What Donald Trump Must Do To Be 'Great' on Economic Policy
While four months is an eternity in politics, it's no longer possible to ignore the likelihood that Donald Trump will be the presidential nominee when Republicans convene in July. Whatever the good or bad of such an outcome, it's apparent that even Trump knows he'll have to replace a great deal of bluster with a lot more substance to be a viable national candidate. This will be especially true in the area of economic policy given the importance American voters attach to growth.
The question then becomes what Trump will need to do, or better yet learn, in order to be "great" on economic policy.
On the subject of taxes, Trump's plan is already mostly good, though it's also unlikely to resemble what he's proposed. Taxes are way too high, and the tax code impossibly complicated, precisely because politicians derive their power from favors offered through the code. The self-interest driving politicians will not disappear thanks to Trump's arrival in Washington anymore than sea levels declined in honor of Barack Obama's arrival.
As for his proposed "wall" to keep out immigrants, lots of luck there. Not only would a policed wall not work, its construction would never pass a Congress that controls the purse strings. That it wouldn't would surely accrue to the Trump economy considering the reduced growth that would be the certain result of expenditures necessary to build and guard a 1,650 mile monstrosity. And while Trump would never admit it, immigrants add to the U.S. economy. That's the case because when immigrants reach U.S. abundance, they become quite a bit more productive when their talents are matched with advanced U.S. production techniques.
All of which brings us to trade policy. This is where Trump is most confused, and it's also where he could do the most damage as Holman Jenkins pointed out last week in the Wall Street Journal. Trump requires a lot of learning here, and thankfully he can learn the most by looking inward.
First up is currency policy. A Trump Treasury would be the mouthpiece for the U.S. dollar. This is important simply because Trump has regularly said that China and Japan routinely devalue their currencies to make their goods more desirable to American consumers. On this subject Trump is embarrassingly wrong.
In truth, and going back to 1971, one U.S. dollar at the time bought 360 Japanese yen. At present a dollar buys 113 yen. The Chinese yuan has risen over 20 percent against the dollar since 2005. If Trump thinks currency devaluation is both a driver of prosperity (it isn't) and also a corrupt act, the U.S. is easily the biggest miscreant among the world's developed countries. No other country comes close.
Importantly, persistent devaluation of the dollar against the yen, yuan, Swiss franc, and other foreign currencies has decidedly not been advantageous to U.S. producers. To understand why, Trump need only observe his much-commented on hands. His detractors say they're small, he says they're large. Whatever the actual truth, a President Trump could theoretically devalue the inch to make his fingers longer in inches, but those same fingers (along with other parts of his anatomy) would hardly grow.
Money, like an inch, foot or minute, is a measure. Because it is, fiddling with that measure won't alter its actual value or size. A President Trump could shrink the square foot, but the apartments in his various buildings wouldn't become more valuable despite a nominal increase in their square footage.
All this helps explain why currency devaluation in no way advantages those who seek to export. Devaluation of a measure doesn't change the actual cost of goods priced in the measure. If anything it increases the cost. This is particularly true when it comes to Japan or China. Neither country is resource rich, which means they have to import many of the inputs that go into the manufacture of their goods. A cheapened currency increases the cost of the inputs, and as oil is priced in dollars, shipping is also rendered more expensive.
Considering labor costs, workers rarely sit back and allow their paychecks to be devalued sans protest. And lest we forget, investment is what drives advances in production techniques meant to shrink the cost of goods. But if a country is devaluing its currency, the act of doing so is a deterrent to the very investors whose capital commitments make it possible for producers to lower their prices. If devaluation worked, Argentina would still list among the richest countries in the world.
Trump utters the word "great" with impressive frequency, and that's another reason why he should he should be an open-trade cheerleader. It's all about great people serving our needs. Really that's the genius of open trade. It means Americans don't just have the talented within these fifty states trying to win their business, it means that Americans have the greatest and most talented producers on earth lining up to serve them.
The U.S. would be quite a bit less great absent free trade simply because the paychecks of the American people would purchase fewer goods, plus Americans themselves would be much less productive. To understand this, all Trump need do is consider how much his own wealth-creating ability would decline if he had to cut his own hair, design and sew his own suits, and individually construct the buildings that bear his name. Trump outsources all three tasks to others so that he can focus on what he's best at. To put it plainly as possible, if Trump weren't himself a free trader we would never have heard of him. He would be poor.
All of which brings us to the most basic misunderstanding about trade that's constantly revealed by Trump. To watch him on the stump or in debates, one can only conclude that he believes the economy's "losers" are those who import. Nothing could be further from the truth. All Trump need do is a consider himself. He sees himself as a winner, and he's won in the richest city on earth: New York City. No city in the world imports more than New York's citizenry does, and they're major importers precisely because they're winners. Those who produce a lot import a lot, almost by definition. Trump "imports" many multiples more than Ted Cruz, Marco Rubio and John Kasich do combined. We produce in order to consume, which tells us the most productive "import" the most.
That the American people import more than any country on earth is the surest sign that the U.S. is already great. We're a nation of winners. If we weren't, the world's talented wouldn't be lining up to export to us, let alone want to live here. A President Donald Trump will make America quite a bit less great unless he observes his own life only to conclude that open trade is the certain path to greatness. Nothing else comes close.