A few predictions (Nothing will change)
By Scott Sumner
A year from today everything will be much clearer. I’m not sure what will happen, and I’m not much of a forecaster, but I’ll take a shot. I think the safest prediction one can make is that nothing will happen, or at least the things people expect to change, won’t change very much. I’ll focus on three issues, monetary policy, nationalism and neoliberalism.
1. I predict that monetary policy will become a hot issue at some time in the latter part of 2017. I base this on two factors; Janet Yellen’s term will end in January 2018, and it’s likely that some sort of economic policy will be put in place by then (perhaps corporate tax reform plus deregulation.) Attention will then turn to the Fed, and it’s role in helping or hindering Trump from reaching his growth target.
My prediction is that Fed policy will not change. Trump may prefer a more dovish Fed, but I don’t think he knows how to get it. “Fedborg” (i.e. the Fed establishment) will maintain the 2% inflation target, regardless of whether Trump reappoints Yellen or not.
2. Nationalism seems to be on the rise throughout the world. But I don’t expect it to take hold in America.
There are two possible types of American nationalism. One type, dubbed “white nationalism” is associated with alt-right figures such as Steven Bannon. A second type might be called “patriotic nationalism” or “rainbow nationalism” depending on whether you are on the right or the left. It includes all Americans.
I don’t think that white nationalism can succeed in America because the concept of racism is too discredited. The millennials are particularly opposed to discrimination and open to engaging with people of different races.
Patriotic nationalism is probably the sort of nationalism that Trump would claim to believe in (his actual statements are all over the map.) In this vision, the relevant “tribe” or “nation” is not white Americans, but rather all Americans—the whole rainbow coalition. This nationalism is about putting America’s interests ahead of the rest of the world.
I see two problems with this sort of nationalism gaining much traction. First, people in America don’t feel a strong tribal connection with others of different races and backgrounds. A white farmer or factory worker in Ohio probably feels more affinity for a white farmer or factory worker in Ontario, than for a black in Mississippi, or a Asian in Silicon Valley, or a Cuban-American in Miami. Strong nationalism is more likely to occur in countries where the “nation” and the “state” more closely coincide, such as Japan.
The second problem with patriotic nationalism is that to a much greater extent than Trump understands, America’s interests coincide with the world’s interests. Getting growth up to the 4% that Trump is looking for is more likely to occur with freer trade and an increased rate of immigration, especially highly skilled immigrants. We also benefit from NATO and the EU not falling apart. Yes, at the margin there are conflicts—we’d like NATO members to up military spending to 2% of GDP. But this is green eyeshades stuff, nothing to build a powerful nationalistic movement around.
3. As nationalism is on the rise throughout the world, neoliberalism seems to be on the decline. My prediction is that this decline will eventually be seen as a myth. Neoliberalism is not going anywhere. As an analogy, some thought the conservative wave that brought Reagan and Thatcher to power would “end welfare as we know it.” There really was a conservative wave in the 1980s, but today the world’s major economies spend just as much on social programs, if not even more than in 1980.
People often say that Trump is an unprecedented figure in American politics, at least since the days of Andrew Jackson. But of course if you look overseas you see that Trump is a very common type of politician, which frequently pops up in places like the Philippines, Venezuela, Argentina, Italy, etc.
But there’s another way of thinking about the Trump phenomenon; consider the movement, not the personality of the leader. Here I’m thinking of the Syriza party in Greece, which took office basically promising to “drain the swamp” in Greece, i.e. it would govern in an entirely new way. That sounds like Trump. Of course we all know what happened next. Syriza threatened to blow up the eurozone if the northern Europeans weren’t more reasonable. The northerners called Syriza’s bluff, and the Greek government backed off. The northerners then demanded that the Greeks take their austerity, and the Greeks meekly obeyed. I don’t think many Greeks view neoliberalism as a spent force—from their perspective it looks like a colossus that rules the entire planet, except a few outposts like North Korea, Cuba, and Venezuela.
I predict that neoliberalism may end up being something like the social welfare state in advanced economies—an immovable object that must ultimately be accommodated. We are too addicted to all that cheap Chinese stuff at Walmart. Trump will take a few pot shots at neoliberalism, which will cause hot-heated pundits (like my alter ego over at TheMoneyIllusion) to overreact and warn of the end of the golden age of globalization. But in the end Trump will back off and accommodate the establishment, just as he recently replaced General Flynn with a much more reasonable NSC head.
More specifically, in 4 years:
1. The US will still be accepting about one million immigrants per year.
2. Less than 15% of the illegals will have been deported.
3. Average tariff rates on US imports will not change very much. (Say less than 1 percentage point for this and the subsequent predictions)
4. The trade deficit won’t change very much as a percent of GDP
5. Average GDP growth won’t change very much from the past 4 years
6. Unemployment won’t change very much from 4.8%
7. Labor force participation won’t change very much 62.9%
8. The number of factory jobs won’t change very much
But Trump will declare the economic carnage is over, and it will be “morning in America”.
PS. Just be glad that it won’t be “mourning in America”!