Shep Melnick’s review of Crisis illustrates, alas, the wide and widening gulf between our two constitutions and between their partisans.
The world would be a much better place if economists, politicians and pundits had this line from Henry Hazlitt memorized: “What is harmful or disastrous to an individual must be equally harmful of disastrous to the collection of individuals that make up a nation.”
It’s arguably the most important line ever written in any economics book. Hazlitt (1894-1993) was making the essential point that an economy is not a living, breathing blob; rather it’s a collection of individuals.
The eminent journalist’s words form the basis of Popular Economics, my 2015 book, in which I use examples from sports, movies, television, music, and well-known businesses to explain the four basic governmental barriers to prosperity: taxes, regulation, tariffs, and floating money values. When an economy is broken down to the individual, what might seem opaque becomes very clear. Figure that no individual is made better off by a bigger income-tax bill; no individual is able to create more wealth if more and more work hours are spent complying with regulators; no individual is made wealthier if tariffs block the world’s talented from serving his needs; and no individual is able to amass more wealth if the dollar earned is constantly being devalued.
Prosperity is blindingly easy when looked at through Hazlitt’s essential idea. Get the four basics right and the economy soars. Get even one wrong, and growth is hampered. All of this matters in light of Donald Trump’s becoming the next President of the United States. Depending on his relationship with a Republican-controlled Congress, Trump could find himself signing a lot of consequential legislation. If so, how do his economic thoughts, as expressed on the campaign trail, square with the four basics to prosperity?
On taxes, he’s good. Taxes are always way too high no matter the person in office simply because taxes penalize productive work and investment. Trump has proposed lowering the price of work (income taxes), the penalty levied on investment (capital gains taxes), the double taxation of individuals (the corporate tax), all the while calling for the abolishment of a horrid tax on progress: the estate tax. Figure that when estates are passed on unmolested, this increases the amount of precious capital chasing the intrepid ideas that are crucial to progress.
Unlikely. Trump has expressed a preference for regulatory rollbacks. Good.
After that, things gets complicated.
The individual is enriched by free trade because free trade doesn’t just mean that one’s countrymen are vying to serve one’s needs, but the most talented people all over the world are vying to serve those needs. Best of all, the ability to import from near and far frees up the individual to focus on the kind of work most commensurate with this individual’s skills. Free trade is the driver of wealth-creation because it enables specialization. The problem is that Trump has expressed a preference for substantial tariffs on foreign goods. Reread this paragraph for what Trump’s trade stance will mean for the individual, and then continue reading to see what Trump’s protectionism could potentially mean for the dollar.
Simply put, the Federal Reserve doesn’t control the value of the dollar. The greenback’s exchange value is a political concept. Presidents get the dollar they want. In the 19th century, President Lincoln didn’t need a central bank to devalue the dollar. In the 20th century, the first two major devaluations of the dollar (1933, 1971) also were unrelated to a Fed that began operating in 1913. Presidents Reagan and Clinton wanted a strong dollar, and currency markets complied. President George W. Bush wanted a weak dollar and markets complied. Let’s apply this to President-elect Trump. His expressed desire for tariffs could be taken as a desire for a weaker dollar.
The economic problems that would result from such a stance are many.
For one, consider the individual, who is—remember Hazlitt—at the center of all economic activity. Money is a measure acquired by the individual for the real goods and services for which it can be exchanged. Devaluation means the money earned by the individuals who comprise the economy will purchase less, which means devaluation is bad for the economy as a whole.
The story gets worse: No economic school can get around the fact that investment is logically the source of company- and job-creation and, by extension, of economic growth. When investors put capital to work, they’re buying dollars in the future. Since they are, devaluation will deter investment—which means it’s a deterrent to economic growth.
Some will respond to all of this with what is alleged to be the unspoken good of devaluation, namely that it enhances exports. If dollars are cheaper, then so will U.S. goods be cheaper globally. Wrong on many counts. For one, a weak dollar renders the products made by foreign producers more expensive for American buyers. If it’s harder for us to buy from foreigners, it will be harder for them to buy from us. In short, a weak dollar logically shrinks global markets for U.S. producers.
Let’s also not forget that production of even the most basic of goods requires global cooperation. Even the pencils you use include imported inputs from around the world. As I said, if the dollar is being devalued, the cost of inputs increases. So does the cost of transporting those goods. So do labor costs increase. Workers generally don’t take income reductions quietly. Devaluation is just that.
Most important of all, investment is the greatest source of falling prices. Figure that all market goods start out expensive. It’s investment in production enhancements that brings down the price of everything. But if the currency is being devalued, investment stagnates. It becomes too risky for investors to commit capital if the returns on investment are being devalued. A weak dollar is a major enemy of falling prices because it’s an enemy of investment.
What all of this hopefully reminds the reader is that weak, unstable money is an insurmountable foe of economic growth, progress, and yes, falling prices. The dollar was weak in the 1970s and the 2000s, and economic activity slowed. Logically. A weak dollar is a major antagonist of the individuals who comprise the economy, not to mention of the investment that makes each individual more productive.
What’s unknown is where Trump will come down on this question. His protectionist leanings should have those in favor of good money scared, along with his oft-expressed view during the campaign that currency devaluation is the path to prosperity.
At the same time, the dollar has strengthened somewhat since the election. Since winning, Trump has been louder in his support for tax cuts, while his desire for a trade war with China has seemingly been pushed to the side. It had been floated that Trump was considering strong-dollar advocate John Allison to be the next Treasury secretary. While Allison would have been an ideal choice, considering his long and very public support of a stable dollar defined in gold terms, we now have a relative unknown, in the policy sense, slated for the most economically consequential of all administration positions. Time will tell if Steven Mnuchin mimics fellow Goldman Sachs alum Robert Rubin’s strong dollar leanings, or if he’ll talk down the dollar. The Trump presidency could pivot based on Mnuchin’s stance. If he talks down the dollar, he’ll be talking down the very investment necessary for a booming economy.
Presidents who succeed economically are generally remembered well. Though he campaigned on slow-growth protectionism and excessive government spending, Trump has seemingly changed since his election. He ought to spend his political capital on tax cuts and deregulation, all the while self-muzzling on the dollar and trade. If so, the economy soars.
Economic growth is basic. If Trump realizes what is true, he’ll be remembered for more than defying the odds. He’ll have presided over a boom. Time will tell. Watch the dollar. If it holds its value, rest assured that Trump will be one of the most successful economic presidents in a very long time.