Ashoka Mody
Ashoka Mody is Visiting Professor of
International Economic Policy at the Woodrow Wilson School of Public and
International Affairs at Princeton University. He is a former mission
chief for Germany and Ireland at the International Monetary Fund.
PRINCETON – At this time last year, the International Monetary Fund reported
disappointing global GDP growth of 3.1% in 2015, and promised that
growth would increase in 2016 and 2017. But that expectation was
unrealistic, as I explained
at the time. And, sure enough, in 2016, it is estimated that global GDP
again grew by only 3.1%, while world trade growth slowed substantially,
from 2.7% to an anemic 1.9%. These figures describe a troubled world
economy.
And yet the IMF is again forecasting
that global GDP growth will significantly improve over the next two
years, and that world trade growth will double. The IMF attributes much
of the expected improvement in the global economy, especially in 2017,
to stronger GDP growth in the United States. This optimism about the US
economy is based on positive business- and consumer-confidence
indicators and rising stock prices, in anticipation of fiscal stimulus
and deregulation.
But this enthusiasm
overlooks a deeper disruption that is now underway. US President Donald
Trump’s administration will hinder economic growth when it starts to
reverse trade agreements, and growth will take an even bigger hit when
the US begins to destroy the norms and institutions that govern markets.
Worse, Trump will be changing the rules of the game at a time when the
global economy is already fragile, China is confronting a massively
inflated bubble in its financial sector, and Europe is asleep at the
wheel of a slow-motion train wreck in Italy’s banking sector.
To be sure,
international trade agreements, propped up by powerful interests, have
become increasingly intrusive. As Vermont Senator and Democratic primary
contender Bernie Sanders pointed out
when he opposed the 12-country Trans-Pacific Partnership (TPP), such
deals tend mainly to protect large multinational corporations’
interests. The Harvard economist Dani Rodrik shares that view, and has
been sharply critical
of some of his fellow economists for endorsing the “propaganda” that
describes such deals as “free-trade agreements.” These deals benefit
only a select few, while damaging economically vulnerable people’s livelihoods.
Trump’s opponent in
the presidential election, Hillary Clinton, had also come out against
the TPP, so his recent decision to abandon the deal was politically
inevitable. But even desirable changes come with transition costs, and
those costs will grow as the new administration dangerously undermines
core market-economy principles.
Trump is playing with
fire when he threatens to impose import tariffs in order to “make
American great again.” Tariffs would immediately hurt American
consumers, and defensive, retaliatory responses from other countries
could fatally undermine already feeble world trade, thus choking off a
critical source of global prosperity.
Trump’s bullying tactics against individual firms could prove to be even more dangerous. According to The Wall Street Journal,
Trump has become the main “preoccupation” of American manufacturers.
“Board members are trying to figure out who has friends in [the] new
administration,” the paper reports, “and task forces have been created
to monitor his Twitter account.” The prospect of companies “suddenly
grappling with a new, unpredictable force in their operations,” should
force anyone who is anticipating a new dawn of deregulation to think
twice. Such active intervention in firms’ operations is the mother of
all regulations.
In a brilliant essay,
Harvard law professor Cass Sunstein argues that Trump’s unpredictable
intrusion into companies’ affairs will undermine the market economy
itself. By arbitrarily selecting particular businesses to carry out his
“commands,” Trump will destroy the core market principles of
transparency and fairness. “In a world of presidential deals,” Sunstein
writes, “companies are going to have horrible incentives – to curry
presidential favor in countless ways, to act strategically, and to make
promises and threats of their own.”
Still, the mirage of economic confidence could continue, because, as Nobel laureate economist Robert Shiller recently observed, one illusion can perpetuate another. But the spell will eventually be broken.
Already, financial markets are starting to reflect a belief that the US Federal Reserve, which has barely changed
its economic outlook, will take longer to raise interest rates than was
previously expected, because economic growth will be weaker than
anticipated. Trump’s protectionist measures will weaken world trade,
increase domestic inflation, and strengthen the dollar, causing
America’s export industries to suffer. Ultimately, and on an even larger
scale, Trump’s arbitrary policy decisions will erode the international
institutions and rules that underpin the US and global economies,
causing massive long-term damage.
These risks come at a
time when Chinese and European growth models are cracking. China has
allowed its credit-fueled property bubble to continue, leaving it
increasingly vulnerable to capital flight. In Europe, Greece’s economic
and social tragedy, though no longer garnering global attention,
continues to deepen.
But the real global
fault line is the Italian economy, which has not grown for nearly a
generation. Italy’s fiscally stressed government is struggling to prop
up insolvent banks as it confronts a populist political insurgency. At
this point, one carelessly lit match – whether in Rome, elsewhere in
Europe, or in Washington, DC – could start a global wildfire.
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