201611

November 10, 2016 1:07PM

What Will Donald Trump’s Presidency Mean for the Federal Reserve?

On election night, former New York mayor Rudy Giuliani told MSNBC interviewer Chris Matthews that Donald Trump’s victory, after a campaign against the elites and insiders, was like Andrew Jackson’s first presidential victory. At the end of his first term in office, Jackson cut the federal government’s ties to the Bank of the United States (by vetoing an Act to renew its charter), an institution that was in some respects the Federal Reserve System of its day. Might Donald Trump’s presidency have equally dramatic consequences for the Federal Reserve?

During his campaign, candidate Trump mulled an idea for thoroughgoing reform of our monetary system: a return to the gold standard. As Ralph Benko noted, Mr. Trump told a New Hampshire television station in March: “We used to have a very, very solid country because it was based on a gold standard.” He added that a return would be difficult because “we don’t have the gold. Other places have the gold.” He similarly told GQ magazine that “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”

It should be pointed out to the president-elect that in fact the US government does have enough gold in Fort Knox and its other depositories, at least if the US Treasury has been reporting its holdings honestly. At the current market price of about $1,280 per fine Troy oz., the U.S. government’s 261.5 million ounces of gold are worth $335 billion. Current required bank reserves are only $168 billion. Looked at another way, $335 billion is just a bit more than 10 percent of the $3,347 in current M1 (the sum of currency and checking account balances), which is more than a healthy reserve ratio by historical standards. In that respect, restoration of the gold standard is eminently feasible. After unwinding the QEs, the Fed could swap commercial banks’  required reserves for gold, and hold gold against its own currency liabilities, Federal Reserve Notes, which would once again be made redeemable in gold. Better yet, the federal government could allow commercial banks to issue their own currency again (or, if it already technically legal, promise not to penalize them).

Whether restoration of the gold standard will be politically feasible depends of course on how serious the new president will be about pushing it, and how receptive the Republican majorities in Congress will be.

Regarding reforms of Fed policy that keep fiat money in place, candidate Trump’s position seemed to evolve. In an April interview, he told Fortune that “The best thing we have going for us is that interest rates are so low,” and that the prospect of rate hikes was “scary.” During an October debate, by contrast, he accused Fed chair Janet Yellen of keeping interest rates artificially low for political reasons, namely to keep the recovery chugging along until the election and so to help the incumbent party. Even back in the April interview, when he thought that Yellen had been doing “a serviceable job,” he was already saying that “I would be more inclined to put other people in.” Thus it would be a surprise for Trump to reappoint Yellen as Fed Chair when her four-year term expires in February 2018. What he would look for in a new Chair is less clear.

As president, Trump will immediately have the authority to nominate two new Governors to the Federal Reserve Board, thereby to the Federal Open Market Committee. Normally the FRB has seven members, including the Chair. Currently it has only five members, all Obama appointees. Senate Republicans have deliberately left the two vacancies open by refusing to hold hearings on Obama’s latest nominees. The FOMC’s makeup is thus currently 5 Obama-appointed Governors plus 5 regional Federal Reserve Bank presidents, who tend to be more hawkish on inflation (apart from the New York Fed president, the only regional Bank president who is permanently on the FOMC). A pair of thoughtful nominations by the Trump White House could increase the hawkishness of the median (tie-breaking) voters on the FOMC.

In his October criticism, Trump said that the Fed was “keeping interest rates so low that the next guy or person who takes over as president could have a real problem.” He said elsewhere that artificially low rates were creating a “very false economy.” In these remarks Trump appeared to have recognized that overly low interest rates can misdirect investments and create unsustainable asset bubbles. He might then be favorable to Congressional proposals made in recent years, particularly by Rep. Jeb Hensarling, for fastening a monetary policy rule on the Federal Reserve. A Taylor Rule with teeth, for example, would mandate automatic adjustments in the Fed’s interest rate target based on publicly observable variables. Such a rule would strip discretion from the FOMC and avoid the problem of politically tinged policymaking.

[Cross-posted from Alt-M.org]

November 10, 2016 11:47AM

What Trump’s First 100 Days Might Mean for Education Policy

President-Elect Donald Trump has released his plans for his first 100 days in office. After outlining proposals for term limits, a trade war, and mass deportations, the plan includes the following paragraph on education policy:

School Choice And Education Opportunity Act. Redirects education dollars to give parents the right to send their kid to the public, private, charter, magnet, religious or home school of their choice. Ends common core, brings education supervision to local communities. It expands vocational and technical education, and make 2 and 4-year college more affordable.

The details are far from clear, but it appears that his education policy will focus on three areas:

1. School choice

Trump has the right instinct on school choice, but if he is planning to promote a national voucher program, then he's going about it the wrong way. He has previously pledged to dedicate $20 billion in federal funds to school choice policies, and stated that he would "give states the option to allow these funds to follow the student to the public or private school they attend" as well as using federal carrots to get states to expand choice policies even further. Expanding educational opportunity is admirable, but using the federal government to do so is misguided. As David Boaz explained more than a decade ago in the Cato Handbook for Congress, the case against federal involvement in education:

is not based simply on a commitment to the original Constitution, as important as that is. It also reflects an understanding of why the Founders were right to reserve most subjects to state, local, or private endeavor. The Founders feared the concentration of power. They believed that the best way to protect individual freedom and civil society was to limit and divide power. Thus it was much better to have decisions made independently by 13–or 50–states, each able to innovate and to observe and copy successful innovations in other states, than to have one decision made for the entire country. As the country gets bigger and more complex, and especially as government amasses more power, the advantages of decentralization and divided power become even greater.

A federal voucher program would very likely lead to increased federal regulation of private schools over time, especially after a new administration takes over that is less friendly to the concept of school choice. As we've seen in some states, misguided regulations can severely undermine the effectiveness of school choice and induce a stifling conformity among schools. Moreover, as I've explained previously, those regulations are harder to block or repeal at the federal level than at the state level and their negative effects would be far more widespread:

When a state adopts regulations that undermine its school choice program, it’s lamentable but at least the ill effects are localized. Other states are free to chart a different course. However, if the federal government regulates a national school choice program, there is no escape. Moreover, state governments are more responsive to citizens than the distant federal bureaucracy. Citizens have a better shot at blocking or reversing harmful regulations at the state and local level rather than the federal level.

That said, the Trump administration can promote school choice in more productive and constitutionally sound ways. The federal government does have constitutional authority in Washington, D.C., where it currently operates the Opportunity Scholarship Program (OSP). The OSP should be expanded into a universal ESA that empowers all D.C. families to spend the funds on a wide variety of educational expenses in addition to private school tuition, including tutors, textbooks, online courses, curricular materials, and more, as well as save unused funds for later expenses, such as college. The Trump administration should explore similar options in areas where the federal government has jurisdiction, such as on Native American lands and military bases.

2. Common Core

Yet again, Trump has the right instinct but the policy leaves much to be desired. Ending Common Core is a noble goal, but it is primarily a matter of state policy and at this point there is little the federal government can do about. As Neal McCluskey noted yesterday, "the main levers of [federal] coercion—the Race to the Top contest and waivers out of the No Child Left Behind Act—are gone." The only way for the federal government to get rid of Common Core would be to engage in the same sort of unconstitutional federal coercion that critics of the Core opposed in the first place.

Nevertheless, the Trump administration could ease the path for states to ditch Common Core by merely refraining from using its authority under Every Student Succeeds Act (ESSA) to dictate state policy. As Neal explained:

What [Trump] can do—and I think, along with a GOP Congress, will do—is ensure that regulations to implement the ESSA do not coerce the use of the Core or any other specific standards or tests. This has been a real concern. While the spirit and rhetoric surrounding the ESSA is about breaking down federal strictures, the Obama education department has been drafting regulations that threaten federal control over funding formulas and accountability systems. And the statute includes language vague enough that it could allow federal control by education secretary veto. A Trump administration would likely avoid that.

3. College and Vocational Education

Here is where Trump's plan is the murkiest. He wants to "expand" vocational education and make college "more affordable" but he does not explain how. His campaign website provides little more in terms of details:

  • Work with Congress on reforms to ensure universities are making a good faith effort to reduce the cost of college and student debt in exchange for the federal tax breaks and tax dollars.
  • Ensure that the opportunity to attend a two or four-year college, or to pursue a trade or a skill set through vocational and technical education, will be easier to access, pay for, and finish.

These vague bromides could just as easily have appeared on Hillary Clinton's campaign website, which states:

  • Every student should have the option to graduate from a public college or university in their state without taking on any student debt. By 2021, families with income up to $125,000 will pay no tuition at in-state four-year public colleges and universities. And from the beginning, every student from a family making $85,000 a year or less will be able to go to an in-state four-year public college or university without paying tuition.
  • All community colleges will offer free tuition.
  • Everyone will do their part. States will have to step up and invest in higher education, and colleges and universities will be held accountable for the success of their students and for controlling tuition costs.

So how will Trump try to expand vocational education and make college more affordable? It's not clear. Ideally, Trump would work to phase out the various federal loan programs and higher ed subsidies that a mountain of research has shown are fueling rapid tuition inflation. Unfortunately, Trump has previously proposed an income-based student loan repayment plan. Such a policy could assist borrowers in repaying loans, but it would still create perverse incentives that fuel tuition inflation and overconsumption of higher ed while leaving the taxpayer on the hook for whatever the borrower couldn't repay. When a student takes out a $35,000 loan to pursue a degree in puppeteering and then surprisingly can't find a decent-paying job, taxpayers would pick up the tab. 

At this point, it's not clear what Trump will do about education policy. His education proposals are vague and somewhat disconcerting, but there is also evidence that he wants to move in the right direction, particularly regarding school choice and a reduced federal role in K-12 education. What Trump needs now is a set of good advisers to help guide his commendable education policy instincts toward wise and effective policy.

November 9, 2016 4:52PM

Isolationist or Imperialist?

In the hit musical Hamilton, King George, newly estranged from the revolutionary American colonies, challenges his former subjects to justify their choice. “What comes next?” he asks, “You’ve been freed. Do you know how hard it is to lead? You’re on your own. Awesome, wow! Do you have a clue what happens now?”

We might well ask the same question.

The unexpected elevation of Donald Trump to the Presidency presents a failure for pollsters, a reorientation of American politics, and raises the fundamental question of what kind of policies a Trump administration is likely to pursue. On foreign policy, Trump’s statements throughout the campaign have been profoundly incoherent, ranging from more traditional hawkish Republican views on issues like the Iran deal, to more unorthodox, restrained views on Syria and other Middle Eastern conflicts, to his more conciliatory approach to Russia and truly bizarre fixation with Russian strongman Vladimir Putin.

So what comes next? How will the Trump administration approach foreign policy? As Elizabeth Saunders notes over at the Monkey Cage, advisors wield substantially more power under an inexperienced president. So to a large extent, Trump’s foreign policy choices will depend on who he chooses, not just to be his key foreign policy advisors, but to staff his administration’s foreign policy positions more generally. There are two potential scenarios that we can imagine:

Scenario One: The Isolationist

President-elect Trump—assisted by advisors from the Breitbart wing of the Republican Party—could choose to double down on the America First, trade- and immigration-bashing policies that helped to get him elected. This approach would bring a few improvements on the Obama administration (or more likely, on the policies Hillary Clinton would likely have pursued): the potential for less U.S. involvement in civil conflicts in the Middle East, and for improved relations with Russia. Yet unlike the prudent, restrained foreign policies often erroneously described as isolationism, Trump’s policies would be truly isolationist, with a less active foreign policy combined with trade and immigration restrictions that would see America retreat from the world. Trump’s emphasis on winning at all costs would create zero-sum conflicts with other states, and potentially lead to dangerous trade wars against other major powers.

Scenario Two: The Imperialist

The other strand prominent in Trump’s campaign was his near-Jacksonian rhetoric, with its focus on the importance of military strength. His repeated calls for ISIS to be crushed, for terrorists’ families to be killed, and even his strange convictions about seizing Iraqi oil all fit into this paradigm, which would see an inwardly-focused America which nonetheless prizes military power. In addition to hawkish-leaning congressional Republicans, and his Vice President Mike Pence, the rumored candidates for cabinet appointments in a Trump administration include neoconservative thinkers like John Bolton and hawks like Gen. Mike Flynn. On the upside, like the first scenario, this would probably see the United States get involved in fewer unnecessary civil conflicts. Yet the downsides are again far more pronounced, with substantially increased military spending and military conflict likely.

Certainly, these are two extreme options. The most likely scenario for foreign policy in a Trump presidency is probably some milder combination of these choices, with Trump perhaps defending his conciliatory approach to Russia, but bowing to congressional hawks on other issues. His foreign policy could remain incoherent, simply reacting to crises on a day-to-day basis. Or it’s possible that Trump largely ignores foreign policy issues, or even that he will be effectively constrained by some combination of foreign policy elites and civil servants within the foreign policy bureaucracy.

But these scenarios still raise a serious concern: we simply don’t know what to expect from Trump’s foreign policy. So as we come to terms with the idea of a Trump presidency, we have to ask ourselves: what comes next? No one knows.

November 9, 2016 4:40PM

Early Thoughts on Trump’s Peace through Strength

With Republicans retaining control of the House and Senate, President-elect Donald Trump might think it will be easy to push through his plans for "peace through strength" but he's offered dubious rationales for why we need a much larger military. And his proposals for how he would pay for the additional spending are incomplete and inadequate.

He outlined his plans in a speech in early September. The high points include:

  • Active-duty Army: 540,000, up from 491,365 today, and currently projected to hit 450,000 in 2018, and stay there through 2020;
  • Marine Corps: 36 battalions, up from 23 now;
  • Navy: 350 surface ships and submarines, up from 276 today (the Navy's current plans call for 308 ships by 2021, peaking at 313 in 2025);
  • Air Force: 1,200+ fighter aircraft; which is close to today's inventory of 1,113;
  • A “State of the art missile defense system”; and
  • Major investments in cybertechnology, both offensive and defensive.

Estimates for what it would cost to implement these changes vary, but most experts doubt that Trump can make up the difference without raising taxes or adding to the deficit. His call for “common sense reforms that eliminate government waste and budget gimmicks,” is extremely vague, and it seems unlikely that Democrats will agree to relax the Budget Control Act caps on defense spending while leaving non-defense caps in place.

The bigger question is what Trump plans to do with this much-larger military. He is right to be skeptical of nation-building in foreign lands. He scorned Hillary Clinton's support for the regime-change wars in Iraq and Libya. Those types of missions often require vast forces, especially ground troops, willing to remain in those countries for decades, or longer. But if he doubts that such missions are needed or wise, why does he call for increasing the active duty Army and Marine Corps? What does he expect them to be doing that they aren't already?

Fighting terrorists doesn't require a massive military, either. The hard part is finding terrorists, not killing them once found. Thus, the most effective operations against groups like al Qaeda involve timely intelligence, active cooperation with local actors, and occasionally the precise application of force.

ISIS is different, because it, unlike al Qaeda, chose to occupy territory that can be targeted by traditional military force. But if Trump follows through on his plans to "bomb the hell out of ISIS," that doesn't require massive U.S. ground forces either.

Lastly, Trump hasn't adequately explained how he would ensure that the military spends the money that it has wisely and efficiently. In inflation-adjusted dollars, American taxpayers spend more on our military today than we did during most of the Cold War, and yet we appear to be spending more, and getting less. Increasing the military budget by 10 percent or more won't make it easier to control rising costs; if anything, it will allow the Pentagon to forego difficult but necessary reforms.

I hope to hear more in the coming weeks about what President-elect Trump will do to rein in the Pentagon's civilian work force, eliminate excess overhead, including unneeded bases, and modernize military compensation. Members of Congress have either failed to address, or actively blocked, reform proposals thus far. Time will tell whether having Trump in the White House will stiffen their spine.

November 9, 2016 4:04PM

Trump, Trade and Foreign Policy

By Christine Guluzian

Donald Trump has been touting staunchly protectionist and isolationist rhetoric on trade policy throughout his campaign. Whether this was merely campaign-talk is still to be seen.

However, at his core, Trump is a businessman. In the business world, isolationism is synonymous with self-destruction.

So when Trump brandishes protectionist rhetoric and sullies the role of international trade, he’s ignoring the fact that, in international relations, trade also serves as an expression of diplomatic goodwill and a means for constructive connectivity. Trade could also promote and advance free market principles abroad.

Take China, for instance. Beijing is embarking on a new era of “economic diplomacy”: trade and foreign investment have become the preferred tools for engaging with the international community, as well as for boosting domestic economic growth. China’s relatively new $1 trillion New Silk Road trade and investment initiative spanning several countries and continents attests to just that.

Instead of taking the opportunity to forge beneficial economic and trade ties with Beijing, Trump is instead threatening to impose high tariffs on China and declaring it a currency manipulator. However, doing so would actually isolate the United States’ economic interests rather than “protect” them, especially in the long run.

Trump will now have to quickly transition from a businessman into a statesman. In the business world, there is something to be said for taking a tough, zero-sum approach to negotiations. But in international relations, flippant threats and tough-talk—especially when it comes to the world’s second largest economy, as well as a nuclear power—is tantamount to recklessness, and likely to cause more harm than good.

Lastly, there are reasons to doubt whether Congress will comply with Trump’s trade and foreign policy stance. Members may instead insist that trade within a mutually beneficial arrangement, and not economic isolationism, will lead to more U.S. jobs and overall economic growth.

November 9, 2016 1:30PM

Trump’s Victory Is a Mixed Bag for China

Xi Jinping Flag

Donald Trump’s upset victory over Hillary Clinton last night is bound to stir up fears of instability and uncertainty in East Asia, a region that was almost entirely ignored during the campaign. Commentators have rushed to predict that Trump’s campaign rhetoric will turn into reality: the United States will pull back from East Asia, and China will take advantage of the ensuing chaos to seize geopolitical dominance of the region. This morning James Palmer at Foreign Policy writes, “Chinese leaders near me in the palatial complex of Zhongnanhai are surely cracking open the drinks.” This is a pretty scary vision of the future. However, such assessments, which focus solely on Chinese benefits, don’t take into account the complex nature of U.S.-China relations.

President Trump is by no means a clear victory for China. The uncertainty created by his victory could easily produce an economic and geopolitical climate that damages Chinese interests. For example, three of the seven points in Trump’s Plan to Rebuild the American Economy mention policies that would hurt the U.S.-China economic relationship: labeling China a currency manipulator; bringing trade cases against China in the World Trade Organization; and imposing tariffs in response to “illegal activities.” Igniting a trade war with China would pose a severe risk to China’s economy, which is already slowing down. Trump’s stated policies would likely deepen China’s economic woes, thereby increasing the domestic instability that Beijing is obsessed with avoiding, especially in the lead-up to the 19th Party Congress in late 2017.



In the realm of geopolitics, Chinese gains in the conventional balance of power resulting from a reduced U.S. commitment to traditional allies could be offset if other regional states turn to nuclear weapons. America’s regional partners have started to improve their conventional self-defense capabilities, but it will take a good deal of time and money to get their militaries to the point where they can resist Chinese coercion without U.S. help. With this in mind, and given the recent nuclear saber rattling by North Korea, if Trump starts shedding U.S. alliance commitments then partners may turn to nuclear weapons to defend themselves.

Japan would likely be the first country to develop a nuclear weapon in such a scenario. Its limited conventional capabilities create a pressing need for a deterrent if the United States would not come to its rescue, and its highly-developed nuclear energy program makes it relatively easy for Japan to acquire the materials it would need. It would still take a good amount of time for Japan to develop such weapons. For example, a 2006 article by Jeffrey Lewis at the Arms Control Wonk blog suggested a timeframe of 3–5 years. If Japan goes down this road, there is a chance that neighboring countries, such as South Korea, would also push for their own nuclear weapons. While Japan would face enormous resistance to nuclear weapons development, support for having nuclear weapons among lawmakers has increased in recent years in response to growing tension in East Asia. A nuclear-armed Japan is completely anathema to Chinese security interests, and would be a serious setback for China’s geopolitical position in East Asia.

While this analysis is almost purely speculative at this point, there is a case to be made that the Trump administration will not be as good for China as many commentators have suggested. China could reap some benefits from a United States occupied with domestic political turmoil and a president that disdains alliance commitments. However, the economic and geopolitical uncertainty that could be unleashed by his victory should curb Beijing’s enthusiasm. As Isaac Stone Fish recently stated in Foreign Policy, “the Chinese elite seem to prefer Trump’s opponent because they feel she would be better … [for] global stability, which remains of great importance to Beijing.” The officials in Zhongnanhai should save those drinks for another day. 

November 9, 2016 1:20PM

Shifting Gears to Contemplate Trump’s Trade Policies

Please excuse the haste, as I’ve spent the last week ignoring the “impossible,” focused instead on writing about the likely direction—including the copious double-talk and rhetorical pirouettes—of President Clinton’s trade policy. If you’re a sucker for transparency, congratulations! You’ll get that in spades from President Trump’s trade policy. It will be transparently awful—for a while, at least.

Having a Republican president and GOP control of both chambers of Congress was once the ideal formulation for successfully negotiating and ratifying trade agreements. That all changed when Donald Trump, an avowed critic of U.S. trade agreements, rose to the top of the party’s ticket. As of last night, there is no longer any realistic chance that the Trans-Pacific Partnership agreement will be ratified in the Lame Duck session of Congress; there is no chance that the TPP will be implemented over the next four years without the deal first being reopened and revised to reflect terms desired by President Trump; there is much greater scope for trade frictions, especially with China, to erupt into deleterious rounds of tit for tat protectionism; and there is the distinct risk that policies intended to punish U.S. companies for outsourcing will slow inward foreign direct investment (insourcing) and chase U.S. companies off-shore, altogether, depleting capital, driving up interest rates, and hamstringing prospects for growth.

But there is a silver lining, which is that the worldviews of presidents tend to be more outward, engaging, and accommodating than the worldviews of presidential candidates. After repeatedly pledging to force Canada and Mexico back to the table to renegotiate the North American Free Trade Agreement during his bid for the White House, President Obama phoned the Canadian prime minister and Mexican president within one week of his 2009 inauguration to reassure them that he had had a change of heart. 

President-elect Trump’s hardline, isolationist, nationalistic, protectionist proposals may be more difficult to walk back, especially if he fails to excommunicate some of his current advisors and branch out to obtain the counsel of economists and policy specialists who have a better understanding of international economics and the rules of global trade. If he is able to expand and diversify the pool of people advising him, there is a reasonable chance that President Trump’s actions will be less bellicose than his rhetoric has been. After all, as someone who wants to make America “great again,” President-elect Trump will want the policies implemented by his administration to help grow the economy. Trade agreements have succeeded in that regard and, in addition to the TPP, there are plenty of countries and regions willing to partner, including the European Union and the United Kingdom (separately), and plenty of alternative negotiating platforms for accomplishing trade and investment liberalization. 

In the short term, if President-elect Trump wants to encourage U.S. manufacturing to produce and hire more, he should ask Congress to eliminate tariffs on all imported intermediate goods – components and raw materials that go into U.S. production. That would immediately reduce U.S. manufacturing costs, which would give the sector a leg up in its competition for U.S. and foreign investment.

Trump might quickly grasp that removing tariffs—rather than imposing them—is the kind of protectionism we can afford.