Mohamed A. El-Erian
It is still early days, but a picture of the economic policy approach favored by President Donald Trump is gradually coming into focus. Here are some of its key features as signaled by the words and actions of the administration in its first week in office:
It is targeting higher growth and greater job creation using what can be called an “import- substitution-plus” approach to policy making, together with elements of an industrial policy:
In a manner reminiscent of traditional import-substitution strategies, the Trump administration is seeking to attract to the U.S. production facilities that serve the domestic market from abroad. Also, and this is where the “plus” comes in, it is seeking to bring to America foreign-based production facilities that serve non-U.S. markets. To amplify the desired impact on jobs and wages, the administration is adding elements of industrial policy in its interactions with certain sectors (automobiles, for example).
It operates both at the micro and macro levels:
This focus highlights the mix of macro and micro interventions being pursued by the administration. The macro level is dominated by four strains: deregulation, tax reform, infrastructure and changing incentives to favor domestic production and the consumption of U.S.-made goods and services. The micro combines sectoral emphasis with the selective application of moral suasion to individual companies and even specific projects.
It actively uses signals and narratives as economic policy tools:
Conventional economists will tend to dismiss the overall impact of such micro measures, but others will note that the signaling effect could be consequential -- through their impact in altering narratives, expectations and behaviors at the more general level. This effect is turbocharged by the president’s repeated emphasis on jobs and the active use of a range of communication tools, including more informal ones such as Twitter.
It is underpinned by a carrot and stick philosophy:
The message is amplified by an evolving implicit contract between the administration and the business sector that is underpinned by carrots and sticks -- notably the incentives of less onerous regulation and lower taxes and the threats of shaming and punishing businesses that aren't sufficiently responsive to the admonition to “put America first.”
When it comes to cross-border relationships, the administration isn't shy about upending multidecade constants in U.S. economic policy making:
This approach seemingly also extends to a willingness to depart from long-established rules and practices governing cross-border relationships -- from talking down the dollar and withdrawing from the Trans-Pacific Partnership to threatening to dismantle the North America Free Trade Agreement and to impose tariffs that would be inconsistent with commitments under the World Trade Organization. In the process, and as part of a negotiating strategy with other countries, the administration is signaling its willingness to question and upend, if necessary, deeply engrained principles of international economic management.
It remains to be seen how all this will come together, especially as many policy intentions haven't made the tricky transition from announcement to detailed design and sustained implementation. Also, Congress will have a say in this process. Despite that, some economists are already comparing the evolving U.S. economic policy approach to those that were pursued in Latin America by populist governments. Veterans of development economics, in particular, are being reminded of the import-substitution growth models that were pursued, on more than one occasion, by such countries as Argentina and Brazil.
But that comparison could be premature, and perhaps even misleading; and not just because of the very different initial economic and financial conditions prevailing in the U.S.
If sustained, the impact of Trump’s approach would extend well beyond changes to the internal workings and orientations of the U.S. economy, including how it picks and chooses the way it interacts with the global economy. Given that the U.S. is at the core of the international monetary system, what happens here would not stay here. It would most likely trigger reactions from other countries while potentially also shaking the conventional functioning of a rule-based global system.
If this is managed in a collaborative manner that balances countries’ domestic and global responsibilities, the result could be the type of generalized policy revamp that is critical for sustaining high and more inclusive growth and for delivering genuine financial stability. But if it is done in an internationally disjointed and uncoordinated fashion, the result would tend toward greater global economic fragmentation. This would reduce both current and future growth and prosperity while increasing the risk of unsettling financial instability down the road.