberals before the interview could be written up.

The changes of PM have come so often that Madame Tussauds, a wax museum, has officially given up trying to make statues of the incumbent, who will inevitably have left office before a likeness is ready. The constant revolution is not just fodder for comedians; it also makes consistent policymaking much harder. For those who consider Australia’s unequalled economic performance the result, at least in part, of far-sighted decisions made 30 years ago, the current choppy politics seem like a harbinger of decline.

This special report will try to explain Australia’s enviable record, and ask how long its good fortune can last. Is it adopting the reforms needed to keep the economy bounding ahead? Will it have to choose between China and America? Is the current generation of politicians up to the job? Is Australia, in short, as lucky a country as its nickname suggests, or is its current streak coming to an end?

Killer Politicians

Jeffrey D. Sachs  

Americans are rightly horrified at Jamal Khashoggi’s brutal murder, yet most fail to recognize that their own leaders' murderous ways may be little different than those who ordered Khashoggi’s death. The pervasiveness of state-sponsored killings is no excuse for treating murder as acceptable, ever.

trump saudi arabia crown prince

NEW YORK – “Will no one rid me of this meddlesome priest?” asked Henry II as he instigated the murder of the Archbishop of Canterbury, Thomas Becket, in 1170. Down through the ages, presidents and princes around the world have been murderers and accessories to murder, as the great Harvard sociologist Pitirim Sorokin and Walter Lunden documented in statistical detail in their masterwork Power and Morality. One of their main findings was that the behavior of ruling groups tends to be more criminal and amoral than that of the people over whom they rule.

What rulers crave most is deniability. But with the murder of the Saudi journalist Jamal Khashoggi by his own government, the poisoning of former Russian spies living in the United Kingdom, and whispers that the head of Interpol, Meng Hongwei, may have been executed in China, the curtain has been slipping more than usual of late. In Riyadh, Moscow, and even Beijing, the political class is scrambling to cover up its lethal ways.

But no one should feel self-righteous here. American presidents have a long history of murder, something unlikely to trouble the current incumbent, Donald Trump, whose favorite predecessor, Andrew Jackson, was a cold-blooded murderer, slaveowner, and ethnic cleanser of native Americans. For Harry Truman, the atomic bombing of Hiroshima spared him the likely high cost of invading Japan. But the second atomic bombing, of Nagasaki, was utterly indefensible and took place through sheer bureaucratic momentum: the bombing apparently occurred without Truman’s explicit order.

Since 1947, the deniability of presidential murder has been facilitated by the CIA, which has served as a secret army (and sometime death squad) for American presidents. The CIA has been a party to murders and mayhem in all parts of the world, with almost no oversight or accountability for its countless assassinations. It is possible, though not definitively proved, that the CIA even assassinated UN Secretary-General Dag Hammarskjöld.

The CIA has only been held to public account on one occasion: the 1975 US Senate hearings led by Frank Church. Since then, the CIA has continued its violent and, yes, murderous ways, without any accountability for it or for the presidents who authorized its actions.

Many mass killings by presidents have involved the conventional military. Lyndon Johnson escalated US military intervention in Vietnam on the pretext of a North Vietnamese attack in the Gulf of Tonkin that never happened. Richard Nixon went further: by carpet-bombing Vietnam, Cambodia, and Laos, he sought to instill in the Soviet Union the fear that he was an irrational leader capable of anything. (Nixon’s willingness to implement his “madman theory” is perhaps the self-fulfilling proof of his madness.) In the end, the Johnson-Nixon American war in Indochina cost millions of innocent lives. There was never a true accounting, and perhaps the opposite: plenty of precedents for later mass killings by US forces.

The mass killings in Iraq under George W. Bush are of course better known, because the US-led war there was made for TV. A supposedly civilized country engaged in “shock and awe” to overthrow another country’s government on utterly false pretenses. Hundreds of thousands of Iraqi civilians died as a result.

Barack Obama was widely attacked by the right for being too soft, yet he, too, notched up quite a death toll. His administration repeatedly approved drone attacks that killed not only terrorists, but also innocents and US citizens who opposed America’s bloody wars in Muslim countries. He signed the presidential finding authorizing the CIA to cooperate with Saudi Arabia in overthrowing the Syrian government. That “covert” operation (hardly discussed in the polite pages of the New York Times) led to an ongoing civil war that has resulted in hundreds of thousands of civilian deaths and millions displaced from their homes. He used NATO airstrikes to overthrow Libya’s Muammar el-Qaddafi, resulting in a failed state and ongoing violence.

Under Trump, the US has abetted Saudi Arabia’s mass murder (including of children) in Yemen by selling it bombs and advanced weapons with almost no awareness, oversight, or accountability by the Congress or the public. Murder committed out of view of the media is almost no longer murder at all.

When the curtain slips, as with the Khashoggi killing, we briefly see the world as it is. A Washington Post columnist is lured to a brutal death and dismembered by America’s close “ally.” The American-Israeli-Saudi big lie that Iran is at the center of global terrorism, a claim refuted by the data, is briefly threatened by the embarrassing disclosure of Khashoggi’s grisly end. Crown Prince Mohammed bin Salman, who ostensibly ordered the operation, is put in charge of the “investigation” of the case; the Saudis duly cashier a few senior officials; and Trump, a master of non-stop lies, parrots official Saudi tall tales about a rogue operation.

A few government and business leaders have postponed visits to Saudi Arabia. The list of announced withdrawals from a glitzy investment conference is a who’s who of America’s military-industrial complex: top Wall Street bankers, CEOs of major media companies, and senior officials of military contractors, such as Airbus’s defense chief.

The US prides itself on being a constitutional democracy, yet when it comes to foreign policy, the president is little different from a despot. Trump has just announced the US withdrawal from the Intermediate-Range Nuclear Force Treaty without so much as a mention to Congress.

Political scientists should test the following hypothesis: countries led by presidents (as in the US) and non-constitutional monarchs (as in Saudi Arabia), rather than by parliaments and prime ministers, are especially vulnerable to murderous politics. Parliaments provide no guarantees of restraint, but one-man rule in foreign policy, as in the US and Saudi Arabia, almost guarantees massive bloodletting.

Americans are rightly horrified by Khashoggi’s murder. But their own government’s murderous ways may be little different. The pervasiveness of state-sponsored killings is no excuse for treating murder as acceptable, ever. It is instead a rationale for subjecting power to strict constitutional constraints and especially to international law, including the United Nations Charter and the Universal Declaration of Human Rights. This is our only true hope for survival and safety in a world where the casual resort to violence can easily be the end of all of us. 
Jeffrey D. Sachs, Professor of Sustainable Development andProfessor of Health Policy and Management at Columbia University,is Director of Columbia’s Center for Sustainable Development andof the UN Sustainable Development Solutions Network. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, Building the New American Economy, and most recently, A New Foreign Policy: Beyond American Exceptionalism.

India’s Own String of Pearls

By Phillip Orchard


India’s internal pressures and geographic isolation have long kept its government focused primarily on the affairs of the subcontinent. But fearing encirclement by China’s expanding military presence, and depending more and more on vital economic lifelines through hotly contested waters, New Delhi is expanding India’s defense presence across the Indo-Pacific. From the shores of southeastern Africa to the mouth of the Malacca Strait and, increasingly, into East and Southeast Asia, India is wooing strategically located states and winning access to foreign ports and military bases, while building up naval and air infrastructure to leverage the geographic advantages its own remote territories provide.

This Deep Dive surveys the strategic logic, advantages and limitations of India’s expanding military footprint in each corner of the Indian Ocean basin. It also looks at how a greater Indian presence might bolster the emerging multinational effort to contain China’s advance. Ultimately, it concludes that while India lacks Beijing’s deep pockets and the pace and scale of China’s military buildup, it has geography and ample international support working in its favor.
Why India Is Pushing Outward
For a country with more than 4,500 miles (7,200 kilometers) of coastline, India has never been particularly ambitious in the maritime sphere. This is largely because it’s never had much reason to look beyond the subcontinent at all. Geographically, India is protected by the near-impenetrable Himalayas to its north, unforgiving tropical terrain to its east and deserts to the west, and buffered by the vast waters of the Arabian Sea, the Bay of Bengal and the open ocean. Any outside power attempting to threaten the heartland would have to arrive either overland, through the Hindu Kush and Indus valley, or by sea. Either way it would confront India’s demographic immensity, which makes direct subjugation by force nearly impossible. That outside powers have dominated the subcontinent is a result mainly of its internal fractiousness. Its primary occupiers – the Moguls from the 11th century to the 18th century and the Europeans beginning shortly thereafter – succeeded because they managed to turn India against itself, deftly exploiting the competition among various factions and power centers to cultivate coalitions of collaborators who would support their largely commercial aims.
With that history in mind, India has generally focused inward since its independence. Its viability as a modern nation-state has hinged on its governments’ abilities to manage internal divisions. External geopolitics, with the exceptions of the periodic blowups with Pakistan and occasional border clashes with China, took a back seat to more immediate concerns. But the demands of this endeavor are changing, along with India’s broader strategic environment.

To fuel growth and development, India’s economic interests have expanded far beyond the subcontinent. The country has well over a billion mouths to feed, and sustaining the level of economic growth and modernization necessary to support this population has given India a voracious appetite for commodity imports such as energy. Last year, around 47 percent of the total energy India consumed came from imports, including more than 80 percent of its oil needs. As a result, the country has been quickly expanding its naval presence around critical chokepoints near the Arabian Peninsula and Horn of Africa – waters known to be teeming with pirates, rebels and explosive risks rooted in Middle Eastern rivalries. Around 40 percent of India’s trade passes through the similarly turbulent waters of the Malacca Strait.
At the same time, the interests of other emerging powers have also expanded. In fact, the foremost driver of India’s expansion is China’s growing presence in the Indian Ocean. Neither India nor China has much interest in duking it out for supremacy in the Indo-Pacific. China’s core strategic concern is the series of maritime chokepoints to its east and south that an outside naval power could use to sever its access to critical sea lines of communication. India’s core strategic concern is its internal incoherence and the hostile nuclear power across its western border.

The problem is that as China moves to address its primary strategic concerns to its east, secondary issues to its southwest are becoming more important, making India, largely unwittingly, more of a potential threat, and vice versa. China needs to find ways to bypass chokepoints in the East and South China seas, meaning it needs to build deep-water ports, pipelines and rail lines in India’s backyard. And to prepare for a potential conflict that blocks its maritime chokepoints, it also needs to develop naval forces to keep its backup outlets open and counter enemy forces coming from the west – an effort that will require a network of bases and logistics facilities on India’s periphery to support them. We’re skeptical about China’s prospects for success in building out this “String of Pearls” – and in developing into a naval power capable of dominating distant waters. But there’s little reason to doubt China’s intentions to try.

For India, the reason for Beijing’s strategic fears is meaningless, as is the reality that China is still too weak to project substantial power into the Indian Ocean. Whatever China’s intentions, India feels encircled by a country with a seemingly insatiable appetite for power – one that happens to be arming New Delhi’s most dangerous rival and intent on building a blue-water navy, putting it at an intolerable risk of a two-front war. And so, as China’s defense footprint expands into the Indian Ocean basin, India is urgently trying to expand its own presence, both in its immediate periphery and in China’s front yard.

This is particularly important since India’s naval modernization lags considerably behind China’s rapidly developing maritime capabilities. India is beginning to invest heavily in maritime power projection assets, including a new fleet of nuclear submarines and its first indigenously built aircraft carrier, as well as a growing arsenal of anti-ship missiles, maritime surveillance planes and anti-submarine warfare aircraft. It’s also considered to have inherited ample operational expertise from the British. Even if India has little hope of checking Chinese operations across the vast Indian Ocean, it does have some options to confront China where it’s most vulnerable.
An Expanding Sphere of Influence
India’s expansion is still very much a work in progress. To date, it has a single overseas military base in Tajikistan – which is useful for containing Pakistan and keeping an eye on China’s expanding footprint in the Himalayas but irrelevant in the maritime realm. It is aiming, however, to develop several other naval and air bases across the Indo-Pacific. Perhaps more important, it’s deepening ties with numerous other regional states that are similarly concerned about China’s rise. These partnerships could give India access to a network of existing bases operated by a range of outside Powers.
Southeast Asia
The strategic reality of India’s budding naval rivalry with China is most apparent in Southeast Asia. In the unlikely event that major maritime hostilities were to erupt between them, the rapidly growing People’s Liberation Army Navy would vastly outgun India. But that would matter only if the conflict were to take place one-on-one in open waters. It wouldn’t. India has an inherent advantage over China – one that countries like Japan and the U.S. have as well: China depends entirely on sea lanes that pass through bottlenecks such as the Malacca, Sunda and Lombok straits. India’s main strategic task is to be in position to help block Chinese ships at these chokepoints should a conflict with China break out. It, by contrast, doesn’t have any such chokepoints in its immediate periphery. And the chokepoints that could threaten important sea lanes on which India relies – those around the Arabian Peninsula – are also critical to other major powers and far from Chinese shores.

India’s advantage in this regard is most apparent in the Andaman and Nicobar islands. Located directly south of Myanmar in the Andaman Sea, the 527-island archipelago, which India controls, serves as the gateway to the Malacca Strait. India, naturally, has been scrambling to build out its military infrastructure there. Currently, the islands host a number of reconnaissance aircraft and sub hunters – critical for monitoring Chinese activities in the waters – but only one infantry brigade and a small force of patrol vessels. Plans call for a dramatic expansion to accommodate a division-level force and several warships, and in May India announced that it would station a fighter squadron on the islands for the first time since World War II.

The Andaman and Nicobar islands also facilitate stronger military ties with Southeast Asian states. In May, Indonesia tentatively agreed to give Indian warships access to a port on the nearby Indonesian island of Sabang, just north of Sumatra, and potentially to others on the Sunda and Lombok straits. An Indian warship made its first visit to the port at Sabang, which India is expected to help expand, a month later. New Delhi is keen to gain a toehold on the other end of the Malacca Strait as well. Last year, it inked a deal with Singapore allowing for temporary deployments to and mutual logistics support at each other’s naval facilities, including Singapore’s all-important Changi Naval Base, which currently hosts rotational U.S. warship deployments. (India is reportedly working on a similar agreement with Japan.)

India’s defense presence is extending even into the South China Sea. In 2016, it signed a deal with Vietnam to set up a satellite tracking and imaging station in the southern part of that country, giving both parties much-needed eyes on the South China Sea, including areas where India has secured oil concessions from Vietnam. (India has similar stations in Brunei and Indonesia.) Vietnam also offered New Delhi exclusive naval access to the port of Nha Trang, not far from China’s critical sub hub at Hainan, in 2011, illustrating Hanoi’s interest in encouraging outside powers to jump into the South China Sea fray.
The Arabian Peninsula and the Horn of Africa
As noted earlier, India’s ambitions would stall out without access to steady flows of imported oil and other critical commodities. For that reason, India has devoted much of its attention to potential chokepoints at the mouths of the Red Sea and the Persian Gulf. That a military footprint in this region serves its interests in keeping tabs on China and, to a lesser extent, Pakistan is an added bonus. So too is the favor that India will gain with stronger naval powers like the U.S. by demonstrating its ability to contribute to a common cause.

Of particular note is India’s burgeoning military partnership with Oman, which sits south of the ever-tenuous Strait of Hormuz. Indian Prime Minister Narendra Modi signed an agreement in February granting his country’s naval vessels access to the port of Duqm and giving Indian aircraft access to several Omani air bases. In addition, India operates a signals intelligence station in the city of Ras al Hadd, in northeastern Oman. The Middle East and the Horn of Africa are also where India’s recent logistics cooperation agreements with France and the United States are most likely to come in handy. The deal with France, reached in March, is expected to give the Indian navy access to facilities in Djibouti (home to China’s first overseas military base) and Abu Dhabi. The U.S. deal may provide India access to any number of U.S. bases across the region.

Despite its growing partnership with the U.S., India has been keen to expand into Iran, too. An Indian firm, for example, is developing a deep-water port in the Iranian town of Chabahar. There’s nothing yet to suggest that India will ever have naval access to the port, but the possibility cannot be ruled out. The port would certainly be valuable to several of its strategic aims. It’s located just 215 miles from the deep-water port China is building in Gwadar, Pakistan, where at least a limited Chinese naval presence is likely in the future. And it’s even closer to the Pakistani port town of Jiwani, which China is eyeing for a full-fledged naval and air base. At a minimum, Chabahar will enable India to route commodity imports from Afghanistan away from Pakistan.
Southern Indian Ocean
India’s priorities in the stretch of water between it and southeastern Africa are similar to its interests around the Arabian Peninsula and the Horn of Africa: ensuring the free flow of maritime traffic through turbulent waters and countering Chinese encirclement. To those ends, India has often been willing to flex its muscles to ensure that the tiny archipelagic nations in the area stay firmly in its orbit when outside powers start poking around in the region. In 1983, for example, India was ready to mount a naval operation to stop a coup attempt from ousting the prime minister of Mauritius. It pulled the trigger in the Seychelles three years later, sending a warship to foil a coup against another allied leader. And in 1988, India once more dispatched commandos and naval ships to stop a coup, this time in the Maldives. It was a Chinese naval deployment around the Maldives that is believed to have deterred India from intervening there again last spring when the country’s president, supported by China, imposed a state of emergency and arrested several opposition leaders, including the former president whom India rescued in 1988.

China’s newfound interest in these states – and the largesse it has flaunted to secure political influence in their capitals – is posing a fresh challenge to India’s sphere of influence while complicating New Delhi’s defense ambitions. In the Seychelles, for example, India struck an agreement in 2015 for the joint development of Assumption Island, including the construction of an airstrip and a jetty. The deal has since become mired in domestic political opposition and concern about jeopardizing the flow of Chinese aid and investment. In January, India conceded to a revised, watered-down deal with strict stipulations, such as a clause precluding India from using the island during wartime. And even these changes have not been enough to secure ratification in the Seychelles parliament.
India’s experience in Mauritius has been similar. As with the Seychelles, New Delhi closed an infrastructure agreement in 2015 that was seen as a precursor to a potential Indian military base on the islands of Agalega. Chinese money has since come pouring into Mauritius – including $700 million for a special economic zone – possibly stalling momentum toward an expanded Indian military presence. In the Maldives, meanwhile, the China-backed government in June declined to renew an agreement allowing a small Indian military presence on the archipelago and joint maritime patrols. (The government was voted out of office last month, and the Indian military contingent reportedly has yet to leave the Maldives.) China, too, is learning firsthand the difficulties of navigating domestic political complications and sovereignty concerns in its Belt and Road Initiative projects.

Nevertheless, India is already operating a coastal surveillance radar station in Mauritius, as well as one in Madagascar. It may also gain entry to the naval base on the French island of Reunion, between Mauritius and Madagascar, thanks to its new logistics exchange agreement with Paris. Furthermore, just northeast of Mauritius is the British-owned Diego Garcia atoll, home to the largest U.S. military base in the Indian Ocean, which India may soon have access to under its recent deals with Washington.
Strategic Implications
Taken as a whole, India’s expansion highlights both its enduring limitations and its value as a partner for other powers. The country is still struggling to win the necessary support of regional states to build out its own network of bases. Like China, India is finding that small countries tend to be quite adept at playing competition between larger rivals to their benefit – and extraordinarily averse to the risks of getting caught in the crossfire of a conflict between great powers. But New Delhi does not have pockets deep enough to easily lock down political support for a substantial military presence across its periphery, nor does it have the military power to make it clear that an Indian security presence is the best and only option for states in the region.

Then again, India also doesn’t have to carry the burden of its defense imperatives alone, unlike China. It merely needs to prove itself valuable to outside powers – the U.S. and its allies in particular – and to smaller, strategically located states that are wary of China’s rise. These countries have ample interest in giving India the access to bases it needs to play its role, meaning India doesn’t have to build a network of facilities from scratch, an immense undertaking. This goal, in part, drives India’s contributions to securing sea lanes around the Arabian Peninsula, and it would also drive the country’s willingness to join multinational operations around chokepoints in Southeast Asia should push come to shove with China.

India is not preparing for an inevitable war with China. Of course, New Delhi wants to be ready for that and all possibilities. But like its partners in the Quad security alliance – Japan, Australia and the United States – India’s overriding goal is to make it exceedingly unwise for China to ever try to start a war in the first place. Japan, India and Australia have ample overlapping interests and little reason to be suspicious of one another’s long-term intentions. They’re separated by several thousand miles, though, and their respective naval buildups have focused on developing the capabilities to address threats in largely discrete spheres. Left to their own devices, each would be overly dependent on the U.S. to counter a challenge from China directly on its behalf.

Given the possibility that the U.S. might be tied down elsewhere, or simply be disinclined to make a costly intervention in regional affairs, there is a risk that China could one day see an opening to exploit the gaps in Australia’s, Japan’s and India’s respective capabilities and reach, and that it would try to address its own geographic vulnerabilities by force. That’s why each country is moving to put the pieces in place for a lasting containment structure in advance – the geography of which could make it vastly greater than the sum of its parts.

Trump Flunks Fed Politics

Bashing Jay Powell makes it harder to keep interest rates low.

By The Editorial Board

President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, November 2, 2017.
President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, November 2, 2017. Photo: carlos barria/Reuters

Donald J. Trump is a real estate man, so naturally he prefers low interest rates. But he’s also President, and publicly mau-mauing the Federal Reserve to keep rates low as he has been doing will lead to the opposite of what he wants. This is Fed Politics 101.

“Every time we do something great, he raises the interest rates,” Mr. Trump said Tuesday in an interview with our Journal colleagues, referring to Fed Chairman Jay Powell. “He was supposed to be a low-interest-rate guy. It’s turned out that he’s not.”


Now, who would say such a thing about Mr. Powell? None other than Mr. Trump’s Treasury Secretary, Steven Mnuchin, who supervised the Fed Chairman’s selection in 2017. As we reported at the time, Mr. Mnuchin told Mr. Trump to select Mr. Powell in substantial part because he could be more easily influenced than other candidates. Mr. Trump could have taken other advice.

The truth is that no Fed Chairman can afford to be seen by markets to be taking interest-rate dictation from the White House, and when they do it typically ends in tears. See Arthur Burns under Richard Nixon and G. William Miller under Jimmy Carter. Alan Greenspan and Ben Bernanke were also too cozy politically with administrations in power, but that influence was mostly behind the scenes.

Poor Mr. Powell has the harrowing task of managing the transition from the largest experiment in monetary-policy history. Mr. Bernanke and later Janet Yellen enjoyed the ride down to near-zero short-term rates and unprecedented bond-buying to keep long-term rates artificially low. The policy pushed investors into riskier assets such as stocks even though it didn’t do much for a real economy that grew slowly during the Obama Administration.

Growth and animal spirits have revived with Mr. Trump’s policy mix of tax reform and deregulation. Now Mr. Powell has to manage the more treacherous monetary road back to normalcy, and Mr. Trump’s public battering won’t make the Chairman’s job any easier. The Fed has signaled it will raise short-term rates again in December, the fourth time this year. Mr. Powell won’t want to look like he’s backing down under political pressure—even if economic events suggest he should.

A better criticism of the Fed would be that it should have unwound its massive bond portfolio first and faster than it has. That would have loosened the Fed’s control over the long-term bond market, encouraging an earlier adjustment out of risk assets before the Fed also began raising rates.

Now the Fed is doing both at the same time, with more risk for asset prices and greater political risk for the Fed. See Wednesday’s rout in equity prices that are now near the formal correction territory of a 10% decline in recent weeks.

Shrinking the Fed’s bond portfolio first and more rapidly is the policy that former Fed Governor Kevin Warsh recommended before Mr. Trump considered him as a finalist for the Fed Chair along with Mr. Powell. But Mr. Mnuchin preferred Mr. Powell, and the President went along with “a low-interest rate guy.”

Fed politics aside, the substantive question is whether Mr. Trump is right that the central bank is too tight. We’ve thought not to this point, as short-term rates are still at or below the rate of inflation. Rates should rise from their historic lows in an economy that is growing by nearly 4%.

Yet there are some signs of slower growth, in particular in housing. New single-family home sales fell 5.5% in September and are down 13.2% from a year ago. Some of this is hurricane-related but housing affordability is also an issue as mortgage rates rise. Business and consumer confidence are still high but are worth watching if stock and other asset prices continue to fall.

The bigger economic risk is slower growth abroad, which Mr. Trump should care about though he professes not to. Faster U.S. growth and rising interest rates are drawing capital from other markets. Mr. Trump’s tariffs are also hurting trade flows and causing companies to delay some investment. Border taxes are never a free lunch, no matter what White House adviser Peter Navarro tells Mr. Trump.

White House economics chief Larry Kudlow says Mr. Trump is merely offering his opinion on the Fed, not issuing an order to Mr. Powell. No doubt the President is also deflecting blame from the White House for any economic slowdown. Mr. Trump needs a foil more than even most politicians. All of which is good reason for the Fed to ignore the President and focus on getting its policy right—whether or not that means raising rates in December.