Donald Trump embodies the spirit of our age

Even ultimate failure would not invalidate his claim to be a truly historic president

Gideon Rachman



When Donald Trump spoke at the UN last month, the audience laughed at him. It was an unprecedented insult to an American president. But I have an uneasy suspicion that Mr Trump may have the last laugh. The 45th US president could yet go down as a leader who changed the course of history and embodied the spirit of an age.

Historic figures do not have to be good people, or even particularly intelligent. Mr Trump is a habitual liar, whose administration has set up detention camps for children. Rex Tillerson, his former secretary of state, is reputed to have called the president a “moron”. But none of that need stop Mr Trump from being what the philosopher Georg Hegel called a “world-historical figure”.

The quintessential world-historical figure of Hegel’s era was Napoleon, whom the German thinker described as the “world spirit on horseback”. Oddly, the best definition I have read of what Hegel meant by that term, came from the current president of France. Emmanuel Macron told Der Spiegel that “Hegel viewed ‘great men’ as instruments of something far greater . . . He believed that an individual can indeed embody the zeitgeist (world spirit) for a moment, but also that the individual isn’t always clear they are doing so.”

I doubt Mr Trump has much to say about Hegel. But he may be the kind of instinctive statesman that Hegel described — a figure who has harnessed and embodied forces that he himself only half-understands. By contrast I fear that Mr Macron, learned though he is, currently looks more like the embodiment of a dying order.

If future historians do indeed decide that Mr Trump was a historic figure, what might they say?

First, that he broke decisively with the elite consensus about how the US should handle its relationship with the rest of the world. Previous presidents had either denied the erosion in American power, or sought quietly to manage it. By contrast, Mr Trump acknowledged American decline — and sought to reverse it. His method was to use US power more overtly and brutally, in an effort to rewrite the rules of the global order to America’s advantage, before it was too late.

In particular, Mr Trump decided that globalisation, embraced by all his predecessors, was actually a terrible idea that was weakening America’s relative power and eroding the living standards of its people. After more than 30 years of stagnant or declining real wages, the American people were receptive to that message. Unconstrained by the politeness of his predecessors, Mr Trump bullied friends as well as enemies.

With his instinctively zero-sum approach to the world, Mr Trump also decided that a richer and more powerful China was obviously bad news for America — and became the first president to try to block China’s rise. Whether or not this is a good idea, it is undoubtedly a historic development, reversing more than 40 years of American foreign policy, which has sought to integrate China into a US-led global order.

On the domestic front, future historians might note that Mr Trump was the first president to notice the huge gap that had opened up between elite American opinion and that of the wider public — on a range of issues from immigration, to trade, to identity politics. As a candidate and then as president, he ruthlessly and effectively exploited these divisions. Mr Trump said and did things that conventional analysts regarded as political suicide. But his instincts proved better than those of the pundits. Despite his age, Mr Trump also “got” new media — and exploited it far more adeptly than other politicians.

But will all this radicalism be crowned with success? As Hegel pointed out, “the owl of Minerva spreads its wings only at dusk”, which is a fancy way of saying it is too soon to tell.

However, from a Trumpian perspective, the early signs are promising. The US economy is booming, while China’s economy is sputtering. The US Supreme Court has been reshaped. Under crushing American pressure, Canada and Mexico have agreed to rewrite their trade deal with America — and other US allies are showing signs of falling into line. Whatever the results of the midterm elections next month, Mr Trump stands a good chance of re-election in 2020.

Of course, it could all still go wrong. And, as an establishment kind of guy, I’m inclined to think it will. The Trump trade wars could backfire. The US economy could overheat and the stock market could tank.

In the event of another global financial crisis, a Trump-led US will struggle to lead a co-ordinated global response. If the Trump administration continues to undermine America’s alliance system, US power could erode even faster than before. In the worst case, Mr Trump’s instinctive risk-taking style could lead to a major miscalculation — and a war with China or Russia or on the Korean peninsula.

But even ultimate failure and disaster would not invalidate Mr Trump’s claim to be a truly historic president. The president may think that greatness is all about “winning”. But Hegel suggested that things usually end badly for world historical figures: “They die early like Alexander, they are murdered like Caesar; or transported to St Helena like Napoleon.” A cheering thought for Mr Trump’s many foes.

After America’s elections

The mid-terms produce a divided government for a divided country

A recipe for gridlock, poor governance and disenchantment with the political system



FOR ONCE, the outcome that was predicted actually occurred. Democrats took the House of Representatives in America’s mid-term elections on November 6th, and will provide some welcome oversight of the White House when members of the new Congress take their seats in January. Republicans held the Senate—with a bigger majority, which will make presidential appointments easier to confirm. Both sides declared victory. A starkly divided country now has a divided government. Underpinning the results, though, is the deepening of a structural shift in American politics that will make the country harder to govern for the foreseeable future. Democrats represent a majority of America’s voters, but Republicans dominate geographically.

Democrats won the popular vote for the House of Representatives by a comfortable margin. Their position as the party that enjoys most support among Americans, thanks to its strength in urban centres, was reinforced by a surge in support from the suburbs, where revulsion with President Donald Trump was evident. Meanwhile Republicans tightened their grip on less populous, more rural states, easily beating Democratic senators in Indiana, Missouri and North Dakota. In a country where one chamber of the legislature is based on population and the other on territory, this division is a recipe for gridlock, poor governance and, eventually, disenchantment with the political system itself.

The breadth of the divide is striking. Ten years ago there were 17 states with one Republican senator and one Democratic one. From January 2019 there will be just seven. In federal elections hardly any candidates seem able to survive in opposition-party territory. Only six Democratic senators won their elections in states carried by Mr Trump in 2016. The picture is less stark for governors, but in statehouses the pattern reasserts itself. From January Minnesota will be the only state where one chamber is controlled by Democrats and the other by Republicans. The last time that was the case was back in 1914.

This equilibrium may be stable, but it is damaging for the country and for both parties. For the Republicans, the danger is a long-term one. For now, they hold the White House and have an increased majority in the Senate. But in a two-party system, a party that prevails while consistently failing to capture a majority of votes will one day find it is no longer seen as exercising power legitimately by a majority of voters. For the Democrats, the challenge is immediate. They may rail against a system that disadvantages them in structural ways, but cannot change that system until they can work out how to win within it. Running up vast vote shares in New York and California is all very well, but on its own will not deliver a governing majority.

What is the way out of this impasse? The main onus is now on the Democrats. For their own good, not to mention the country’s, they have to find ways to appeal in America’s heartland.

That starts with exercising restraint. Yes, they should use their majority in the House to scrutinise a president who shows contempt for the norms that have constrained past presidents.

They should look carefully at what has been going on in federal agencies, and investigate possible presidential abuses of power or misuse of the office for personal aggrandisement. But Democrats should resist the urge to use their majority in the House to take revenge, hounding the president in the way that Newt Gingrich and his Republican colleagues once hounded Bill Clinton. Prosecution should be left to prosecutors. It is not obvious, for instance, that there would be much to gain by investigating the circumstances of Justice Brett Kavanaugh’s confirmation to the Supreme Court. There is certainly no ground to impeach him, as some Democrats want.

A second Democratic priority should be to show that they have the ideas and capacity for governing that can appeal to a broader swathe of voters. One way to do so is to make a good-faith effort to work with the president and the Republicans. There are deals to be done on infrastructure and on drug prices. They also need to make immigration less toxic (see article).

In 2010, when Republicans won the House during Barack Obama’s presidency and proceeded to block everything Democrats wanted to do, the White House argued that it was unjust for half of one branch of the federal government to stand in the way of everything else. That was right then and it is right now. House Democrats should not declare, as Mitch McConnell once did, that they will oppose everything the president does. There should be no repeat of the hostage-taking that saw the Republican House flirt with a sovereign default during Mr Obama’s second term.

Plenty of Democrats will counsel against holding back, arguing that the scorched-earth strategy that the Republicans used when they had a majority in the House worked perfectly well for them. Why, they will ask, should Democrats be the party of compromise in the name of better government, when their opponents have so often refused to give an inch?

For two reasons. First, it might just yield results. Admittedly, Mr Trump’s recent behaviour does not bode well. Accusing Democrats of facilitating the murder of policemen, as he did in the closing stages of the campaign, is not the best way to foster bipartisan spirits. Mr Trump could give up on the idea of signing any legislation in the next two years, preferring to rule by executive order, while ranting against the opposition.

But he may also surprise, proving more willing to deal with Democrats than other Republican presidents have been. The Trump motivating principle is self-interest rather than party loyalty. He has proved willing to discard some long-standing party positions, for good and ill. The role of dealmaker-in-chief could rather suit his ego.

Second, even if bipartisan efforts fail, behaving responsibly is in Democrats’ long-term interests. By and large, Democrats want the federal government to work well. Republicans, by contrast, still consider the words “I’m from the government and I’m here to help” to be a micro-aggression. Gridlock does nothing for confidence in government, which is something Democrats need if they are to win more voters’ confidence. Like it or not, they have more to lose from dysfunction than Republicans do.

The Digital Divide Is Impeding Development

Mukhisa Kituyi  

By the end of the next decade, growth, productivity gains, and human development will be determined by levels of integration into the digital economy. To guard against new forms of inequality, the international community must do more to help developing countries close the connectivity gap.



GENEVA – It is easy to assume that access to the digital economy is ubiquitous, and that online shopping is the natural evolution of commerce. For example, in July, Amazon sold more than 100 million products to consumers worldwide during its annual Prime Day event, a $4.2 billion bonanza that included sales of table salt in India, Coke Zero in Singapore, and toothbrushes in China.

But figures like these mask the fact that for many people in developing countries, the road to e-commerce is riddled with potholes. Simply put, the growth of e-commerce is not automatic, and the spread of its benefits is not guaranteed.

Some of the obstacles are logistical. On the tiny South Pacific island of Tuvalu, for example, fewer than ten streets in the capital, Funafuti, are named, and only about 100 homes have a postal address. Even if everyone in Tuvalu had access to the Internet (which they don’t; only 13% of the country’s population had broadband in 2016, according to the World Bank), delivery of goods purchased online would be difficult.

Elsewhere, billions of people lack bank accounts and credit cards, and in many developing countries, consumer-protection laws do not extend to goods purchased online. These challenges are particularly acute for people in Sub-Saharan Africa, in remote island states, and in several landlocked countries.

By contrast, in most developed economies, well-functioning postal systems and strong legal frameworks mean that products can be purchased online and delivered without a second thought.

But e-commerce is only one facet of the evolving digital economy. Innovation, production, and sales are all being transformed by technology platforms, data analytics, 3D printing, and the so-called Internet of Things (IoT). By 2030, the number of IoT-connected devices is expected to reach 125 billion, compared to 27 billion in 2017. Moreover, this rapid pace of digital tethering is occurring even as half the world’s population remains unconnected from the Internet.

If left unaddressed, the yawning gap between under-connected and hyper-digitalized countries will widen, exacerbating existing inequalities. Levels of digitalization may even influence whether countries are able to achieve the Sustainable Development Goals set by the international community for tackling challenges like hunger, disease, and climate change. That is why I believe more must be done to support poor countries as they strive to integrate into the digital economy.

How that economy will develop is difficult to predict. But we already know that actions taken by governments, donors, and development partners will determine the way forward. One effort – the Going Digital project, launched by the OECD in 2017 – is helping countries seize opportunities and prepare for technological disruption. Areas of focus include competition, consumer protection, innovation and entrepreneurship, insurance and pensions, education, governance, and trade. It is a holistic approach that specialists in development cooperation should emulate.

Moreover, by the end of the next decade, information and communication technology (ICT) will drive economic growth and power productivity gains. To thrive, people will need new skills and knowledge, and countries will require updated policies to protect online users. Small companies, including those owned and operated by women, will be especially vulnerable to the changing business environment.

Unfortunately, only 1% of all funding provided by Aid for Trade – an initiative by World Trade Organization members to help developing countries improve their trading infrastructure – is currently being allocated to ICT solutions. Similarly, multilateral development banks are investing just 1% of their total spending on ICT projects, and only about 4% of this limited investment is being spent on policy development, work that is critical if digital economies are to be well regulated.

At my organization, the United Nations Conference on Trade and Development, we are creating strategies to help developing countries leverage their assets and improve digital capabilities. One initiative, “eTrade for all,” is aimed at making it easier for developing countries to source financial and technical assistance. Since the program’s inception two years ago, nearly 30 global partners have been recruited, and an online platform has linked governments with organizations and donors to share resources, expertise, and knowledge.

The G20 is also planting its flag on this issue; in August, I joined G20 ministers in Argentina to discuss what can be done to spread the benefits of the digital transformation. Needless to say, the meeting could not have come at a better time.

Still, while programs and summits can offer the world’s developing and least-developed countries a place to start in their push for greater connectivity, more support is needed if we are ever to close the digital divide. With billions of people still below the first rung of the digital ladder, the climb to prosperity is becoming more challenging than ever.


Mukhisa Kituyi is Secretary-General of the United Nations Conference on Trade and Development (UNCTAD).

The Pros Are Predicting An Imminent Squeeze Higher In Stocks - What Say You?

by: The Heisenberg

- On the heels of the U.S. midterm elections, multiple desks and several high profile names are calling for a squeeze higher in equities.

- The arguments range from the nebulous to the trenchant, and taken together, the case is compelling.

- Or is it? I'm not so sure, and for those of you who like being contrarians, I'll give you some ammo.

- This post contains all the usual detail and in-depth analysis you've come to expect and should serve as a helpful guide going into year-end.

 

If you're the type of investor who's inclined to think the crowd is usually wrong or that the consensus view is mistaken more often than not, then you might want to think about curbing any pent-up enthusiasm you're harboring about U.S. equities into year end.

 

Headed into the midterm elections, the thinking on Wall Street (generally speaking) was that divided government would be good for stocks (SPY). The rationale for that call was pretty simple. Gridlock would ensure the market-friendly aspects of President Trump's agenda aren't rolled back but would also prevent the White House from moving forward too aggressively on the trade war or on any other contentious issues that might materially dent market sentiment.

 

That view (or some derivation thereof) was shared by most analysts, although some desks cautioned that given how high the tension is running inside the Beltway, divided government could lead to higher volatility. SocGen, for instance, had this to offer on Monday:

If Republicans lose either the House or Senate, SG strategists would expect more volatility on risk assets and a rising risk premium. The political and economic agenda has driven the financial markets for the past two years – so political gridlock and uncertainty will not come without pain.

Similarly, BNP was out on Wednesday morning suggesting that while equities should hold up ok, the waters will likely get choppier from here. To wit:

In the very short term, we expect to see volatility compression and the S&P500 term structure to continue to normalize. Longer term, we expect the trend in equity volatility to be higher.

Those caveats aside, the prevailing view is that gridlock is good and, on top of that, history suggests equities "should" rally. Here's what normally happens following midterm elections since 1974 (from a Goldman note released just as the polls began to close on Tuesday evening):

 

(Goldman)

 

 

In the same vein, here's a handy visual from BofAML which depicts YoY returns in the year following a midterm election, broken down by the various possible combinations for who controls the White House and Congress:

 

 

(BofAML)

 

 

Again, history is on your side if you're an equity bull, and according to Wall Street, gridlock is good not only in the context of history but especially in the current context.

 

Ok, so for those of you who like to take the contrarian side, I'm going to give you a handful of arguments to support the view that caution might be warranted, despite the consensus bullish view. After that, I'll briefly run through some additional, more concrete, reasons to think equities will indeed squeeze higher into the end of 2018.

 

One discrepancy I've seen over and over again in the research is that while most everyone seems to agree that a "Red Wall" scenario (i.e., an outcome where the GOP retained both the House and Senate) would have given the President more scope to ratchet up the trade tensions (especially with regard to China), nobody seems to be able to say, definitively, just what it is about a divided Congress that will serve as a check on the executive when it comes to trade.

 

Rather, the argument seems to rest almost entirely on the rather nebulous notion that a Democratic House means more "pushback".

But there's been no shortage of such pushback all year long when it comes to the trade war.

 

Lawmakers on both sides of the aisle, business luminaries and corporate management teams have all variously warned about the inherent perils of an all-out trade war and that was wholly insufficient to stop it from escalating. As BNP reminds you (in the same note cited above), "Presidents derive their trade powers from existing legislation, specifically the Trade Expansion Act of 1962 and the Trade Act of 1974 [and] to override these powers, it would likely take new legislation to be passed by both the House and Senate, along with a two-thirds vote in both chambers to override a likely presidential veto."

 

In other words, it's not clear whether a divided Congress is really going to make any difference when it comes to putting the brakes on the trade war if the administration decides to move ahead with, for instance, tariffs on the remainder of Chinese imports, assuming there's no grand bargain between President Trump and Xi Jinping at the G-20. If last week taught us anything, it's that the market is even more hyper-sensitive to the trade headlines than ever as the U.S. moves closer to taxing everything China ships to the U.S. (see here for a full recap of the market action around last week's schizophrenic trade reports).

 

That's a nice segue into a quick reminder about the burgeoning global slowdown. The synchronized global growth narrative that dominated 2017 has recently morphed into a tale of a concurrent global slowdown, with a further deceleration in China leading the way. PMIs have come in weak lately, as have other growth indicators. As I was writing this piece, Japan reported an 18.3% MoM slide in core machine orders for September, more than double the -9% print analysts were looking for. Obviously, that doesn't bode particularly well for capex in Japan.

 

At the same time, I don't see a compelling reason to believe that a divided Congress in the U.S. will materially change the Fed's decision calculus. It's true that another round of stimulus is now less likely (unless you think the President and Democrats will be able to reach an agreement on the long-rumored infrastructure deal), which may take a bit of pressure off in terms of the Fed having to worry about more overheating in the economy. But really, that ship has sailed - the economy is overheating and the October jobs report only underscores that contention. In a note dated November 4, for instance, Goldman wrote the following:

Inflation is on track for a meaningful overshoot of the Fed’s 2% target. In our baseline forecast of 2.3% for core PCE by late 2019, that overshoot remains within the Fed’s likely comfort zone. But we see the risks to this forecast as tilted to a bigger increase. The economy really needs to slow to avoid a dangerous overheating.

 

This means the Fed is likely to stay the course at least for now (we'll get the November statement on Thursday, although it's likely to be a "see you in December" type of deal).

 

If you don't think the S&P fell enough in October to find a new equilibrium consistent with Jerome Powell's efforts to restrike the "Fed put", well then the November rally in stocks leaves us even further from that equilibrium.

 

Lastly, I would note that a divided Congress likely means more flattening in the curve (think: dimmer prospects for more stimulus and lower long-end yields). Although Wednesday saw a late afternoon bout of steepening following a lackluster 30Y auction, the curve was still flatter on the day and at one point, the 2s10s was on pace for its largest one-day flattening since May.

 

So, if you're the type who believes inversion everywhere and always portends trouble, the results of the midterms are likely to lead to a resumption of curve flattening following the early October steepening episode.

 

If you're looking for reasons to doubt the consensus bullish view for U.S. stocks into year-end,

 

I've just given you three plausible arguments for adopting a cautious stance.

 

Now, it's important for readers to understand that in addition to the rather tenuous bull case outlined here at the outset, there are more concrete reasons to believe stocks could squeeze higher into the end of the year.

 

Both JPMorgan's Marko Kolanovic and Nomura’s Charlie McElligott were out on Wednesday reiterating their view that there's further upside for U.S. stocks ahead based in part on technical factors and forced buying.

 

These are long discussions and I don't want to get too far into the weeds, so I'll just give you the broad strokes and links where those who are interested can find further information.

For McElligott, the story is the same as it was last week. Hedge funds and asset managers who low-ticked their exposure last Monday just ahead of a monumental two-day rally have become forced buyers as the market rises. I detailed this dynamic pretty extensively over the weekend in "'Crushed Souls' And The Case For A 'Rolling Squeeze Higher' In The S&P". Basically, McElligott posits that Long/Short hedge funds and asset managers who deleveraged dramatically during October's tech rout are now attempting to use futures and ETFs to grab for exposure on rallies. Here's the gist of it, from McElligott's Wednesday note:

I continue to expect a near-term tactical pain-trade HIGHER for U.S. Equities, almost entirely due to the past month’s gashing of “market” exposure from the fundamental community throughout the performance drawdown, which has forced “net-down” / “gross-down” / “beta-down” behavior (which accelerated particularly over the final week of October).  

The “fundamental” active Equities universe then has essentially become a source of synthetic “short gamma” in the market, as with any rally in stocks, said performance-burned funds effectively “get shorter” the higher Equities travel, in turn contributing to these violent bear market rallies on “up” days, with funds grabbing exposure “dynamically hedging” futures on said move.

Again, regular readers will be familiar with this and on Wednesday, McElligott notes that it's not just hedge funds and leveraged investors - it's also asset managers. Below, find two visuals.

 

In the left pane is a chart from JPMorgan which shows the massive decline in the Long/Short crowd's beta to the S&P (red arrow) and the uptick in their beta last week (yellow arrow), with the latter suggesting they're trying to rebuild their exposure. In the right pane is a chart from Nomura which shows the recent plunge in asset managers' cumulative position in the S&P, the Nasdaq 100 and the Russell.

 

 

(JPMorgan, left; Nomura, right)

 

The bottom line appears to be that these fundamental investors were caught underexposed early last week just as the systematic crowd (e.g., CTAs) and macro funds started to re-risk/rebuild their exposure. Vol-targeting funds might well be adding equity exposure as well. Here's McElligott one more time:

Our CTA model already shows Equities exposure again being added WoW in SPX, Nasdaq, Nikkei, ASX (while also reducing their HSCEI “short” and over their “buy signal” in HSI after today), while our Risk Parity model too shows +$2.1B of “adds” in global Equities vs 2 weeks ago.

As those players re-risk, it puts the fundamental, active community (hedge funds and asset managers) even further behind the curve as the market rallies while their exposure is low.

 

Again, they're effectively getting "shorter" as the market runs away from them, forcing them to buy, which only adds to the bullish impetus for stocks. That helps explain why the rallies since October 30 have been so powerful (four out of the last seven sessions have seen the S&P rise at least 1%):

 

(Heisenberg)

 

McElligott has several more reasons to expect a "max pain" rally and you can peruse some of the details here, but for our purposes, the above summary should more than suffice.

 

Moving on to Marko Kolanovic's Wednesday note, I'd be remiss not to remind you up front that he called for a squeeze higher on October 30 at 10:15 AM ET. The S&P is up ~6% since then. Zooming in on his most recent thoughts, Marko of course focuses on systematic strats and technical flows (that's his wheelhouse). Here are the key excerpts (more here):

Short convexity of market makers is rapidly declining and may turn long. This should be positive as it will bring back intraday reversion as opposed to momentum. This reduces realized volatility, and many investors will misconstrue this as a return of the ‘buy the dip’ environment. Realized volatility is expected to decline. Systematic investors (such as vol targeters) will start rebuilding positions into year-end. Implied volatility has declined, with the VIX term structure reverting to contango. For some strategies this is a positive signal. Next week, 1M price momentum will turn positive for most equity indices globally (1M ‘anniversary’ of the crash), and may lead to CTA inflows or short covering.

When you combine the benign influence from market makers (remember: Their influence was the very opposite of "benign" during the October 10 rout) with re-risking/re-leveraging from systematic strats and then throw in the reinvigorated corporate bid (i.e., buybacks), you end up with a pretty solid argument for more upside in equities.

 

For what it's worth, here's a chart of short- and long-term momentum signals from JPMorgan's Nikolaos Panigirtzoglou:

 

(JPMorgan)

 

 

Finally, I would also encourage you to consider that the results of the midterms are likely to be bearish for the dollar (UUP). That's a consensus view that I tend to agree with. Less scope for more stimulus and lower long-end yields should both play negative for the greenback which is already due for a pullback, especially considering how stretched (on the long side) positioning is. America's fiscal trajectory isn't going to change materially under a divided Congress, which means the longer-term dollar bearish arguments aren't going away.

 

Of course a weaker dollar is bullish for risk assets, especially downtrodden emerging market equities (EEM) and FX. A big part of the whole "convergence" trade narrative that started to make the rounds in August and September revolved around the notion that the best way for the historic disparity between U.S. equities and their global counterparts to resolve itself without the former catching down to the latter, was for the dollar to pull back. Well, now there's scope for just such a pullback.

 

As my buddy Kevin Muir at EastWest Investment Management wrote late last month, "the spread between P/E ratios of [U.S. stocks and EM equities] has hit a 13-year high". More simply: The S&P is the most expensive compared to the MSCI Emerging Markets Index since 2005.

(Bloomberg, EastWest)

 

 

So, there you have it. A comprehensive, balanced assessment that touches on both the bearish case and the bullish case and includes all the excruciating detail you'd expect from a Heisenberg production.

 

And look, I do realize this is a lot to digest, but I try to arm my readers with as much information as possible so that they can make an informed decision and, hopefully, learn a thing or two along the way.

 

As ever, you're left to draw your own conclusions from the above, and I trust you'll do just that in the comments.

Who Deserves Credit for the Strong US Economy?

Michael J. Boskin  


Although US President Donald Trump is prone to hyperbole, he is not wrong to tout the strength of the US economy on his watch. But while Trump's regulatory and tax policies have been good for growth, his efforts to attach his name to the economy all but ensure that he will bear the blame in the event of a downturn.
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STANFORD – US President Donald Trump claims credit for “the greatest ever” economy, and constantly contrasts economic conditions today with the historically weak recovery under President Barack Obama. With growth this year over 3%, unemployment at 3.7%, and more job openings than unemployed people, the economy has greatly improved on Trump’s watch. The macroeconomic indicators are the best in decades.

Meanwhile, Obama, too, claims credit for the strong economy, arguing that his policies prevented a far worse downturn following the 2008 financial crisis. Neither Trump’s hyperbole nor Obama’s selective memory comes as a surprise.

American presidents, like star athletes in team sports, get both too much credit and too much blame from voters and historians for what happens on their watch. Most presidential policies must be enacted by Congress, which often alters or blocks them. And many other factors are constantly at work, not least the US Federal Reserve’s monetary policy. So far, the Fed’s policies under its new chairman, Jerome Powell, have been spot on; but that hasn’t stopped Trump from publicly complaining that interest rates are rising too rapidly. While unusual, Trump’s griping pales in comparison to President Jimmy Carter’s nationally televised admonition to the Fed to lower interest rates in the midst of the raging inflation of the late 1970s.

Of equal importance are economic and political events in the rest of the world, technological and demographic forces at home and abroad, and the policies of previous administrations, which can expand or constrain a sitting president’s options. For example, President Ronald Reagan inherited double-digit inflation from Carter. President George H.W. Bush inherited a Latin American debt crisis and a savings-and-loan disaster that had been brewing for more than a decade. To their credit, Reagan and Bush both saw the problems before them and supported successful responses, despite the predictable political costs of the downturn that followed each episode.

For his part, President Bill Clinton inherited low inflation and a revived financial system. After the Republicans captured both houses of Congress in the 1994 midterm election, Clinton worked with them to balance the budget and reform welfare. Then came President George W. Bush, who inherited a legacy of insufficient national-defense spending. Early in his presidency, the attacks of September 11, 2001, laid bare the need to rebuild the military and improve homeland security. Finally, Obama inherited the financial crisis and the subsequent Great Recession. But he then presided over the weakest economic recovery since World War II, owing partly to his attempts to reengineer vast swaths of the economy.

These American examples are tame compared to others in recent history. In Central and Eastern Europe, post-Cold War reformers had to manage the transition from a decrepit centrally planned socialist system to a free-market economy. Whoever eventually succeeds President Nicolás Maduro in Venezuela will inherit the unmitigated economic and social disaster that is Chavism.

Returning to 2018, the Trump administration’s rollback of Obama-era regulations and enactment of corporate-tax reform have both helped to promote growth. Trump’s trade policy, however, is risky. If it proves successful in opening up China’s market and curtailing technology transfers from US companies, then it will have been constructive. But if it precipitates a long-term trade war, it could do serious damage.

Trump often takes presidential exaggeration to new heights with his common refrain that, “Nobody’s ever seen anything like this.” But this is not to say that past presidents have eschewed such hyperbole. For example, after repeatedly invoking “shovel-ready” projects to pass his February 2009 stimulus bill, Obama later admitted “…there’s no such thing as a shovel-ready project.” And his pledge that Obamacare guaranteed that patients could keep their health plan and doctor received “four Pinocchios”, the worst possible rating, from the Washington Post fact checker.

Obama has also claimed that nobody knew how bad the Great Recession was going to be. And yet, immediately after his election, I pointed out that, “This recession is the real thing, far worse than the two brief, mild recessions of the last quarter-century.” Later, Obama expressed regrets that he had not communicated earlier just how bad the recession would be and that if he had, perhaps he could have made the stimulus bill much larger. But if nobody knew how bad it was going to be, how could it have been communicated earlier?

Obama seems to have conveniently forgotten that his first term budgets repeatedly estimated growth above 4% for the next several years. That is double what was actually achieved. Clearly, his advisers either didn’t have an accurate read on the economy, or they were wildly optimistic about the efficacy of his policies. Since then, they have fallen back on a discredited theory of “secular stagnation” to explain the tepid recovery.

As a result, when Trump came to office, he inherited a national debt that had doubled on Obama’s watch, rapidly rising interest rates, and unfunded Social Security and Medicare costs. Under these conditions, Trump’s biggest and boldest policy proposals will likely run into budgetary constraints. He has already ruled out any changes to Social Security. His and congressional Republicans’ attempts to replace the Affordable Care Act (Obamacare), and to curtail the growth in Medicaid spending, have been unsuccessful. And a temporary increase in defense spending will revert back to insufficient levels after this fiscal year.

Although the tax package that Trump signed into law last December front-loaded tax cuts and is now helping the economy to grow, government revenue has yet to respond much to that growth. Unfortunately, growing deficits mean it will be hard to make the legislation’s personal tax cuts permanent any time soon.

In the event of a downturn, voters will be quicker to blame Trump than they have been in giving him credit for today’s boom. Given all of the president’s efforts to attach his name to the current economy, it will not be easy for him to shift the blame to the Fed, Democrats, or anyone else.


Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.

Paul Volcker sets a challenge for the next generation

The former Fed chair wants attention to public service to be part of his legacy

Gillian Tett
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Paul Volcker, former Fed chairman, in 2008 © Getty


Last week, I received a poignant invitation: Paul Volcker, the legendary former chairman of the US Federal Reserve, asked me to visit his apartment to discuss his legacy.

Mr Volcker is publishing his memoir. The release of Keeping At It was initially scheduled for late November but the publisher has rushed the date forward to October because the former Fed chair is ill. So the towering figure of finance wanted to share some thoughts — and warnings — to current and future policymakers, politicians, voters and investors.

The message is sobering. Some of the points on Mr Volcker’s mind involve finance and economics. No surprise there. As Fed chair in the 1970s hecrushed inflation and, after the 2008 financial crisis, he helped to craft reforms, as economic adviser to Barack Obama’s White House. His memoir explains in lively detail how he (and others) spent the second half of the 20th century experimenting with different policy tools, to deal with the crumbling postwar Bretton Woods global economic order.

This is partly a tale of 20th-century financial policy innovation — and progress. But not entirely. Mr Volcker thinks that there are three areas where progress is going into reverse.

First, he is uneasy about the 21st-century central banking fashion — or obsession — for chasing a 2 per cent inflation target. He thinks it is “ridiculous to be worrying about the [fine details] of 1.75 per cent or 2 per cent” price growth. He suggests central banks would do better to chase price stability, since deflationary dangers are overstated.

Second, he is uneasy about the risks to the financial system unleashed by the past decade of experimental quantitative easing policies: “There’s a lot of leverage going on now, a lot of debt . . . interest rates are very low,” he observed, predicting that someone of my age (51) will probably see “at least two” more financial crises.

That threat of another crisis is exacerbated by a third point: a decade after the credit crunch, financiers are slipping back into bad habits, he fears, chasing “chicanery” and lobbying to loosen regulation, such as the “ Volcker rule” he authored to curb proprietary trading after 2008.

These are important warnings. Many observers were not fans of the Volcker rule. Others might disagree with his views on QE. But he is entirely correct to warn about the wider dangers of financial reform backsliding and the distortions unleashed by QE. Let us hope he will be heeded.

More surprising is that, when Mr Volcker thinks about his message to the next generation, it is not finance or economics that is at the top of his mind. On the contrary, he emphasises, “I would like my legacy to be some attention to public service.”

Mr Volcker fears that, as the 21st century wears on, society is abandoning the 20th-century idea that government should be valued and supported, particularly in America. “When I grew up good government was a good slogan,” he says, pointing out that public service was so respected in the 1950s that courses in “public administration” commanded high status at universities such as Princeton.

“But now the phrase ‘good government’ is a mockery,” he laments. Universities have effectively abandoned practical public administration training, focusing instead on “policy”. Few students want to make the type of financial sacrifices that Mr Volcker did for many decades, in the name of public service.

He has tried to fight back, by launching initiatives to champion public administration education. But it has “been a struggle”, he admits. “I thought I could raise money for this from these guys who had billions. No! They are all anti-government and don’t care. It’s a losing proposition.”

This is alarming and important — not least because the issue is so rarely discussed. After all, if there were ever a time when the US needs effective public administration to handle problems ranging from climate change to education — or even just to referee free market solutions — it is now. But, as the author Michael Lewis describes in The Fifth Risk, the administration of President Donald Trump is, at best, uninterested in the functions of government. At worst, it is deliberately hostile to them.

The neglect and hostility is creating visible risks: Mr Trump’s recent attacks on the Fed, say, could undermine its credibility. Mr Lewis’s book describes less visible threats too, such as the dangerous impact on the nuclear sector of this indifference.

Let us hope the publication of Mr Volcker’s memoir will draw attention to the issue of how to make government more credible, popular and effective. Perhaps, in discussions about Mr Volcker’s legacy, some benefactors will respond by creating programmes to make public administration more exciting. We need the next generation of Volckers.

But the truth is that, at the age of 91, Mr Volcker doubts he will live to see this debate about public service. “I hope people listen,” he said, as I finally left his apartment, with a lump in my throat. “But will they?” It is a lament — and a timely challenge.