Archives: 11/2016

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.

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.

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:

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?

Trump, Trade and Foreign Policy

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.

Trump’s Victory Is a Mixed Bag for China

Xi Jinping FlagDonald 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.

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.

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