Trump, Clinton and the Demise of Free Trade

Preview of the 2016 Investment Innovation Conference

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inflation eagleAs a speaker at this fall’s Investment Innovation Conference at JW Marriott Phoenix Desert Ridge Resort & Spa, (October 26 to 28), Todd Buchholz, former White House director of economic policy and best-selling author of The Price of Prosperity: Why Rich Nations Fail and How to Renew Them (HarperCollins 2016), will talk about the challenges to prosperity. In advance of the conference, we asked Todd a few questions about the economic policies of the U.S. Presidential candidates, the problems with trade and the barriers to growth. To find out more about Todd’s presentation and the Investment Innovation Conference, click here.

What is the potential impact of the U.S. presidential election on the U.S. and on the global economy?

It could be huge, to quote one of the candidates. Hillary Clinton’s policies do not dramatically differ from President Obama’s. However, on trade policy, the Democratic party in general is moving swiftly to the left, to an anti-free-trade position. Hillary Clinton has stated that she would not promote the Trans-Pacific Trade Partnership. At the same time, a Clinton administration may be more skeptical towards NAFTA, which is ironic, since her husband signed NAFTA in 1993.

On trade, Donald Trump is provocative and unpredictable. Not only has he scorned NAFTA and blamed it for massive job losses in the U.S., but his general attitude suggests that almost all trade relationships have been damaging to America’s middle class. The question under a Trump presidency is whether he will either temper those principles or, as I would suggest, take a different view. I believe that Trump should, and probably would, take a more tactical approach. He could identify certain countries and certain sectors where U.S. workers and U.S. companies have been unfairly targeted and retaliate against those, à la Reagan, as opposed to a wholesale shutdown of the borders, which of course he threatens from time to time.

Is the trade debate verging on neo-mercantilism?

Well, I think it is. I don’t think Canadians would have much to worry about explicitly, but if U.S. trade policy changes, Canada will have to fight for some exceptions, which becomes a little bit thorny. Canada and Mexico are together in NAFTA. It would be difficult for Donald Trump or Hillary Clinton to pick a fight with Mexico and not have shrapnel being deflected north of the border. We are becoming, if not mercantilist, certainly very skeptical about the benefits of trade.

Are there ways to mitigate the structural impacts of trade agreements?

I think many supporters of free trade, and I count myself among them, have frankly not spent enough time acknowledging that there are losers from trade. And so, there’s been this battle under the banner that “free trade makes everyone better off and if you’re against free trade, you don’t understand the benefits of it.”  Well, in fact free trade does make most people better off and the country better off but it does create victims. So first we must acknowledge that there are victims of trade, and then ask the question, “What do you do about them?”

I believe that in the U.S. we need much more mobility among labour. People ought to be encouraged to move to different states, different regions, where the jobs are – that used to be woven into our American fabric. That’s something we as a country have lost over the last 20 to 40 years.

What keeps workers from being mobile?

I think there is an expectation that jobs will come to you. The government bureaucracy does not promote mobility. When an American loses a job, he or she reports to a local unemployment office; yet in this age of the internet and Google, bureaucrats are not in a position to link networks together so that they can share opportunities elsewhere.

Is there a training gap?

There does seem to be a mismatch of skills. The Labor Department reports that over five million jobs are available and being advertised yet not being taken. So there may very well be a skills problem. Our education system has been off kilter, in a way, so that it encourages university attendance, which is wonderful for those who want to attend, but there has been very little attention to training or encouraging people to be machinists and trades workers for whom there is actually a great deal of demand in the economy. We have more choreographers and art history professionals than we have jobs for them, yet we really need people who understand computer coding and plumbing.

Isn’t this the fate of any rich nation?

As I argue in my new book The Price of Prosperity, when countries become more prosperous it becomes more difficult to maintain a work ethic, to act responsibly towards debt.

Again, labour should be encouraged to be more mobile. I think we should provide signing bonuses for people who move to a different place to take a job. On the issue of debt, those not yet of voting age and those who have not yet been born should have a proxy in fiscal matters so that current voters do not have the right to burden future generations that haven’t had an opportunity to have input into building up debt.

Which form of debt is the more perilous, private or public?

Public debt burdens future generations. Now consider private debt. Let’s say an individual goes on a spending spree and racks up a lot of debt. Then he dies. Typically, his sons and daughters are not required to pay back that debt. Whoever lent the spendthrift the money was foolish and suffers. But that’s not the way it works in the public sector. Our children will be stuck paying off our bonds. So I think public debt can be more pernicious and indeed less moral. Now, I’m not saying that governments should not borrow. But it should be limited to what taxpayers can reasonably pay back without massive changes in the tax structure.

With interest rates low, a lot of economists are promoting debt-financed infrastructure spending. How do you view that?

I think it is in many cases a panacea. Yes, targeted infrastructure spending that is responsibly delivered is a good thing. I find politicians often wave the flag of infrastructure spending because it sounds like an incontrovertible positive. Nobody likes sitting in traffic; so every driver would like better roads.  But is it always effective macroeconomic policy?

Japan has spent massive sums, trillions of dollars in the last 10 years on infrastructure, under the claim that this will boost the economy, create long-term jobs. But the degree of success looks rather scanty. China has spent massively on infrastructure and what we have learned now is that there are bridges that have been left unfinished, trains that may derail and apartment buildings and hotels that have been left empty in new cities. The government and developers built replicas of Manhattan and Paris, for example. That doesn’t mean that infrastructure can’t be good, but let’s be careful. If the money flows through the hands of politicians, the spending tends to be excessive and not carefully targeted.

What’s best to encourage growth?

We need to give businesses confidence that lower tax rates can be sustainable, that governments will be able to responsibly handle their debts. Governments should discourage manias in certain sectors, so, for instance, governments like Canada need to be very careful not to raise expectations for future commodity prices because that leads to a misallocation of resources. And governments should support the independence of central banks because that will keep lending rates and inflation at reasonable levels. Finally, governments should remove obstacles that discourage young people from developing new skills and moving to new places. In Arizona if a person wants to cut hair in a beauty salon, the government requires her to first take 1,600 hours of classroom training. That could cost $20,000. If she wants to join the Phoenix police force, she gets just 600 hours of training. Arizona politicians apparently think that a blow dryer is more dangerous than a 40-calibre Glock.

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