Will Donald Trump Embrace Main Street Capitalism?
WHEN DONALD Trump assumes office in January 2017, he will confront both a troubled world economy and a domestic economy incapable of achieving historic levels of GDP growth on a sustainable basis.
Trump campaigned successfully on the theme that America needs better trade deals and protections from currency manipulation. But trade represents only 13 percent of U.S. GDP. What Trump plans for the other 87 percent of the U.S. economy could make all the difference.
Team Trump and congressional Republicans are trotting out all sorts of stimulus proposals. But America’s ultimate economic problem is one of attitude. People have lost confidence in the future. They are holding back. Thus, the economy has been growing at subpar rates. And people are not just consumers; they are entrepreneurs, small business operators and dreamers of innovation.
In its essence, Donald Trump’s ultimate challenge is to launch a bipartisan campaign that creates a paradigm shift that moves American expectations more to the positive. He needs to convince America’s dreamers and discoverers to believe in the future again.
True, policy change will help. America needs to invest in smart infrastructure, reform the Dodd-Frank bank regulatory framework, reform the corporate and individual tax systems, and fixate on reviving the small business sector. The goal is to remove barriers that are preventing the economy from achieving historic rates of economic growth. But for Trump to ultimately succeed, he needs to fixate on why business start-ups are happening at half their rate of fifteen years ago, and why today’s “new normal” of mediocre economic growth is unacceptable if not dangerous.
These are challenging times for the global economic and financial systems. Robust growth is America’s only protection from a global environment of serious risk. Since the 2008 financial crisis, for instance, global GDP and trade growth rates have been cut in half. Commodity prices have become unstable. Emerging markets led by China are bogged down with massive amounts of excess supply capacity. They have blindly produced regardless of demand for their products and spread dangerous disinflationary pressure worldwide.
Meanwhile, some of the world’s largest central banks have been forced to resort to negative interest rates—when banks ask you to pay them to hold your money. In the 1930s, average folk just stuffed their cash in mattresses. Negative rates have had the unintended consequence of leaving large parts of the global banking system highly vulnerable.
The world’s total public and private debt is approaching a mind-boggling 300 percent of GDP. Yet throughout the world, the return on capital is often so low there are serious questions about how long borrowers will be able to service that debt, particularly when it is denominated in U.S. dollars. Indeed, if the dollar strengthens during the big-spending Trump era, the value of that dollar-denominated debt will go up for many emerging market economies. So will the cost of commodities, including energy. The risk is a series of defaults, or disguised defaults, wreaking havoc on the world’s financial system.
Worldwide, there is a dangerous shortage of dollars and potential for a liquidity crisis. In the field of energy alone, for example, with the drop in the price of oil from the $100- to the $50-per-barrel level, the amount of dollars flowing through the U.S. banking system to the rest of the world has been halved. What that means is that aggressive tightening by the Federal Reserve is not without serious global financial risk. Because so many nations manipulate their currencies relative to the dollar by adjusting their interest rates—through the buying and selling of bonds—relative to U.S. interest rates, the Federal Reserve has essentially become the world’s central bank.
And if these potential difficulties were not troubling enough, in the industrialized world, technological change, including the rise of artificial intelligence, is now coming at people overwhelmingly fast. Many have become terrified of the future.
Some experts worry about the potential for a second financial crisis or a bout of hyperinflation. Nothing is out of the question. But the greater danger may be that large parts of the world simply become more like Japan—economically passive with massive debt, subpar growth despite record low interest rates, zombie banks that are reluctant to lend, an aging population with underfunded pension systems and millennials by the tens of millions still living at home. Economists call this trend the “new normal” of global economic mediocrity.
THE QUESTION for President-elect Trump is whether the U.S. economy can avoid this malaise. Can America, with its innovative engines firing on all cylinders, decouple from this scenario of global economic, financial and political vulnerability? Can a Trump administration help America sidestep the quicksand?
The question for Trump will come down to whether his policymakers can develop a strategy to raise U.S. GDP growth rates from today’s “new normal” of 2 percent to well above 3 percent, the average growth rate, historically. The difference sounds minor. But moving from 2 percent plus growth to 3 percent plus growth would not be a 50 percent hike but more like a 500 percent jump in economic dynamism. It would allow Trump to galvanize not only the American, but perhaps even the world economy.
Trump should seize the opportunity to restore growth and prosperity. The blunt truth is that the American people had a message for both Donald Trump and Hillary Clinton during the 2016 presidential contest: Stop the partisan bickering. Fix the economy to allow for higher rates of economic growth. Try different things. Cut bipartisan deals. Be bold. Unite the country behind a plan.
Trump’s approach should be as sweeping as it is obvious. He should recognize that capitalism comes in different varieties, and a return to a more equitable society of higher growth hardly means embracing European-style socialism. The key to a better economy is not to reject capitalism; it is to rediscover the Main Street roots of capitalism—and to jettison today’s desultory corporate capitalist mind-set.
Corporate capitalism is a recipe for economic gloom. Today’s corporate capitalism of top-down mismanagement and backroom deal making has smothered the American people’s innovative spirit. Even central-bank policy now favors the big, the corporate and the status quo at the expense of the small, the young, the new, the inventive and the entrepreneurial. It favors Wall Street over Main Street. Under today’s stifling corporate capitalism, Washington policymakers have an almost slavish devotion to large institutions, both public and private. They have also allowed a poisonous hyperpartisanship to make effective policymaking impossible. They have squandered the chance for an effective immigration policy that confronts the demographic challenge. They have imagined away America’s coming entitlement nightmare. As a result, average folk, apprehensive of the future, can feel in their bones that the American Dream is slipping away.
Main Street capitalism offers the opposite approach. When Main Street capitalism is working, it produces an explosion of success and failure, of reinvention, dynamism, and growth, all happening on a level playing field where the winners and losers are difficult to predict. Main Street capitalism creates a culture of start-ups. The dreamers continually come up with new, creative, commercially viable ideas that, in some cases, are transformative for the economy. This climate of dynamic reinvention and equal opportunity to achieve moves the economy to new heights. It empowers people at all levels of the income ladder.
In recent decades, the Main Street capitalist model has receded. As a result, the U.S. economy is suffering from a disease that has led to almost terminal morbidity—mediocre growth and a growing inequality. Productivity growth rates (doing more with less) have been abysmal. Innovators are starting firms at half the rate they did fifteen years ago. Existing firms are not investing in new opportunities at the same rate as in the past. Young firms are finding it much tougher to go public—and 80 percent of new job opportunities come when firms five years old or less go public. Today’s innovation itself appears to be less than transformational to the lives of average working families.
Meanwhile, America’s large corporations—the ones that haven’t moved offshore—have used the Federal Reserve’s low interest rates not to invest in America’s economic future but to buy back their own stock, creating an unprecedented mountain of corporate debt for this point in the business cycle. Even today’s leaders in high technology, Google and Facebook, now spend more on patent lawyers and lobbyists to stifle competition than they do on research and development. Is it any wonder that GDP growth rates have been subpar and inequality has expanded?
Main Street capitalism requires a change in mind-set. It entails a dynamic climate of economic mobility. In this climate, every man or woman is a potential founder of a business start-up. (Today, women are now starting firms at twice the rate of men. They are among the economy’s new secret weapons.) With Main Street capitalism, people again are not just consumers; they are also investors, business operators and, in some cases, dreamers of breathtaking innovation. For the majority of Americans who don’t start new firms, Main Street capitalism offers a new grassroots climate of more dynamic growth and more lucrative job opportunities. Trump should emphasize that the key to not only higher economic growth but greater social mobility is for America to return to a start-up culture. He should become the “start-up president.”
Innovative breakthroughs are the key to long-term prosperity. They are particularly essential to an economy bogged down with massive amounts of debt. But here’s the problem: Broad-based prosperity requires more than a handful of glitzy technological breakthroughs, such as the smart phone, coming from rarified places such as Silicon Valley. History shows that significant increases in per capita income arise from what economist Edmund Phelps calls “mass flourishing” at the grassroots level. In this process, average folk become “idea machines” in an environment where ordinary people reinvent ordinary products and services from the bottom up. For Washington policymakers, the greatest challenge is to figure out how to make the entire economy, not just Silicon Valley and the dozen or so other tech centers, the innovative economy.
POLICYMAKERS HAVE got it all wrong. America’s economic destiny is not a matter of luck. Human initiative and creativity are not irrelevant in determining economic success or failure. Attitude is everything. The health of an economy depends on behavioral elements that don’t always fit on an Excel spreadsheet or follow the confines of a predictable theory. Economies involve a complex ecosystem and are linked to psychology.
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.
But to try to create higher levels of growth, we first need a better understanding of money. Since the 2008 financial crisis, the world’s central bankers have injected massive amounts of liquidity into the global banking system. To their credit, in the face of the most devastating financial collapse since the 1930s, the world’s policymakers responded boldly. Governments and central banks collectively committed, in terms of both present and potentially future resources, a mind-boggling $17 trillion—almost one-quarter the size of global GDP at the time—for bailouts, guarantees, stimulus packages and an ocean of monetary stimulus.
Thankfully, the immediate free fall in global aggregate demand was arrested. Stock markets rebounded. But then, beginning in 2010, the world economy progressively slowed. But why? The U.S. economy could never quite gain momentum on a sustainable basis. Something always held it back. True, there were months when the data looked to be highly promising. But the sugar rush always faded.
Central-bank liquidity failed to be the magic pill for prosperity and, in fact, produced unintended consequences that distorted financial markets and increased inequality. The reason is that low interest rates mean very little to a person terrified of the future in an environment where risk capital for the little guy is hard to come by.
What policymakers should be more concerned with is another type of liquidity: the liquidity of confidence. Confidence—in particular, stemming from the knowledge that our leaders have a game plan for prosperity—creates liquidity. In a sense, liquidity is confidence.
The economic task, therefore, is not just to “put money into people’s pockets” but to shift expectations toward the positive to produce sustainable long-term growth. Washington policymakers should enact a series of bipartisan “grand bargains” on issues including infrastructure modernization, entitlement reform, healthcare reform, the financing of start-ups, the bolstering of existing businesses, more favorable corporate-tax treatment (repatriation) in exchange for purchases of 1 percent infrastructure bonds (in an environment of even broader tax reform), elimination of corporate efforts to gain competitive advantage through regulatory arbitrage, Dodd-Frank bank regulatory reform to restore the health of regional and community banks, the workhorses of small business expansion, and ways to allow families to be more economically mobile.
America needs a game plan, and it should be bipartisan. Passing Obamacare on a party-line vote was a major mistake. On both of his major tax initiatives, Ronald Reagan sought to make the legislation bipartisan. This added a greater sense of credibility to the exercise. Today by making the economic-reform package bipartisan, the entire country will prosper with a renewed sense of confidence that America now has an economic game-plan backed by a solid majority of its citizens. The extremes, both the Left and the Right, will resist, but it is time to unleash what rock star and social activist Bono called America’s “radical center”—the 70 percent of the country desperate for common-sense reform.
Trump should also explore the possibility of renewing the Plaza Agreement to try to establish order in today’s foreign-exchange markets, which are at the doorstep of a currency war. With the world’s combined public and private debt approaching an astonishing—and likely unsustainable—300 percent of GDP, there needs to be a global debt conference to establish contingency planning in the event parts of the world, particularly emerging markets, at some point initiate a scenario of debt default.
But most of all, Washington policymakers need to adopt a new Main Street mind-set that focuses like a laser on the small, the new and the entrepreneurial. They need to establish the conditions that continue to make the United States the start-up capital of the world. Audacious discovery is the goal, the true magic of this capitalism for all.
There is no doubt that technology today is feared by some as a disruptive force. And it is true that technological change can be scary. The rise of artificial intelligence is an exciting but sobering development. If computers increase their IQ by just 1.5 points per year, in less than a decade computers will be smarter than 90 percent of the U.S. population. Artificial intelligence has the capacity to be an awesome economic disrupter leaving a lot of people sitting around with not much to do. But fear of technological advancement has been present throughout history. Intense fear developed with the advancement of agricultural technology. And the pessimists time and again have been proven wrong. The new technology brought with it the creation of entire new industries.
But there is another reason why people had better hope the pessimists are wrong. The only way the world can save itself from the coming tidal wave of social chaos and violence associated with joblessness and debt is with turbocharged, innovation-driven growth. The facts are startling. Over the next twenty-five years, 3 billion more people worldwide will enter the global middle class. This growth will require the creation of hundreds of millions of new jobs. For many countries, within a quarter century, nearly half of their populations will be under the age of thirty, all desperate for a better life. An innovation-driven explosion in global growth is the only means of avoiding a worldwide political calamity of economic hopelessness dropped someday soon onto the laps of our kids.
THERE ARE reasons to be positive. As high-tech investor Christopher Schroeder argues, the global economy has enormous potential for growth. “In less than five years, two-thirds of the world will be walking around holding the equivalent of today’s smart-phone, a device with more computing power than NASA had in the 1960s.” As the late Joel Kurtzman, the former Harvard Business Review editor, aptly put it, “There are no facts about the future.”
The future has always been beyond prediction, requiring risk-takers, explorers and dreamers to take a leap of faith. The world is always full of surprises. What nation, for example, is today the world’s top per-capita consumer of YouTube? The United States? China? The United Kingdom? No. The answer is Saudi Arabia. Saudi women comprise the largest group of viewers. And their most popular viewings? Anything involving education.
But as encouraging as this and other developments are, a large bulk of the world economy, led by Europe, Japan and now China, faces a corporate capitalism far worse than in the United States. Instead of unleashing the innovative talents of their citizens, just the opposite appears to be happening. A stifling top-down mismanagement by establishment elites reigns. The innovators continue to hold back.
This is a tragedy. Today’s innovative advancements in information and other technologies, while on the surface terrifying, can produce a powerful bottom-up growth phenomenon. The breadth of human knowledge is at everyone’s fingertips and essentially is free. Customers are theoretically limitless.
Even though today’s economic system still favors the elites, that situation is changing. Intellectual property is increasingly the most valuable asset in today’s changing economy. Everyone may very well soon have access to the means of production. The doors of entry to the innovative economy are being blown wide open.
In the United States, the building blocks are still in place to achieve higher levels of economic success. Top-down design solutions and large, inefficient bureaucratic institutions are perceived increasingly by voters with skepticism. We live in an increasingly bottom-up world where the empowerment of people can be an awesome force. But leadership from Washington is essential to creating a level playing field.
Compared to the rest of the world, America holds some unique advantages, including in the field of energy technology and production.
America has a culture that historically has valued entrepreneurial risk-taking and tolerated failure, while adhering firmly to the rule of law. In some parts of the world, debtor prisons still exist. Or intense social stigma is associated with business failure. It is not inevitable that the United States will fall into a Japan-like scenario, muddling through for the next several decades.
But policymakers need to write a new American economic narrative in which not just the risk-takers of Silicon Valley and Wall Street are seen as the essential actors. Average folk must be encouraged to dream big and dare big. This should be the start of an important process of Americans attempting to discover who they are as a nation. The window for change is only open briefly. The clock is ticking. Half of American families are near insolvency. Half have no means of handling an unexpected $500 bill for a medical emergency or car repair. In economic policy, results matter. The elites in Washington have run out of excuses. The 2016 election was proof that the little guy in America is desperate for a more robust economy. The little guy is fighting back.
David M. Smick is chairman and CEO of the macroeconomic advisory firm Johnson Smick International, founder and editor of the International Economy magazine, and bestselling author of The World Is Curved: Hidden Dangers to the Global Economy (Portfolio, 2008). This essay draws on his forthcoming book The Great Equalizer: How Main Street Capitalism Can Create an Economy for Everyone (PublicAffairs).
Image: Tokyo at night. Wikimedia Commons/Creative Commons/Moyan Brenn