Will Donald Trump Embrace Main Street Capitalism?

Tokyo at night. Wikimedia Commons/Creative Commons/Moyan Brenn

The elites in Washington have run out of excuses.

January-February 2017

How else does one explain the phenomenon of why so many Americans have quit their jobs, mortgaged their homes, maxed out their credit cards, and borrowed from family and friends—all to pursue the commercialization of some new idea or vision in an environment where 90 percent of such pursuits fail? Americans are unique in the world for their sheer daring in taking on entrepreneurial risk.

People may be the problem, but they are ultimately also the solution to a growing economy. Main Street capitalism begins with a new mind-set about the role of human drive, courage and ingenuity in the process of economic growth and job creation. After all, how can the experts capture in an econometric model a scenario in which 325 million Americans all collectively become inspired to re-engage and reinvent their economy behind a bipartisan leadership that removes obstacles to growth and changes today’s negative expectations toward the future?

How do you forecast the effect of a new paradigm that results from daring leadership brushing aside the ideological extremes and charting a new course backed by achievable common-sense policy reforms.

To achieve successful deployment of today’s central-bank liquidity, policymakers need to better understand the hopes, dreams and fears of average folk. In other words, they need to discover why so many working Americans have lost faith in the future. Why has the rate of business start-ups halved? Why are existing businesses not expanding as much as they have in the past?

Is it because the rest of the world is so terrifying? Is it that people are simply afraid of the future? Are people holding back because of America’s, and the world’s, enormous debt? Is it, again, that the world is holding trillions of dollars in U.S. dollar-denominated debt, but there is now a global shortage of dollars? Thus there is the potential for a growing global liquidity crisis? Or is it that the world’s undercapitalized banks in some cases are hanging by a thread?

Is it, as both Trump and Bernie Sanders claimed, the result of bad deals on trade and currency relationships? Is it the problem of America’s own compromised fiscal, regulatory and immigration policies? Is it that the world’s central banks, including the Federal Reserve, appear to have run out of monetary ammunition despite today’s challenging environment? With past recessions, the Fed, as a weapon, has been able to cut short-term interest rates by 3 percent to avoid a so-called economic “hard landing.” But now that short-term interest rates are much lower than the 3 percent level, the Fed has relatively few bullets available.

Is it that Washington is held captive by partisan hacks so nothing ever gets done? Is it because the public is well aware that potentially dangerous problems, including the financing of the entitlement system, remain unaddressed like a ticking time bomb?

Is it that our central bankers can’t tell us with much credibility whether the risk ahead is inflation or deflation (or disinflation), and whether global stock markets in today’s age of central-bank intervention are grossly overvalued, undervalued or priced just right?

Is it that America’s leaders still believe in top-down economic design even as the world, whether through Facebook or ISIS, is ironically in the midst of a bottom-up revolution?

Is it the result of the consolidation of finance since 2008, with a dozen giant, risk-averse zombie banks now in control of 75 percent of U.S. bank financing? The big and established firms receive loans; small ones often do not.

Is the entire nation simply overloaded on change? Is technological change, in particular, coming at people so fast they are feeling helpless? Is it that people feel artificial intelligence will someday make their kids, even the math and science majors, permanently unemployed?

Or is it simply an attitude problem? Have Americans themselves lost the courage, daring and optimism that have traditionally made the United States the world’s hotbed of innovation? Some people assume that there are no more major technological advances forthcoming. Others in the big-data economy are overwhelmed by the sheer quantity of information available and find the sorting process difficult. Because technology allows people to verticalize, people tend to associate only with those of similar views. Thus they tend not to see opportunities not immediately relevant to their present environment. Does this trend make everyone more risk-averse and afraid of the new?

THE TRUTH is, all of these elements are impeding America’s GDP growth. They all collectively make up the headwinds holding back prosperity. And they all need to be addressed.

Trump’s first task is clear. The goal is not simply to apply more stimulus, but to produce a series of paradigm shifts that change the nation’s expectations toward the future—that reverse today’s negative psychology.

Growth is everything. The American economy’s long-term growth rate, in particular, has huge implications for the level of an economy’s ability to deliver prosperity. For example, in the period from 1789 to 2000, U.S. real GDP grew by an average annual rate of 3.73 percent. Had the economy grown by an average of today’s “new normal” growth rate of roughly 2 percent, America’s per-capita income would not reflect the output of the world’s most powerful economy. U.S. per-capita income instead would be lower than Papua New Guinea’s. That is, it would be below the per-capita income of a relatively poor country in the Southwestern Pacific Ocean.