Tag Archives: economy

Economics And The Rule Of Law

One of the multiple failures of the not-very-bright people who are currently running/ruining our government is their inability to connect the dots, to understand that when they set out to undermine X, the consequences of that assault aren’t just limited to X. We live in a complex and interrelated world, and failure to understand those complexities can lead to unanticipated damage.

The Trump administration consistently displays enormous ignorance of the way the world actually works. That ignorance–that disdain for pesky things like expertise and evidence–is particularly evident in Trump’s approach to economic policy. It isn’t just his insane belief in tariffs (a belief shared by no economist, conservative or liberal). It isn’t just his echoing of longstanding Republican insistence that tax cuts for “job creators” will grow the economy–despite ample evidence to the contrary. (Of course, even if those tax cuts don’t lead to economic growth, they do lead to the growth of generous political contributions…)

It isn’t even the GOP’s failure to understand the dire economic and civic consequences of further impoverishing citizens who are already struggling in order to fatten the wallets of the already wealthy, a failure once again demonstrated by Trump’s “Big Beautiful Bill.”

The most dangerous failure to connect the dots is the less-noted but even more consequential failure to understand the economic importance of the rule of law, or to recognize how Trump’s assaults on the law will dramatically and inevitably undermine the nation’s economy.

I’ve previously explained why widespread obedience to the rule of law is an essential underpinning of liberty and civic equality–why it is at the very basis of what I call “the American Idea.” But it is equally important to understand why the nation’s economic health is absolutely dependent upon a government that respects the rule of law.

Trump’s autocratic attacks on–and utter disregard for– the rule of law are a direct threat to the willingness of foreign investors to buy and hold American  stocks and bonds. When those investors see Trump and his administration unilaterally defaulting on contracts, arbitrarily withholding funds that have been properly and legally appropriated, ignoring court decisions and attacking judges, deporting people without even the pretense of due process–while at the same time providing special treatment for donors, favored companies, and White immigrants– those investors re-think the safety of their investments.

Why should we care?

Among other things, foreign investors inject capital for increased production and economic expansion. They create new employment opportunities and facilitate technology transfer. Foreign investors often bring in advanced technologies and expertise, fostering innovation and boosting productivity in local industries. When foreign businesses generate profits, they contribute to U.S. tax revenues, providing American government with resources to fund public services.

That investment is at risk. As one economist put it,

The erosion of the rule of law under Trump can have enormous economic significance for a foreign government, investor, or company with stakes in our economy. They now know that the U.S. government may ignore its contracts with them or decide not to enforce their agreements with others when it serves the political or personal interests of the president. That’s the way the world works in the kleptocratic dictatorships in Russia and Venezuela, and virtually no one invests in their stocks and bonds.

By following their lead, Trump and his apprentices risk devastating capital flight that could leave many of our leading financial institutions insolvent. In addition to his deeply destructive tariffs, Trump’s sweeping campaign against the rule of law in the United States has raised the economic stakes from a rocky business cycle to a potential financial and economic meltdown with terrible consequences.

America’s respect for the rule of law is the reason foreign investors have felt safe parking their money here, and all Americans have benefitted from our role as a safe place in the global economy.

Anyone who has taken Economics 101 understands that the rule of law is fundamental to business and investment. It creates the predictable, stable, and fair environment that economic activity depends upon. Without predictability and stability,
businesses and investors are unable to make long-term plans and commitments. Unless laws governing commerce are clear and consistently enforced– and not subject to arbitrary changes– companies can’t assess risks and returns.

You would think the Republicans who fancy themselves protectors of private property and capital would understand that it is the rule of law that protects that private property from seizure or infringement, and that investors–foreign or domestic– are highly unlikely to put money into an economy where assets can be seized or destroyed without due process.

When the GOP was a party, and not a cult, it understood that.

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The Problem With Mad Kings

Back in 2009, I wrote a book titled “Distrust, American Style,” in which I explored the role of trust in government and civil society. My research for that book involved dipping into the considerable scholarship on the subject, and confirmed the immense importance of trustworthy behavior by both governments and the various elements of our society. I traced the negative effects of then-emerging examples of untrustworthy behaviors–by businesses like Enron, by a variety of sports figures, and by religious figures. (Catholic Church scandals were in the news daily.)

I did not, however, turn my attention to the importance of trust to national economic performance. Paul Krugman has recently filled that void, explaining the likely, significantly negative consequences of having a madman and would-be king occupying the Oval Office.

Krugman began by focusing on the stupidity of the law firms that “bent the knee” to our mad king–pointing out what should have been blatantly obvious (and raising doubts about the intellectual and analytic bona fides of the fat-cat partners who cowered before Trump’s patently illegal threats.)

Less than a month ago many of America’s biggest law firms made deals with the White House in which they promised to end diversity, equity and inclusion (DEI) practices and to devote substantial resources to pro bono work on causes the administration supports. It was a shameful capitulation.

It was also stupid. Anyone who looked either at Donald Trump’s personal history or the history of authoritarian regimes in general would have realized that there’s no such thing as a deal with this administration. Whatever you think Trump and co. have agreed to, they will feel entirely free to make new demands whenever it suits them.

Those firms should have known that giving in to Trump just signals weakness, which leads him to demand further concessions.

Then Krugman explains why Trump’s mercurial behaviors are such a threat to the American economy. U.S. efforts to build an anti-China trade alliance are doomed to failure, Krugman says,  “Because nobody with any sense trusts the Trump administration to honor the terms of any deals it makes, whether they’re deals about pro bono work with law firms or tariff deals with other governments.”

And as more and more people realize that Trump and his minions can’t be trusted, the damage will spread from trade to finance. The international role of the dollar and, eventually, America’s ability to service its debt are very much at risk.

Why can’t Donald Trump be trusted? Partly because he’s Donald Trump. But even if he weren’t, absolute monarchs — which is what Trump is trying to become — are fundamentally untrustworthy. The ruler may sometimes choose to honor his promises, but it’s always his choice — a choice that can be changed at any moment. And his untrammeled power makes the nation he rules weaker, not stronger.

Krugman uses historical examples to buttress his central argument that reliance upon a nation’s commitment to the rule of law–a commitment that promises stability–is central to economic growth and prosperity. And as he says, Trump will be unable to make trade deals because nobody trusts his promises.

The international role of the dollar depends in significant part on the belief that the U.S. government can be trusted to behave responsibly. “Among other things, international investors normally assume that the president will respect the independence of the Federal Reserve and refrain from, say, arbitrarily rewriting the terms of federal debt.”

Krugman ends his economics lesson by writing that, “Even now, I don’t think businesses, investors and the public in general fully appreciate what it means that we’re all subject to the whims of a mad king. But they’ll learn.’

Actually, there are indications that the more sophisticated investors and businesspeople are beginning to understand the enormous consequences of installing this madman in office, and of surrounding him with sycophants and clowns unable to restrain his incoherence.

But I’m quite sure Krugman is correct when he says that the public in general doesn’t “get it.”

A couple of days ago, I quoted Frederich Hayek for his analysis of the conditions giving rise to the emergence of “the worst.” They were 1) a dumbed down populace, 2) a gullible electorate, and 3) scapegoats on which that demagogue can focus public enmity and anger. MAGA voters have proved Hayek prescient. Millions of Americans lack even rudimentary civic and economic literacy, and have been kept gullible by media outlets that tell them what they want to hear.

And as a recent Facebook meme has it, “This is all so unfair to people who were just voting their racism.”

Sic transit America…

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Unintended Consequences?

One of the dangers of even thoughtful policymaking is the possibility of unintended consequences; as I used to tell my students, even the best-intended legislative efforts can create unforeseen “spinoffs” that range from unfortunate to truly damaging. That’s why careful attention to policy details, consultation with people having expertise on the subject, and thorough review of available evidence are all so important.

So what happens when people in positions of authority are incapable of thoughtful policymaking and dismissive of evidence and expertise? We are about to face the consequences of policymaking by ignorant egomaniacs, and Paul Krugman has identified some of the most obvious.

Krugman notes that the new PM of Canada has ordered a review of that country’s plan to buy a substantial number of U.S.-made F-35 fighter jets, joining European nations that are similarly reconsidering their dependence on U.S. weapons.

This turn away from military dependence on the U.S. is understandable. America is no longer a reliable ally to the world’s democracies; indeed, between Trump’s turn toward Putin and his talk of annexing Canada and Greenland, we don’t look like an ally at all. Rumors that U.S. jets have a “kill switch” that would allow Trump to disable them at will are probably false, but sophisticated military equipment requires a lot of technical support, so you don’t want to buy it from a country you don’t trust.

He then considered several other emerging responses to the chaos being caused by our mad kings, pointing out that a nation “that can’t be trusted to honor agreements or follow the rule of law has to have monetary as well as political and diplomatic consequences.”

Several of those monetary consequences will be very damaging. Krugman says he’s been exploring the available data, and “U.S. exposure to foreign revulsion looks quite large.”

Military hardware isn’t the only export likely to suffer from our new rogue nation status. Our trade deficit in goods is partly offset by a surplus in services trade, but several of our major service exports will definitely be hurt by America’s turn to the dark side.

One of these is education. Many foreigners come to America to study, attracted by the quality of our colleges and universities. In 2023, the most recent year for which data are available, they spent more than $50 billion. But if you were a foreigner considering study in the U.S. next year, wouldn’t you be worried that you might find yourself arrested and deported for expressing what the current administration considers anti-American views? I would. So we can expect a hit to higher education, which, although we rarely think of it this way, is a major U.S. export.

Personal travel — basically tourism — was even bigger, more than $100 billion. But you can be sure that we’ll be seeing a lot fewer Canadians this year and next. And it won’t just be Canadians reconsidering their plans.

Media is already reporting cratering European tourism.

Krugman admits that he’s much more worried about Trump’s threat to our democracy than his bad economic policies. He also notes that– even in purely economic terms–the self-inflicted damage from tariffs and deportations is likely to outweigh the costs caused by other countries’ loss of trust in the United States. That said, those costs are real.

One way to think about this is to say that Trump is doing to America what Elon Musk is doing to Tesla, destroying a valuable brand through erratic behavior and repulsive ideology. Did I mention that Tesla sales in Europe appear to be cratering?

True, there are differences between a private business and a nation-state. I don’t think people visiting Tesla showrooms are subject to random arrest, or that Musk will kill your car if you say something he doesn’t like (although to be honest I’m not entirely sure on either count, especially since Musk seems to be running much of the government.) On the other hand, Tesla depends a lot more on buyer goodwill than the United States as a whole does.

Still, Trump’s belief that America holds all the cards, that the rest of the world needs access to our markets but we don’t need them, is all wrong. We are rapidly losing the world’s trust, and part of the cost will be financial.

I think it’s unlikely that either of our mad megalomaniacs considers the probable or improbable consequences of their actions. The hard core of MAGA cultists will refuse to acknowledge even the outcomes that negatively affect them (and the data suggests that Red states will likely bear the brunt).

We can only hope that a sufficient number of “softer” Trump supporters will realize that the costs of voting their racism have become too high.

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Taking Credit

What do scolds like yours truly mean when we bemoan low levels of civic literacy ? Rather obviously, it’s an accusation of  lack of knowledge of America’s legal/philosophical framework–the Constitution and Bill of Rights, an understanding of what is meant by the “rule of law.” But it’s also, increasingly, a reference to citizens’ lack of historical knowledge and worrisome ignorance of the realities of the governing and economic environment they inhabit.

Civic ignorance isn’t all the fault of individuals who simply don’t care or don’t pay attention. For many years, high schools have neglected civics instruction and whitewashed America’s history. And the fragmented nature of our information environment positively encourages misunderstanding –or often, offers politically-motivated mythology–about the performance of Presidential administrations.

We’ve just emerged from an election in which Trump benefited handsomely from that latter ignorance, as voters blamed Biden for an inflation that was worldwide, even though, under his administration, the U.S. brought it under control far more quickly than other nations managed to do.

Trump’s narrow win points to a major problem posed by Americans’ low levels of civic literacy–the erroneous assignment of credit and blame.

Simon Rosenberg recently considered that problem.

Joe Biden and Kamala Harris inherited one of the worst first days an American Presidential Administration in our history. Trump left us a dadly bungled pandemic response that caused hundreds of thousands of Americans to die unnecessarily, an economy in deep recession and a global economy teetering, a Capital City and our democracy that had just been attacked by Trump and his mobs. What Joe Biden and Kamala Harris walked into on January 20th was without doubt one of the worst first days an American Administration has ever faced.

Trump and Vance will inherit one of the best. The Biden-Harris job market has been the best since the 1960s. Wage growth, new business formation and the # of job openings per unemployed persons have been at historically elevated levels. Inflation has been beaten, gas prices are low, interest rates are coming down and our recovery from COVID has been the best of any advanced nation in the world. The dollar is strong. GDP growth has hovered around 3% for all four years of Biden’s Presidency and the stock market keeps booming. The uninsured rate is the lowest on record. Through historic levels of domestic production of renewables, oil and gas America is more energy independent today than we’ve been in decades. Crime, overdose rates, the flows to the border and the deficit have come way down. Biden’s big three investment bills are creating jobs and opportunities for American workers today and will keep doing so for decades if Trump doesn’t gut them. We’ve begun stripping away the requirement of a four year college degree for government employment and other jobs too. We’ve lowered the price of prescription drugs, capped insulin at $35 and this year all seniors will enjoy a $2,000 Rx price cap. The Iranian-Russian-Hezbollah-Hamas axis in the Middle East has been deeply degraded. The Western alliance has been rejuvenated…..

Rosenberg morosely itemizes what we know is coming: Trump will take credit for Biden’s accomplishments. If he doesn’t manage to tank the stock market, its health will be due to him.

The economy will be strong due to him. Crime will be down due to him. Seniors will have their prescriptions capped at $2,000 due to him. Bridges will be built due to him. Record domestic gas and oil production will happen due to him. Gas prices will be low due to him. Iran and Russia will be weakened in the Middle East due to him…….

Rosenberg writes that Americans need to engage in a “long and deep conversation” about why the story of the Biden-Harris administration failed to resonate with the public–why so many Americans simply failed to understand its really remarkable performance–and dramatically mis-remembered the chaos and ineptitude of the prior Trump administration. As Rosenberg writes,

There has been one big story in American politics since 1989 when the Berlin Wall fell – Democrats have made things better for the American people, Republicans have made them worse. We’ve repeatedly brought growth, lower deficits, rising wages, American progress. Republicans have brought 3 recessions in a row, higher deficits, American decline and now unfathomable MAGA ugliness and extremism.

Americans’ confusion of celebrity with actual accomplishment is responsible for some of the phenomena I lump under “civic illiteracy.” If Joe Biden had the glamour and oratorical skills of a Barack Obama, perhaps the successes of his administration would have been more widely understood.

Trump will take credit for Biden’s accomplishments. Those of us who know better need to be loud and persistent truth tellers.

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The Big Sort

I have frequently cited a 2009 book by Bill Bishop, titled “The Big Sort.” Bishop pointed to a then-emerging trend of “voting with one’s feet”–the tendency of many Americans to relocate to places that they find philosophically and politically compatible. The consequences of such sorting can be troubling. What happens when most neighbors agree with your outlook and values, reducing the need to accommodate disagreement or defend your woldview?

I read “The Big Sort” when it first came out, but I still ponder many of the issues it raised. One issue that it didn’t raise, however–at least, I don’t recall Bishop paying attention to it–involved “macro” outcomes: what if the sorting led to very different economic and quality-of-life differences between what we’ve come to identify as “Red” and “Blue” parts of the country?

More than a decade after the book, we are seeing major differences emerge. A recent column by Michael Hicks focused directly on that outcome. As he writes,

Of the 20 richest states today, 19 are solidly Democratic. Of the poorest 20 states, 19 are solidly Republican. The GOP dominates in poor, slowly growing states, while the Democrats dominate politics of prosperous, faster-growing states.

Hicks notes that these differences are largely an outcome of the nationalization of our politics. In former times–in fact, up until the late 1990s– there were conservative Democrats and liberal Republicans. But then, state parties began to align with national politics.

Even races for local municipal government tend to be nationalized. State and local issues are often ignored, or barely discussed in primary or general elections. The homogeneity of national politics will naturally cause parties to represent more similar places.

Hicks then echoes Bishop, finding household sorting by politics. “Though most sorting happens at the sub-state level” (presumably, rural and urban) “the nationalization of politics means that state borders now affect household location choice.” Voters are choosing the political landscapes they prefer.

Hicks notes that when he began researching state and local policy some quarter-century ago, state legislators focused more on local issues; now, many take their “legislative marching orders from national think tanks or national parties. Today, elected leaders from both parties are expected to advance similar legislation, typically written by think tanks, everywhere at once.” (That is certainly the case in Indiana, where our dreadful General Assembly obediently does ALEC’s bidding.)

Education, Hicks tells us, is the most consequential policy difference between thriving Blue states and struggling Red states like Indiana.

The most likely cause of divergence between rich and poor places is the fact that human capital — education, innovation and invention — replaced manufacturing and movement of goods as the primary source of prosperity. In other words, places that grow will collect more human capital. However, the educational policies pursued by both parties are vastly different.

The GOP has largely tried to adopt broad school choice, while cutting funding to both K-12 schools and higher education. The Democrats have largely eschewed school choice, but amply fund both K-12 and higher education. Today, 17 of the 20 states with high educational spending are Democratically controlled and 17 out of the 20 lowest funded states are GOP strongholds.

There’s more to education than spending. Still, higher educational spending, even if it means higher tax rates, is leading to enrollment and population growth. Educational attainment differences alone explain about three quarters of the difference in per capita income between states.

At the same time, school choice effects are smaller than almost anyone hoped or expected. Today, it’s clear that the average student in private school underperforms their public school counterparts (charter schools tend to out-perform both). So, if poor states spend less on education and rely more on school choice, they will become poorer than states spending more on public education.

Economists have been saying this for three decades, with little effect. The prognosis is simply that poor states like Indiana are going to get poorer for decades to come while rich states will grow richer.

Here in Indiana, incoming Governor Braun has made expansion of the state’s voucher program a key priority. He wants to make it “universal,” meaning the eradication of income limits. Indiana’s program is already disproportionately used by upper-middle-class parents; Braun’s proposed giveaway would allow participation by even more privileged families (So much for the pious assurances that vouchers would allow poor children to escape “failing” public schools.)

Vouchers don’t improve educational outcomes, and they drain critical resources from the public schools that continue to serve the overwhelming majority of Indiana children.

If Hicks is reading the data correctly–and I believe he is–states like Indiana will continue to decline, and educated citizens will choose to move elsewhere.

Continuing the “sort.”

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