Does Trump actually want Trumponomics?
The costs of Bessent's new "international economic system"
It looks like Trump will name Scott Bessent as his Treasury secretary Unlike the first Trump Treasury Secretary, who produced the Lego Movie, Bessent is a macro hedge fund manager and recently wrote rather lucid op-ed in The Economist laying out how Trump II will view the world economy. Let’s lay out what this worldview entails.
What Trump says he wants
If I could sum up Trumponomics1 in a few bullet points, he wants:
A restored US manufacturing sector, via:
Tariffs, both universal and China-focused
Lower deficits
Lower taxes
Lower prices
To what extent is this a coherent set of objectives?
(2) and (3) directly counteract each other, as is oft-noted every time a Republican President slashes taxes while railing against the widening deficit. In his first administration, Trump passed a sweeping tax cut but failed to make a dent in spending. This led to a widening deficit in the lead-up to the borrowing explosion during COVID-19. But this almost goes without saying.
(1)(a) and (2) are compatible. By spending less, the Trump administration will lower growth and interest rates, which will weaken the dollar relative to other currencies and make US exports more competitive relative foreign competitors.
The interaction between (1)(a) and (1)(b) is more subtle. Tariffs are partially offset by changes in exchange rates. In the first bout of Trump tariffs targeted at China, the dollar appreciated and the renminbi depreciated. Further, as Matt Klein and Michael Pettis noted in their book, Trade Wars are Class Wars, (which JD Vance seems to have read), Trump’s tariffs didn’t really make a dent in the US trade surplus. (China → US) trade flows simply transformed into (China → Vietnam/Mexico → US) trade flows.
Bessent acknowledges this failure in his piece:
Critically, these measures must act on a global basis, as bilateral actions largely shift imbalances around rather than address their underlying source. Interventions at the macroeconomic level, like broad-based tariffs, will be more effective than microeconomic interventions like industrial policy that generally rely on the government to pick winners and losers.2
Bessent also seems to allude to more broad multilateral action centered on “commitments from allies to spend more on our collective security and to structure their economies in ways that reduce imbalances over time.”
Some commentators have read this to imply a kind of “Mar-a-Lago Accord” between the US and other major economies, an homage to the Plaza Accord that James Baker, Treasury Secretary under Reagan, brokered with France, the UK, West Germany, and Japan. That agreement pegged the dollar favorably against other major currencies and led to dollar depreciation, a win for US exporters. Perhaps the Trump administration believes that with the threat of tariffs, they can set up a comparably favorable currency regime for US exports.
The problem, of course, is that the currency relationship that matters the most by far is that between the dollar and the renminbi. Any multilateral agreement with teeth would require Chinese cooperation, and as Brad Setser has documented in detail on his blog, China has maintained a consistent policy of currency intervention through its reserve banks to keep the renminbi stable.3
To pull another lever, the Trump administration could intervene in exchange markets in-kind. Michael Pettis has long called for the US to tax foreign investment in equity and bond markets in order to deter outside capital. At Treasury, Bessent would have control over the Exchange Stabilization Fund, and could embark in more aggressive intervention in foreign exchange markets.
Of course, the rub of all of these measures is that they would make (4) all but impossible, at least in the immediate term. The American producer would benefit from tariffs at the expense of the American consumer. Bessent and other protectionist acolytes would claim that inflation is the price we must pay to reshore production from abroad. Not to mention that any sustained intervention in financial markets would certainly make American retirement and brokerage accounts to take a big hit.
This is what Trump says he wants, at least. But when prices in the heartland spike at the same time the stock market crashes, will he remain so committed?
Macro can only take you so far
Sometimes it’s easiest to wear the macro strategist hat and think of the world as a massive set of interrelated production-consumption-currency models. As Klein and Pettis lay out in their book, Chinese consumption must go up4 for Western production to rebalance. But another takeaway I gleaned from their book was the structural stickiness of the imbalances we find ourselves in.
The “China shock” is both a real and a financial phenomenon. Low consumption and high exports represent as much a political choice for the CCP as an economic one, and the same holds true for its mirror image in the US. These dynamics are self-reinforcing, despite what our domestic politics would tell you. Americans may rail against Chinese protectionism, but are accustomed to the fruits of multinational supply chains, a robust consumer economy, and ballooning asset values. Just the same, provincial CCP officials rely on meager social safety nets, lax labor protections, and hukou restrictions to deliver the production-centric results that the Politburo in Beijing demands.
As the Biden administration learned all too well, economic transition is tumultuous and politically unstable. Consumption, production, and trade are not just inputs in a macroeconomic model; they reflect a system of social relations that elites and laborers alike accustom themselves to and rely on. The neoliberal, globalized economic order, maligned is it is, have proven itself to be durable.
Trump represents a populist shock to that system, to be sure. But, unorthodoxy notwithstanding, he still faces the same set of political-economic tradeoffs that Biden and other Western leaders have stumbled over. It is unclear to me from everything that I’ve observed of him as a politician that Trump is either committed or coherent enough to pay the price that upending that order would demand.
Kind of hate this portmanteau. Dononomics? Donomics? Whatever.
Note the subtle dig at Bidenomics industrial policy here
Another thing Trump could do to weaken the dollar would be to stuff the Fed full of low-interest rate cronies and generally wreak monetary havoc a la Erdogan. I’ve actually got a post on Fed independence cooking but wrote this one instead
China seems to finally be embarking on a bout of fiscal stimulus, which is a major change of tune for Xi, but we’ll how much substantial it winds up being