Economics

The Trump Trilemma

Dani Rodrik, the Turkish born Harvard Economist states that a nation may have two of the following three things: national sovereignty, democracy, or deep, global economic integration. It can have any combination of two. But it cannot have all three.

This is “Rodrik’s Trilemma.”

The logic behind why is somewhat complicated but can be reasonably explained as three forces pulling on one rope. Only two can pull at once to balance it. The third has nothing to grab on to.

One force, economic integration or, globalization as it’s called in the political world, is created when we reduce the barriers for trade of goods and flow of capital between nations. In order to have it, we reduce transaction costs; tariffs, import/export quotas, etc. When we do this, we inherently weaken some aspects of the control of the nation state and strengthen the input of global regulatory bodies in the sovereign affairs of the participating nations. The two sides pulling on the rope in this scenario are globalization and the sovereignty of a state.

If a nation desires globalization, it has to give up some power in determining its trade policy. If it wants more control over trade policy, it should be prepared to lose bargaining power in a globally integrated economy. The ebb and flow can be rationally managed and balanced to meet the best outcomes of the nation.

The trilemma comes in to play when that nation tries to do this while maintaining the accountability of democracy. In a deeply integrated global trade environment, an electorate has to have a focus beyond the nation’s own borders to ensure that it governs and makes policy in a way that effectively facilitates the global flow of goods and capital. In order to do this, the electorate must be willing to surrender, through democratic process, some sovereign power to global regulatory entities. They need to be able to do this in all circumstances even when, or especially when, the near-term outcomes of trade policy negatively impact the outcomes of the electorate.

Rodrik maintains that electorates don’t do this.

As a result, a nation wishing to maintain global trade integration and democracy must give up sovereign power to the global regulating entity lest the unwashed masses of democracy break the global economy with a tariff to protect their jobs. The tug of war then transitions between global trade outcomes and democracy. The more power the democracy has, the less integration we’ll receive. Sovereign control sits it out, surrendered to the electorate or the global regulatory entity.

We could continue the analogy through all the potential combinations but the one material to the Trump-ism discussion is where we’ve insisted that global economic integration sit out the contest and let democracy and sovereign control of trade policy have a go at it.

Let the people pick the leader. Let the leader pick the economy that delivers for the people. Everyone else get in line behind America.

America First.

This path is sold easily after hard times like the Great Recession. Trump and Brexit are textbook Rodrik’s Trilemma occurrences. Globalism is the casualty.

Most economists agree, if not in magnitude at least in direction, globalism is a net economic positive. It increases GDP, decreases the cost of goods, and makes the world an “overall” more stable place. The global margin increases.

People don’t vote on the global margin. In America today, they don’t vote much on their individual outcomes either. They vote on their culture. And that makes globalism an easy target.

Much of the Trump-ism message is about transitioning the economics of globalism into a cultural message of nationalism. One of the great tricks of Trump-ism has been to align the negative economic outcomes for its political base with the culture of toleration.

About halfway through the first quarter of the 2017 Super Bowl, I began to get the feeling that the American consumer, or at least the corporations that sell to the American consumer, were not big fans of the inward anti-globalism focus voted into office with the Trump administration.

The global cultural mindset was everywhere.

Coca-Cola ran an ad with people from all over the world singing America the Beautiful in their native tongues. Budweiser told the story of Adolphus Busch’s immigration. 84 Lumber showed the first half of a story that had to be cut off and shown on the internet because it actually showed Trump’s dubious great wall of America.

The message was loud and clear. Americans associate positive sentiment with a modern, compassionate, global perspective. We feel warm and fuzzy about the idea of diverse cultures all longing for and participating in the American dream. That message was market tested and executed by multi-national corporations who spent $160K a second on airtime to deliver it. It was not an unintentional endeavor.

The commercials we were fed were about people and culture and diversity. And tolerance. They filled Americans with the positive sentiment ad companies love to attach to the brands they represent. Inclusion sells. The sentiment, though, is a classic example of a problematic progressive globalism trap.

The progressive globalism trap pushes the notion that globalism is about people and tolerance. And if you’re about people and tolerance (I am), then you are a fan of globalism. In reality, globalism as we know it, the globalism that’s actually materially impacting Americans, has almost nothing to do with people and cultures and everything to do with trade and money. The standards enforced by the World Trade Organization and the outcomes that reducing barriers to free trade have coincided with an era of tremendous global growth. It’s drastically reduced economic inequality across nations.

But at a cost.

That cost has been the re-distribution of wealth and the increase of income inequality within already wealthy nations like America. It’s a firm reality of economics. We grow other place’s middle class at some difficult to quantify expense to our own.

Additionally, the opening up of the international flow of capital allows money to move seamlessly from country to country. But that’s come at a cost too. That cost has been a financial interdependence that fuels global recessions without alleviating the need for sovereign nations to bail out institutions deemed “too big to fail.” The global community didn’t bail out the American financial sector or our automakers. America did.

At the same time, the open flow of capital has also allowed open competition for corporate earnings to drive the corporate tax rate down globally almost 50% in just a few decades in a way that makes America less competitive for internal investment.

The fair point that Trump-ism makes is that global growth and stability hasn’t come without a cost to America. And the cost has fallen heavily on an American working class that hasn’t realized that we transitioned from a manufacturing and production economy to a services economy two generations ago. While the benefits of that global growth of the second half the 20th century exist, the costs are easier to point to in the wake of the recession.

By aligning the economics of anti-globalism with the cultural phenomenon of nativist nationalism, Trump-ism trapped their opposition in a reality where one is either for diversity, or one is for America. One can’t be for both and have the economic interests of Americans as a priority. The only counter Democrats found in 2016 was a departure from capitalism all together of Bernie Sanders.

And we know how that went.

11 replies »

  1. Thank you for a very insightful commentary. I’m bookmarking it for future reference.

    I’ve read these two sentences several times and am still not certain that they say what you mean to say. “How about the three million American Muslims already here that actually are American citizens just like me. But also carried out the last two major terrorist attacks on American soil?” Surely you are not implying that the three million American Muslim citizens collectively carried out the major terrorist attacks? May I request a rewrite for more clarity, please.

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  2. great piece. you have moral authority to make these charges. I am inspired by the resistance, and living in WA state, proud of my state leading the charge on the travel ban.

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  3. “Both sides also appear to agree that strength and compassion are opposites, and mutually exclusive. Fueled by a $285 billion media apparatus that can’t figure out how to package anything that’s not point/counterpoint we appear doomed to argue about one or the other when the answer is both.”

    This is so insightful. With the Trump team’s anti-media stance and determination to de-legitimize the mainstream media, it’s time for our Fourth Estate (and Fifth Estate) to step up and prove there is more to them, and all of us, than point-counterpoint. The problem is that they’ve figured out that’s where the money is. Remember when news programs weren’t expected to make money? Just to be impartial and report the “factual” news?

    The media must trust that news consumers can handle more than the pablum they are dishing out, which may end up to be one of the positive byproducts of this crazy-making administration.

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