dani rodrik

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.

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Last fall, economists Steven Levitt (of Freakonomics fame), Peter Cohen, Robert Han, Jonathan Hall and Robert Metcalfe published a paper on their findings of the analysis of the car service provider Uber X’s customer interactions from 2015. All 50 million of them. And they found something startling. Uber X’s ability to provide on demand transportation through flexible pricing and scheduling created $2.9 billion of economic surplus for Americans in 2015. Which means that because of how Uber X works, Americans spent $2.9 billion less on getting from point A to point B than they would have had Uber X not existed. And those Americans were therefore able to spend that money on something else, mostly in America so that other Americans could make more money.

That’s a hell of a finding. That’s roughly what it took to run the entire city of San Diego during the same period. But, it’s actually the second most interesting thing in the paper. What was more interesting than creating $2.9 billion out of thin air? It’s what actually told the team that bit of information—an actual demand curve, the first ever real demand curve ever seen.

Now, anyone who has taken introductory economics understands that the first day of class, the professor stands in front of the room and draws two curves. A supply curve. And a demand curve. And then he/she goes on to pontificate how perfectly they operate, all things being held constant. And if you’re lucky he/she might jump right into the power of comparative advantage and the magic it unlocks in free trade for mankind. So when I heard Steven Levitt say that they’d never actually seen a real live demand curve, in the history of mankind demanding things and supplying them, I nearly drove my car off the freeway and into a ditch, dooming me to contribute first hand to more economic Uber X surplus.

I recovered though. And I stayed on the road. And it started me off on a bit of a journey. I wanted to understand how the hell economists actually have a job.

Well, a little less than a year later after swimming in the work of people like Paul Krugman, Peter Thaler, Dani Rodrik, Jeffrey Sachs and Tyler Cowen, I’ve learned a few things. One is that I like economics. Who knew. The other is that there’s really two kinds of economics. There’s actually way more than two in real life. But for the sake of a reasonably short blog that someone might actually read, I’ve picked two that showed up as patterns in the work.

The first kind of is the one almost none of us actually encounter, unless we’re economists. It’s what I like to call, “academic economics.” Often delivered by a bearded gentlemen in a corduroy sport coat with those leather things on the elbows, academic economics believes in many things, but one thing absolutely. Context matters. When a professor stands up in front of a class and gives a lecture, two things are always present. A laundry list of assumptions. And a model. And it is common knowledge that assumptions change, as do the utility of the various as-sundry economic models. And if someone actually asks a question, like is free trade good? The answer is always, well that depends. And the things it depends on are about a billion situational factors about a time, place, culture, region that one could form an opinion out of. Very few things are answered absolutely and permanently about broad things like global trade or capital markets.  Lots of theories come about. All of them start with “it depends”.

That’s “academic economics”.

The other kind of economics is the kind that we all hear about all the time. It’s what I like to call “public policy” economics. And it’s ubiquitous. Public policy economics is usually is the less interesting economics elected official or a think tanks deal in. It rears its dismissive head when a bunch of economists who spend at least some of their time saying “it depends” in the classroom start saying something very different when asked questions like “is free trade good” in front of congress. They say things like, of course it is. Everyone agrees. And then they recommend policies in support of it.

 

Because, like just about anything, economics is not free from the risk of infection of politics. And “It depends on your assumptions” is really hard to put on a bumper sticker. Or a meme. And it’s even harder for stiff smiley politicians to talk about. Because most of them don’t have a ton of depth on the subject. Even the great Winston Churchill, once in charge of the British economic policy as Chancellor of the Exchequer was admittedly lost, claiming that his economic advisors were “speaking Persian”. And from a political perspective, those Persian speaking economists need to make sure that everyone understands that free markets rule and government intervention or protectionism is evil, lest we go and break the economy permanently with something draconian like a tariff. Never mind any of that thinking that economist Jeffrey Sachs calls, differential diagnosis. The considering of unique situational factors to be critical to an economic policy recommendation. All that thinking and considering nonsense is for the classroom. Politics renders it less useful in the light of day.

Something interesting is actually happening in economic politics right now though. When it comes to foreign trade specifically. Free trade appears to be the only thing anyone can agree on any more. Everyone hates it. Except economists that is. None of the politicians, at least the ones running for president, appeared to be big fans of our current trade agreements. Not the Republicans. Not the Democrats. And not whatever President Trump is. Bernie, Hillary and POTUS 45 all campaigned on pulling out of the Trans Pacific Partnership, the trade agreement that lowers barriers to trade for 12 Pacific nations not named China.

There’s another interesting thing too. None of the American people like our free trade agreements either. In fact, they never have. Survey after survey after survey of Americans and others all say they hate liberalization of free trade. They feel like it takes their jobs away. And forces them to do other things they weren’t trained to do. And lose money.

And they’re right. It often does. It’s not the only thing it does. It also gives us cheap goods that make that loss of income a little easier to bear. But the masses, this time, aren’t wrong about what’s happened to them over the last 40 years. How not wrong is up for debate of course.

Even your most ardent free trader admits, that though free trade creates overall economic growth, it comes with the cost of income redistribution and labor shifts that are big damn drag for a lot of people, particularly those at the lower end of the skill curve in the labor force. In fact the negative impact for those that lose out on the redistribution is about 50 times (also Rodrik’s number) more significant than the overall gain. Redistribution isn’t loss though. Someone else gains that fifty times. And even a little more because free trade does promote economic growth. But right now, in America, it’s really hard to ask the middle and working class to take more hits.

This is probably a good place to point out that two of the assumptions the “it depends” answer actually relies on is political climate and state of the workforce. Ours right now elected Donald Trump to be president. We may not have a model for that one yet…

Free trade didn’t create the loss of manufacturing jobs in America. Or the equality gap between low and high income Americans. Increased productivity that outpaced demand and a shiny new modern China over the last forty years are probably the main culprits, free trader or not. But it’s not helping fix our equality gap right now either. And when the executive action to scrap something like the TPP is wedged between building walls, deleting EPA data from government web sites or the wholesale repeal of healthcare, it’s easy to start to scream opposition to it as we develop a new political dynamic that says that Trump is bad=anything Trump does is bad. I think what we’re seeing though, is an interesting realignment.

The idea of free trade and the aim of reducing government intervention is an idea that really began to come to life under Reagan with the neo-liberalist movement. The free market fixes all ills and moves man forward. The government is bad and can only hurt things. The development of income inequality in the decades since and the certainty of its existence has thrust us into a different debate. The debate has shifted the argument from free trade vs. not free trade to how to deal with the fallout of free trade, without breaking the benefits of it. It sounds much less aspirational. But that’s where we are.

Right now, the developing party line for liberalization of trade is that free trade moves the world forward and helps global inequality, at some cost to inequality within nations of wealth. And the most appropriate action isn’t protectionism. It’s a stronger social safety net at home for the American worker. Which sounds like it evolves into a good old fashion conservative vs. liberal argument. But it’s really an argument about where government intervention is most appropriate. To protect our internal economic development through protectionism? Or to compensate the American worker through government social measures in return. You’ll note, keeping government out of it is no longer on the menu. And that’s new in America. Or at least new again.

So who’s right?  Well it depends…remember? It depends on about a billion different things. Things like exactly what the rest of Trump economic policy looks like. It depends on whether or not the election of an unknown agent leads to catastrophe of domestic or global proportions. It depends on whether or not Mexico breaks off diplomatic and economic relations with us. It depends on whether or not our commander in chief gets impeached for refusing to sell his businesses or fondling an unsuspecting intern. It depends on so many things that the only real thing you should be sure of is that if someone tells you pulling out of the TPP without certainty is a bad/good idea, than they are full of “fake news.”

Wait and see on this one. Keep a firm watch on the other stuff that is far more scary right now. Pulling out of that trade deal isn’t downright nuts. (there’s a bumper sticker for you) Not the way building a magical symbolic wall in 2017 is. Not the way pulling the plug on ACA without a plan is. So resist the urge to oppose for opposition sake. There’s plenty of meat still on the bone for that one.