It will succeed before it fails

By Wolfgang MUNCHAU

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The great physicist Richard Feynman once wrote: “I think I can safely say that nobody understands quantum mechanics.”

I can say safely that nobody understands the economic and political consequences of Donald Trump. I am not likening his policies to one of the greatest scientific discoveries of all time. But what the two have in common is radical unpredictability. In quantum mechanics, unpredictability arises at the time of measurement. Economists have the same problem with Trump. We cannot look at the current slew of economic data to see where this is going. If you are an anti-Trump economic evangelist, you are very likely to get things wrong, just as economists did with Brexit or Trump’s first term.

I expect that the US economy will probably be fine. Before you jump to the conclusion that I am a Trump supporter, I can assure you that I am not. Nor was I a Brexit supporter, though I was critical of the self-defeating arguments of the Remain campaign. I see similar dynamics at work in the US right now. Trump’s critics, both in the US and Europe, keep on underestimating him with predictions of imminent gloom.

They predicted that his tariffs would raise inflation. So far that has not happened. I don’t think it will. Some also predicted that the US stock market would soon crash. In fact, Europeans celebrated the collapse in the S&P 500 that followed the Liberation Day tariffs. They erroneously relied on the markets as a corrective mechanism to frustrate Trump’s tariffs. That did not happen. The markets recovered and never looked back. The overall level of tariffs today is at least as high as those announced by Trump on 2 April. They are bound to get higher still, now that he has slapped a 100% tariff on branded pharmaceutical products and a 50% tariff on Ikea furniture.

It does not look like the stock market will do us the favour of crashing during the Trump presidency. It is quite possible that the S&P 500 will rise from its current level of around 6,400 to 10,000. Market valuations could rise from the stratospheric to the mesospheric to the exospheric. Prices will crash eventually. But that might not happen until the next Democratic president.

The economic success I expect to see is that of a last hurrah of a declining power. It will be a hell of a party, with the fake glitter of a Mar-a-Lago ballroom: lights, music and attention-deflecting smoke and mirrors.

John Maynard Keynes once said all politicians were under the influence of long-defunct economists. We can safely say that Trump is not. The Left hates him, of course. But so does the old Right. Monetarists would have been aghast at his assault on the independence of the Federal Reserve. Virtually every school of conservative economic thought, from the ancient to modern, would have rejected his tariffs. Or his unfunded tax cuts. Or the stablecoins through which he wants to attract investment in the US debt markets. You can’t even caricature his policies as “businessman economics” either. Businesspeople tend to be fiscally conservative.

The reason I chose not to underestimate him is that his big tax cuts, extreme deregulation and tariffs will turn the US into a super-competitive economy at the expense of other Western countries. We Europeans still live in the technological Stone Age, but at least we used to have competitive industries. We are now being squeezed by the US and China both in innovation and competitiveness.

China’s economic policies could not more different than Trump’s, but they share one important trait: they both ignore the advice of mainstream macroeconomics. President Xi Jinping is an old-fashioned mercantilist. He maximises exports and minimise imports. He does not care what this does to the rest of the world. China has not freed up its capital markets. The Chinese renminbi is locked in a semi-fixed exchange rate against the dollar. China unashamedly picks winners. Were we not told that government should never, ever do this? China’s central planners picked the electric car, the entire battery supply chain behind it, and solar panels. The problem with picking winners is not the act of picking. It is about what you pick. We Westerners should perhaps not pick winners. China did better.

Trump is picking fossil fuels. If your time horizon is four years, this is going to be fine. Cheap oil and gas fuel the fire of American entrepreneurialism. But China’s energy policy is much more sophisticated. They still burn coal, but they invest into renewable energies like nobody else. One of the water dams being planned will have a capacity as large as the entire energy consumption of countries such as Greece.

To use Trump’s own words: China has all the cards. It has more people; it has a work ethic that has been lost in the West; it has industrial supply chains; and it is willing to shift resources from one part to another in our economy with a ruthlessness that our democracies cannot replicate. I would rather live in Europe or the US than in China. But I am not optimistic about the long-term prospects of the West.

I have no doubt that Trump’s economics will fail in the end. It will not become the foundation of a new economic era; he will not match Margaret Thatcher and Ronald Reagan in influencing economic policy in the West for decades after they left the stage. They both failed before they succeeded. With Trump, it is more likely to be the other way round.

What I am sure of, however, that he will fail in his foreign policies even in the short run. The reason is a complete lack of interest in strategic alliances, and in strategic action in general. The only chance the democratic West has against the rise of China and its global partners-in-crime is as a well-managed team.

“The only chance the democratic West has against the rise of China and its global partners-in-crime is as a well-managed team.”

I am not just talking about his delusional announcements: that it would take him 24 hours to cut a peace in deal in Ukraine. Or his claim at the end of last week that we are about to have a peace deal in Gaza. He claims to have ended seven wars. He has not. Nor has he saved millions of lives. His “America First” agenda is by definition not one of foreign policy. His only foreign policy objective is to get the Nobel Peace Prize.

Trump’s delusions are easy to dismiss, but they have will have serious effects. The first casualty of Trump’s foreign policy is Europe. Europe must be very careful about Trump’s latest policy u-turn on Ukraine. This looks like a setup to me. Don’t fall for the “Ukraine is winning” narrative that has recently popped up out of nowhere. Nothing substantive has changed on the ground. I think Trump is setting Europe up for failure by insisting that Ukraine can win the war, and that Europe should pay for it. If it fails, as I believe it will, he can blame Europe.

There is no way that Europe can make itself independent of Russian oil with the speed that Trump demands. He knows that, of course. Europe is financially too weak and politically too divided to be able to fund the Ukraine war on its own. This is still true if the EU commission ends up sequestering €200 billion in Russian reserve assets currently frozen in EU bank accounts. I concluded a long time ago that, because they all think in national terms, European political elites are incapable of strategic geopolitical thought. A Franco-German fighter project is on the rocks right now, because the two countries cannot agree on the work share. Pettiness has a habit of intruding all the time in European politics, even during emergencies.

Japan is as weak as Europe. It too has an outdated industrial base and a declining population. Under Trump, the West will fragment into a disparate collection of failed states. An inward-looking US will remain its most formidable power, but not a leader. The US will look like the Norma Desmond character from Sunset Boulevard, who thought that she was still big, and that it was the movies that got smaller.

Movie directors know about turning points — the peripeteia in classical Greek drama — where events shift, either in the positive or the negative direction. To his supporters, Trump may well the person who arrests the decline of civilisation. They will end up disappointed. So may his detractors who see his presidency as a phase of comic relief, a moment that will eventually pass before the final happy ending sets in.

My guess is that America will not be great at the end of the MAGA episode. But America will be OK, if not great, whereas Europe will be neither. What we would really need is a reboot, but we are afraid. There was a tradition in European intellectual thought that started with the acknowledgement that you don’t know. Scio nescio, Plato wrote. Feynman’s comment about quantum mechanics is in that spirit too. That state of mind is a precondition for success. You start at zero. It is where the Age of Enlightenment began. It is where China started too.

Trump is the very opposite of this. The real tragedy is that his detractors, are too.

Original article: Why economists get Trumpism wrong – UnHerd