We need to get more sophisticated in our conversation on government regulation, or interference, in private business. Despite President Trump’s statements and possibly intentions to the contrary, we’re witnessing a massive increase in federal interference in civil society.
A simple way to understanding business-versus-regulation is this: Businesses usually resist the extra cost and hassle of governments making, changing, and then enforcing rules, some of which seem arbitrary, blunt, and excessive.
To an energy company owner facing the EPA, a financial services company facing the CFPB or SEC, or a pharmaceutical company facing the FDA, regulations will seem profit-reducing at best and business-destroying at worst.
And yet, as consumers, we typically don’t want energy waste dumped in our waterways, financial shysters running amok preying on the vulnerable, or untested drugs unleashed on the sick.
Reasonable people in a reasonable society can and should debate the right level of government interference with business.
Gary Dudley and Charlie Amato, for example, founded the San Antonio-based insurance giant SWBC forty years ago, and have seen a dramatic rise in the cost of compliance with federal regulations over that time.
Dudley told me recently “Everybody can agree we need to protect consumers from being taken advantage of. But the CFPB (The Dodd-Frank created Consumer Financial Protection Board) for example has a little too much power, in my mind. If you attack the financial institutions, you drive costs up, and consumers end up paying for that.”
In the past five years alone, Dudley says, ”The number of compliance officers on our payroll has increased by four times. A reduction in regulation,” Dudley continued “would go a long way toward helping businesses like ours employ more people and boost the economy.”
So, many people believe local, state, and federal regulation of businesses in the United States has gone too far as a rule. As a profit-seeking capitalist myself, I’m open to that idea.
President Donald Trump agrees with that idea as well, and I guess that’s why he promised to business leaders in January: “We think we can cut regulations by 75 percent. Maybe more.”
Beyond the semantic question of what “75 percent” really means here, I think we have to reach for a deeper understanding of how government interacts with business to properly interpret Trump’s promise, tactical style, and effects.
I say that because there’s another consequence of regulation that should make everyone skeptical of government interactions with business. By this I mean a sort of libertarian view of the regulatory state. I’ve been reading my Plutarch recently, so I’ll call this the “Cato” view of government rules and regulation, named for the Roman Statesman who famously spoke out against the encroaching power of would-be dictators like Pompey and Caesar. The Cato view goes like this:
Every regulation acts as a bureaucratic bottleneck that a business must resolve via interactions with public officials. You don’t need to resort to outright bribes (although some will!) to understand the power that a public official wields at that bottleneck.
We’re talking about delays, paperwork, inspections, licensing, fees, fines, exceptions, certifications, committee hearings, and waivers. You get the idea.
In the Cato view, public officials empower themselves by exploiting those bottlenecks, to the detriment of everyone else in society. Businesses and consumers alike pay the costs, one way or another, of officials’ empowerment.
The Cato view, broadly understood, is what worries the heck out of me about President Trump’s approach to doing “deals” for business. He talks about “eliminating 75 percent of regulations,” but his core policies and style threaten to generate regulatory bottlenecks instead.
Restrictions on immigration, “America First” trade policy, carrots-and-sticks for on-shoring manufacturing, and Twitter-bullying of specific businesses all lead to bottlenecks that expand – rather than reduce – the power of public officials and the regulatory state.
Whatever your view of the Executive Order dubbed the “Muslim Ban,” there is no denying this creates an extraordinary bottleneck, in the Cato sense of the world. This bottleneck is why more than 100 tech CEOs filed a brief in the Ninth US Circuit Court of Appeals against the Executive Order. Tech CEOs understand the “Muslim Ban” hampers their ability to hire and attract the best talent in the world.
And they know, and we know, what would happen next, with this kind of ban, right? The Trump administration, in its eagerness to show it can do deals, would create special immigration waivers for those tech companies. Provided, of course, those companies “play ball” with the administration in other ways. Otherwise, they should expect delays and intransigence from federal regulators.
Whatever your view of Trump’s proposal for “America First” tariffs on goods coming from Mexico or China or other supposed trade rivals, there is no denying this border tariff creates extraordinary costs for importers. Can some group of importers cut a deal to get those costs reduced, because of a particular favored-company or favored-industry status? Do you have any doubt they will try? That’s what the corporate lobbying industry is built for!
A new set of import tariffs, as consistently promoted by the Trump administration, creates extraordinary opportunity for bottlenecks, and therefore, public-official empowerment through “deals” and “solutions.”
Whatever your view of the deal cut by Trump and then-Indiana Governor Mike Pence for the Carrier plant to maintain some manufacturing jobs in Indiana, there is no denying the message sent to other companies: If you want to get waivers, exceptions, or tax breaks, be sure to follow what the Trump administration would like you to do with respect to on-shoring, or domestic “job creation.” What manufacturing CEO would not try to get in line to curry favor with the Trump administration? Maybe they too can get a “deal” on some tax incentives? Right?
That deal may have given the appearance of “job creation” by government officials – who will certainly claim that success – but it also resembles an exploitable regulatory bottleneck, in the Cato view of the world.
When the Twitterer-in-Chief attacks a particular company like Ford or Nordstrom, it’s an extraordinarily blunt attack by the federal government against civil society.
Some of this is not particular to the current administration, but rather is inherent in government regulation. We’ve seen some of this before now. Some of it, however, is new, and forms the core the administration’s policies, tactics, and style. Regulation and interference come in a variety of forms, and we need to understand them as such.
Cato tried to warn the Roman Republic about the overreach of its leaders. Consider yourself warned about the Trump administration and its true approach to government interference in business.
I was under the impression that we all agreed that government officials should do everything to eliminate both the reality and the appearance of acting for financial gain before, during, and after serving as a public figure.
Apparently, that was naïve of me, as President-elect Trump has signalled his plan to turn over his business to his children, with details to follow in January 2017.
Wall Street Journal columnist Holman Jenkins wrote recently that any President is “always conflicted,” and therefore maybe President Elect Trump should be cut some slack with respect to his and his family’s business interests.
As Trump declines to fully separate himself from the family business, “Why not widen our tolerance a bit?” asks Jenkins. “Why not allow that Americans have the right to pick a business owner as President? Let’s see how their choice plays out.”
No, let’s not. People who make public policy should not have a private financial stake in the outcome, or even the appearance of a stake in the outcome. Shifting the Trump businesses to his children does not solve this problem. Even if the Trump family members aren’t seeking to profit from government ties, both critics and favor-seekers will assume that’s the case. That assumption itself undermines basic good government.
I understand Trump supporters view his business success as a kind of protection against financial corruption. After all, he and his children don’t need the money. Personally, I like the idea of a wealthy businessperson in office who therefore should be “immune” to financial temptation.
But that’s not even the point. People will still assume that policy isn’t made with the public’s interest foremost in mind. His critics will assume everyone’s on the take. Allies and favor-seekers will attempt to gain an advantage however they can. Is that great hotel site with water views in Costa Rica worth $50 million? Maybe selling to the Trump children for just $40 million gets an important meeting set up. Revisiting Dodd-Frank banking regulation soon? I’m happy to review those financing terms for you, Mr. Trump, Jr.
What real estate seller anywhere in the world wouldn’t want to cut them a good deal? What bank wouldn’t offer preferential terms?
Mafia
The widespread idea that people get rich off of public service is an insidious termite nest, eating at and hollowing out the foundations of a republic. Successful generals in the late Roman republic generated extraordinary, corrupting wealth through their public offices. Latin American governments and Putin’s Russia offer past and current examples of the corrupt practices and cynicism it engenders about government. This is not a “Let’s see how their choice plays out” situation. We already know how it plays out.
Different moral codes
Jane Jacobs in Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics argued that a completely different set of moral codes defines how people in government should act versus how people in private enterprise should act. The two moral codes are each valid, and each work independently and properly in parallel, when contained within their own system. The blending of the two moral systems, however, leads to criminal outcomes and a breakdown of trust in society.
I read this about 20 years ago and haven’t seen a better explanation since.
The partial list of the proper moral codes of government workers – and here you could picture the police and military, plus political campaigners and government office holders – include the following precepts: Shun Trading, Be Obedient and Disciplined, Adhere to Tradition, Respect Hierarchy, Be Loyal, Take Vengeance, Dispense Largess, Be Exclusive, Show Fortitude, and Treasure Honor. Those moral codes make me picture an impressive old county courthouse, commanding a bit of awe. In a government and public service context, these moral precepts work best.
A partial list of the proper moral actions of business people – and here you could picture a trading firm, a technology startup, or a busy coffee shop – include the following codes: Shun Force, Collaborate Easily with Strangers, Compete, Use Initiative and Enterprise, Be Open to Inventiveness and Novelty, Be Efficient, Be Thrifty, Dissent for the Sake of the Task. I’m picturing an open floorplan marketing company with comic-book colored walls, glass conference rooms, and the smell of caffeine. In a business context, these moral values work best.
The point is not which code of conduct is morally superior, but rather that each code is consistent and appropriate to the job at hand.
Jane Jacobs, activist and brilliant writer
The problem, Jacobs explained, is when you mix the two moral codes. The mixing leads to monstrosities. The Mafia, for example, is a for-profit business enterprise which employs moral codes from the government side, like loyalty, largesse, honor, and vengeance. Government office holders, on the other side, slip into corruption when they adopt values like of profit-seeking, inventiveness, and enterprise. Private armies and mercenaries are a special kind of mixed moral-code monstrosity, as is anytime we see politicians engaging in clear pay-to-play practices. What is moral and good in one context is not moral and good in the other.
Democrats too
By no means does one party have a cleaner history than the other on this. According to biographer Robert Caro, Lyndon Johnson built an ill-gotten fortune through pressuring businesses in Texas to advertise with radio stations nominally “owned” by Lady Bird Johnson, while Johnson served in Congress and the Senate. Technically (technically!) they weren’t his, but come on, “entrepreneurial activity” in this context is obviously wrong. Al Gore reportedly left the Vice Presidency in 2000 with a $1.7 million net worth, which then grew to an estimated $200 million net worth by 2012 through media, technology, and solar investments. I have a hard time believing his business partners solely valued him for his business acumen, rather than his government experience. The $240 million in income reportedly earned by the Clintons in their post White House careers also disgust me. They mixed the separate moral codes of business and government in a monstrous way, and they unfortunately set the stage for Trump to blow off calls to fully separate himself from his family’s businesses.
The point should not be “forget it, because both sides do this.” The point is, we should not be ok with the mixing of profit and public service, nor even the appearance of it. People will assume it’s happening with Trump’s family. We can’t do what Jenkins suggests, and normalize it, accept it, and “see how their choice plays out.”
Accepting this kind of moral monstrosity moves the republic much close to the Russian and Latin American model, and that’s not a good thing.
When I write all these things, I want to clarify these are not predictions, but rather my frightened projections forward of what I see Trump has indicated he will do. I will get no pleasure in being “right.” I sincerely hope Trump’s supporters and allies have the last laugh at me. As an American citizen, I hope he turns out to be just a call-it-like-he-sees-it competent businessman thumbing his nose at the elite establishment.[1]
What would allow me to sleep better? For starters, I wish there was real opposition in government right now. With the Democratic Party stripped from the top levers of federal power, that opposition has to come from within the Republican Party. That’s the real bottom line right now.
The two things I want most for Christmas this year are an assertive free press and aggressive enforcers of the separation of powers and the Bill of Rights. If I’m really laying out all my wants, somebody who can keep us from foreign wars and fiscal suicide would be nice as well.
My policy agenda
If you’ve read this far into my posts on the Trump administration, can I let you in on a little (sort of unintended) joke about my Trump fears and my policy advocacy?
I didn’t really intend this when I started writing about Trump, but the things I’m advocating here are all traditional conservative Republican values. That’s not usually where I land. I don’t know Bill Kristol’s inner dialogue deeply, but I’d like to think he and I would agree on all of this stuff.
I’m talking about enforcing strict constitutional values, like individual freedom, not collective rights. I’m talking about protections against encroaching government interventions like surveillance and registrations – the kinds of things conservative Republicans usually advocate. I’m talking about limiting our responses to foreign provocations. I’m talking about balancing our budget and paying our debts. I’m talking about maintaining national strength through an independent central bank and monetary policy. I’m talking about expanding free trade, not getting into a protectionist crouch to coddle certain favored industries. Shit, this would put me on the same page as a conservative icon like Ronald Reagan. That’s all I ask for right now.
The way I figure it, this is not the time to be pushing my more narrow progressive agenda, or any wish for the arc of history to bend my way. This is a time to keep the focus on surviving First Order threats to the Republic.
It’s a lot to ask, I know. These are the kind of existential threats we haven’t really worried about at the start of a Presidency since the four inaugurations of Franklin Delano Roosevelt during the Great Depression and World War Two.
Because if you take President-elect Donald Trump at his literal word during the campaign, all of these threats are suddenly back on the table. This is why I’m not sleeping.
Help us, Ted Cruz!
Calling all patriotic leaders of the Republican Party: The time will come, probably very soon, for you to take brave, even historic, stands. This is your time to show America’s greatness.
I feel like Princess Leia here, stuffing a message into my laptop just before the Empire arrives, whispering earnestly into my MacBook Pro: “Help us, Ted Cruz, you’re our only hope.”
Here is my short-list of Republican patriots I am counting on.
Senator Ted Cruz – You believe deeply in the US Constitution and even taught Constitutional law at the University of Texas. Your senior thesis at Princeton was on the separation of powers. Before becoming my Senator from Texas you argued and won five cases in front of the Supreme Court. You have shown an eagerness to be a completely maniacal obstructionist in the Senate on principles you believe in. You nearly took down our government during The Fiscal Cliff near-default of 2013.
This is a great start! You even deeply dislike Trump! We could all use a guy like you right now.
I figure you also understand the #Calexit impulse of Californians wanting to secede from the union, since that’s an old idea from the Right in Texas. You believe in protecting states from the encroachment of the federal government. You need to be a bulwark of support for these Californians who are newly frightened of the federal government! You’ve got this!
Senator John McCain – Nobody understands the grave damage torturing enemy combatants does to our security and reputation – in addition to what we might poetically call our nation’s soul – more than you. You suffered for years at the hands of torturers in Vietnam.
President-elect Trump has threatened he will torture enemies with “waterboarding and much worse.” Senator McCain, you have called waterboarding a War Crime. You have singular credibility and a duty to stand up on this issue. I’m guessing Trump – after he said of you he likes “people who weren’t captured,” is not a close ally of yours. You did make a good start when you declared that you would take the Trump administration to court if they attempt to torture people. Please continue to speak out.
Chief Justice John Roberts – Our individual, inalienable, rights may be trampled by the instincts of Donald Trump, with the appointment of people who seem to want to take these away. If they are appointed to cabinet positions, will the Supreme Court stand up to advocates for increased domestic spying, or terrible ideas like advocacy for special registration for American Muslims? Religious freedom and freedom from warrantless searches underpin our system. Justice Roberts, please guide the Supreme Court toward striking down laws or executive orders that contradict our First and Fourth Amendment rights to religious freedom and privacy.
Senator Rand Paul – Your whole career – and that of your father Congressman Ron Paul – is a fight for principles you believe in, particularly strongly on both First Amendment rights and on the idea we should not involve ourselves in foreign military adventures. We all need you to be a zealot on both of these issues right now. Our incoming Commander-in-Chief Trump exudes an appetite for vengeance and violence, with little impulse control.
Sen. Rand Paul, R-Ky., speaks during an event at the University of Chicago’s Ida Noyes Hall in Chicago on Tuesday, April 22, 2014. (AP Photo/Andrew A. Nelles) ORG XMIT: ILAN114
On First Amendment rights of free speech and a free press, Trump said he was “running against the crooked media,” calling them “dishonest” “disgusting,” and “scum.” He threatened newspapers like the Washington Post with “such problems” once he has been elected.
As for foreign wars, we will certainly be threatened by other countries and terrorists in the next few years, but that does not mean we should go to war because some tinpot dictator tweeted about Trump’s tiny fingers. Senator Paul, please continue to make the principled case for keeping us out of Trumped-up wars.
“[I]s Donald Trump a serious candidate? The reason I ask this is, if you’re going to close the internet, realize, America, what that entails. That entails getting rid of the First Amendment, ok? It’s no small feat. If you are going to kill the families of terrorists, realize that there’s something called the Geneva Convention we’re going to have to pull out of. It would defy every norm that is America. So when you ask yourself, whoever you are, that think you’re going to support Donald Trump, think, do you believe in the Constitution? Are you going to change the Constitution?”
House Speaker Paul Ryan – You made your reputation within the Republican Party as an economic policy wonk and fiscal conservative. That means spending only what we can afford, and responsibly paying our bills. You know in your head, within your heart, and on your spreadsheets that our country – with a 100 percent debt to GDP ratio already right now – cannot afford a massive tax cut and a trillion dollar infrastructure spending plan, as called for by President-Elect Trump. And certainly, not both at the same time. I know you know this, because you understand budgets.
The US Constitution’s Article 1, Section 7 mandates:
“All bills for raising revenue shall originate in the House of Representatives.”
That’s you! C’mon Speaker Ryan, you got this. Stand up for what’s right. The US Bond markets turn their lonely eyes to you.
America – you need leadership in your corner, at least until 2018 mid-term elections. I present to you the principled leadership of Cruz, McCain, Roberts, Paul, and Ryan. Let’s hope they are enough.
I’m sorry, folks. I’ll probably never sleep again.
[1] With the self-control, empathy, honesty, and class of an 8 year-old spoiled man-child, but still.
Trump does not respect the freedom of religion when he says Muslims resident in the country may need to sign up with a specific registry. He undermines both the rule of law and the separation of powers when he attacks the court investigating his Trump University fraud – because of a specific judge’s ancestry.
Even short of Constitutional threats, he’s already ripped up traditions and best practices that are often as important as codified law. The fact that he repeatedly lied about not releasing his tax returns because of an IRS audit – thus flouting modern tradition about financial disclosure from Presidential candidates – shows he will push the limits on unwritten norms, when it suits him.
This limit-pushing instinct, combined with a disregard for Constitutional checks on power, make Trump a danger to the Republic. At every turn he attempts the immoral, illegal, or unconstitutional choice. It’s going to take alert and brave members of government and society at all levels to keep the US Constitutional issues front and center, and viable.
As Matt Levine pointedly reminded us the day after Trump’s election, the Constitution and other laws are only as good as the people who are willing to enforce them. Otherwise laws just become silly pieces of paper, worthy of little notice, or the kind of things to knowingly flout like speed limits that few heed on a highway. That’s why it’s a little extra frightening right now that the opposition party in Washington is so weak. Are there Republican leaders who can stand up to Trump? I really hope so.
It should be obvious by now – even before he takes office – that, as President, Trump will attempt to violate many of our most important constitutional protections and best practices in his first few years in office. The question will be whether and how people respond. Chavez, Putin, and Hitler all managed to eliminate checks and balances to their power in their early years in office.
Do our leaders roll over and allow him to get away with it?
This is a long post about how Trump has specifically threatened to cause an economic or financial crises through either a trade war or through undermining the US monetary system and credit.
Similar to a security crisis, I can’t sleep because I worry Trump may inadvertently cause an economic crisis, which he may then uses as a pretext for further authoritarian moves.
Look, this can’t be a prediction about “what’s going to happen” with the economy under Trump. Most of the time when we talk about markets responding to a presidency, we are finding false signals in noise or we’re predicting things that are really unknowable.
I do worry, however, about two specific economic problems that Trump has promised to cause: Trade wars, and interference with US financial strength through the bond markets and Federal Reserve. The long-term problem with an economic crisis – besides the obvious pain and suffering – is a societal desperation that allows an authoritarian to make bold moves otherwise unavailable to him.
Let’s start with trade.
In the arena of international trade, Trump’s “plans” – such as they are – could and would cause a worldwide trade-war and global recession. He launched his presidential campaign pledging massive 35% tariffs on our major trading partner Mexico. He reiterated his plans many times on the campaign trail to retaliate both against Mexico, and against companies like Ford Motor that may move manufacturing jobs to Mexico. By the way, 16% of our national exports go to Mexico.
Trump pledged to withdraw not only from the recently-negotiated Trans-Pacific Partnership but also to renegotiate or withdraw from 1994’s North American Free Trade Agreement with major trading partners Canada and Mexico. By the way, 19% percent of all U.S. exports go to Canada.
Trump’s promises mark a very big shift in US policy and leadership.
The problem with unilateral trade sanctions like this is:
They don’t stay unilateral. Countries affected will obviously retaliate against us with their own trade sanctions, and;
The United States would probably be in violation of international trade systems like the WTO.
The globalization of trade since the end of World War II – and in particular since the end of the Cold War – has greatly favored the United States, even if the effects of trade hurt particular industries or geographies. A reversal of that trade situation – championed by Trump as he champions those most hurt by globalization – will make us all poorer.
At the same time, high tariffs are unlikely to bring back manufacturing jobs. The bad news[1] is that we pay people too much in this country and we enforce too many worker protections to make many manufacturing jobs viable here.
Trump has promised a trade war, but without a chance that it could possibly “work” in the sense of bringing back many jobs for those most affected by globalization.
Now, maybe Trump is just kidding about his trade war plans. Maybe its just a goof, indicating his direction of thought, but he won’t enact anything as crazy as what he’s promised?
Commerce Secretary Wilbur Ross
His selection of billionaire investor Wilbur Ross for Commerce Secretary, however, indicates Trump’s seriousness about protective tariffs. Ross made his career as an extraordinarily successful vulture investor in beaten-down industries such as steel and coal, domestic industries buffeted in part by regulations and high worker-costs, but also by international trade.
In 2002 and 2003, Ross bought up bankrupt steel-producers LTV Corporation, Acme Metals and Bethlehem Steel.
A well-timed 30% tariff on imported steel in 2002 enacted during the George W. Bush Administration helped raise the value of Ross’ steel holdings, which he eventually sold to Indian-owned Mittal Corp in 2005.
Incoming Commerce Secretary Wilbur Ross likes steel tariffs
Ross has indicated his support for both Trump and the idea of protective tariffs, and he clearly has the business experience to know that trade protection can enrich the owners of certain industries.
While higher steel prices help steel workers and owners, however, they hurt other industrial companies – like the auto or construction industries – that need to buy steel at the lowest price possible.
Trade wars can benefit some select sectors and people even while most of us end up poorer through higher costs. International trade has been a major generator of wealth since the end of World War II, with the United States as its biggest cheerleader. I’m afraid Trump intends to kill the golden goose, with severe economic consequences.
Undermining financial strength
The second economic crisis threatened by Trump is his promise to weaken the Federal Reserve. It will take some wise financial counseling to explain to Trump why his threats do not really help the United States. He has not shown evidence, however, that he can take that kind of advice, or learn from it.
I worry that over the next two years Trump will have the ability to reshape the Federal Reserve in ways that undermine one of the central bank’s key strengths – its independence from politics.
Janet Yellen, Chair of Federal Reserve
The Fed is the quasi-public, semi-mysterious, massively-powerful, independent central bank for the United States. It’s an “independent” regulator, meaning it technically doesn’t report to Congress or the U.S. president. Given its mystery and importance, critics on the Left and Right often seek to curb the power of the Fed. Anything that powerful must be part of some kind of conspiracy, right?
President-Elect Trump — who served as human fly-paper for the bad economic ideas of fringy cranks throughout his campaign — caught this wave too. He accused the Fed of being in the tank for the Obama administration. Like the Republican Party, the Democratic Party, the FBI, the Electoral College, and the media to name a few — the Fed — Trump complained, was part of an unfair conspiracy against him.
But then Trump went further down an even darker path in attacking the Fed. In “Donald Trump’s Argument For America,” released in the days before the election, he linked images of Fed Chair Janet Yellen to the well-known faces of financiers George Soros and Goldman Sachs CEO Lloyd Blankfein, as part of a “global elite” conspiring against ordinary Americans. All three are Jewish, of course, and the ad recalled anti-Semitic conspiracy theories that follow the vile and fictional “Protocols of the Elders of Zion.” Whether Trump claims that Yellen is in the tank for his opponents, or whether he winks knowingly at anti-Semites about a global Jewish conspiracy, he has set the stage to justify curbing the Fed’s independence.
This video:
This should trouble us tremendously. The U.S. is a country that — despite the confounding popularity of the Kardashians — retains an outsized role in the global economy. One of America’s greatest strengths as a financial power is the belief that its central bank is not unduly subject to political control from any particular party or faction.
Usually when we talk about policies from the Fed, we don’t focus on Democrats and Republicans or Liberals and Conservatives, but rather “Hawks” and “Doves.”
In simplest terms, a “hawk” tends to worry about inflation more than unemployment, and pushes the board to raise interest rates quickly enough to avoid unexpected inflation. A “dove,” conversely, worries more about unemployment than inflation, and would tend to want to keep interest rates low as long as possible, to juice economic activity even if it spurs a little bit of inflation. I’m simplifying here, but these are the broad strokes.
A key point, though, is that a Fed governor — whether hawk or dove — is supposed act independently from politics. Almost as important is the idea that a Fed governor seems to act independently from politics. We count on the appearance of independence as much as the reality.
The first guarantee of independence is that the seven board members, known as governors, serve 14-year terms, thus guaranteed to outlast any U.S. President. A bit like justices appointed to the Supreme Court for life, Fed governors therefore should not owe their ongoing positions to any particular political faction. The next guarantee of central bank independence is that the Fed Chair is nominated by the President from among the governors and gets appointed to a four-year term that does not coincide with a President’s four-year term. Janet Yellen, the current Fed Chair, plans to stay in office at least through her term in 2018.
Inflation spikes correspond with political interference with the Fed
The specter of political interference in Fed policy has darkened our political scene before. Economist and former Minneapolis Fed President Narayana Kocherlakota recently wrote about historical problems when the executive branch interferes with the US Fed. During and following World War II, the Fed kept long-term rates artificially low to allow the government to borrow cheaply. Inflation soared to nearly 10 percent by the time the Korean War began in 1950. Later, Narayana reports, Presidents Johnson and Nixon pressured the Fed to stimulate the economy, leading in part to astronomical inflation of the ’60s and ’70s that peaked at 14 percent in 1980.
With President Trump able to appoint a new Fed chair and vice-chair in 2018, plus the chance to fill two more currently open spots on the Board of Governors, a real point of pressure exists. By 2018, he will have appointed four of seven Fed governors. Would Trump show restraint, or would he pressure the Fed to support his agenda?
Authoritarians, as a rule, cannot stand independent central banks. They don’t like the idea that some entity independent of them can wield vast power over both the real economy and banking institutions.
The U.S. enjoys a massive financial subsidy because, up until now, the wealthy of the world trust that our currency will not be suddenly inflated away to worthlessness. An independent Fed assures the world that authoritarians cannot bend monetary policy to their will. But authoritarian regimes, the kind that curb central bank independence, never get trusted with this kind of financial status, as a place where global holders of capital want to park their surpluses.
There are many areas where Trump’s actions might undermine our strengths as a country. Attacking the independence of the Fed is one of the most important ones to watch out for.
Threatening bond markets
Last but certainly not least, it takes a long time (dating back to Alexander Hamilton!) to build up the kind of credit the United States gets for political independence in monetary policy, as well as the kind of trust that attracts global capital to fund our government. It probably only takes one aggressive authoritarian to make that capital flee. And if it flees quickly, that alone can cause a financial crisis.
During the campaign last Summer, Trump argued that if the US borrowed too much, he would simply re-negotiate our debts.
“I’ve borrowed knowing that you can pay back with discounts. [As President,] I would borrow knowing that if the economy crashed, you could make a deal.”
Um. Wut.
Holy fucking shit. Gah. That’s not how it works with the US bond market. You don’t default (that’s what “making a deal” means) on the US bond market. Or at least, you don’t get to do it more than once. Because suddenly you’re Argentina, or Ecuador, or Ukraine when it comes to your ability to borrow.
He’s talking about treating our country like one of his Atlantic City casinos, walking away and stiffing our lenders. If bond investors took him seriously and literally (like I do) we’d have an immediate financial panic. Personally I think Trump’s attitude towards US sovereign debt is the scariest thing he’s ever said, in terms of a threat to the continuation of the United States of America as we know it.
And that’s saying a lot, considering what’s come out of his mouth or Twitter account.
Who will be to blame?
If an economic or financial crisis occurs under a Trump administration, I don’t see the events as something that would cause Trump to reflect on his actions or take responsibility for his errors. I think he will see the crisis he caused as an opportunity to blame his enemies.
An economic crisis – like a security crisis – can make people desperate for action, any action (however rash) to make it better. People who are angry or fearful about losing their jobs or financial status or fortunes are more likely to turn a blind eye to constitutional encroachments.
Those constitutional encroachments are in the end what I’m most worried about, and are what I will write about next.
I can’t predict the future, but we know every US President is tested by security crises – whether domestic or foreign. President Trump’s four years will be no different.
We don’t know if the biggest threat will come from domestic disturbances or jihadists at home. We don’t know whether the crisis will be abroad, like a foreign military threat. We do know there will be heightened moments during and after a security crisis when we as civilians are especially frightened for our safety.
Those are the times when society turns eagerly to the institutions with a monopoly on the legitimate use of force – institutions like the police, the FBI, spy agencies, the National Guard, and the Army.
It’s precisely at that time that we are most vulnerable to leaders’ worst instincts. It’s then that we willingly vote in – with few Congressional dissenters – the Patriot Act, to give up our protections from domestic surveillance. When we are under direct attack we (many of us) seem willing to condone the creation of Japanese internment camps.
It’s then that we applaud extrajudicial interrogation techniques – like waterboarding – that authoritarians seek.
The Turkish premier Erdogan is right now using the crisis opportunity of the failed coup in Turkey to jail or fire independent voices from the universities, the press, the military, the judiciary, and the civil service.
Former Congressman, Obama White House Chief of Staff, and now mayor of Chicago Rahm Emanuel famously counseled, “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.” [1]
In the authoritarian’s hands, what use can he make of that inevitable security crisis? What opportunity will he take to do the things he could not do before?
When the next lone-wolf jihadist shoots up a movie theater, will that be the pretext that Trump needs to register all Muslims for a government database as Trump says he wants to do? When the next dead-ender pledges allegiance to ISIS on Facebook just before shooting up a mall, does that mean Homeland Security shuts down all immigration from majority Muslim countries as Trump says he wants to do? When Russian irregulars in civilian clothes in Estonia, Latvia, or Lithuania ask for Russian military intervention to protect their rights, and Putin responds with another opportunistic strike, how does NATO, and our country, respond?
Trump does not have to enact a false flag attack – As Putin’s FSB seems to have done – in order to take advantage of a security crisis to enact his plans. We will have incidents around which he and his national security team can build a case for breaking with constitutional norms.
Trump has told us over and over how he yearns to bully perceived enemies. He has demonstrated a vengeful character throughout his campaign.
We know that vengeful instinct because we’ve even felt it ourselves, when we feel attacked. What will we give up, that we can’t get back again, when we’re most fearful?
In January Trump will control the awesome power of the US national security apparatus. He will wield more power to threaten, detain, injure, and kill people than anyone else on the planet. This is part of why I can’t sleep.
We need to get more sophisticated in our conversation on government regulation, or interference, in private business. Despite President Trump’s statements and possibly intentions to the contrary, we’re witnessing a massive increase in federal interference in civil society.
Beyond the semantic question of what “75 percent” really means here, I think we have to reach for a deeper understanding of how government interacts with business to properly interpret Trump’s promise, tactical style, and effects.
empowerment.
