With Donald Trump’s inauguration now just one day away, much is unknown but one forecast is for sure: he will not be a placid President content to let bygones be bygones or controversies pass uncontested. The battlefields on which the President-elect has waged hand-to-hand combat is so far-ranging that one might be excused for missing what I think is emerging as the most consequential one for U.S. financial policy: the struggle between the forces of economic nationalism and those advancing libertarian goals. Mr. Trump is comfortable passing easily between the rhetoric that sometimes binds these strong wings of his popular support, but each side is substantively not only different from the other, but also at war with it. If economic nationalism prevails in the next four years, financial policy will assume forms comfortable for, if not familiar to, central bankers and large companies (at least those domiciled in the U.S.). If libertarian thinking gains traction, “Davos Man” will be sent back to the cave. Here’s why:
One reason the conflict between these two heart-felt theories has yet clearly to show itself is that economic nationalism and libertarian thinking share many elements familiar to populist and just darn-angry voters who supported Mr. Trump. Importantly these are generally only in domestic-policy areas such as health care and gun rights – economic nationalists don’t much care about them and libertarians support freewheeling pistol-packing because it’s what makes each person fend for him or herself. Similarly, the two camps are not generally racist or sexist in theory if not always in practice – each is focused on what both consider bigger-picture policy goals even as each is generally willing that folks do what they want as long as they don’t expect the state to protect them through affirmative-action or similar statutes.
Because these domestic issues garner a lot of attention, clamor over them distracts from profound differences with significant strategic economic and market impact. Take trade policy. It is one clear dividing line – economic nationalists such as Mr. Trump on this point want to man the barricades against foreign goods and, I expect, financial services. Libertarians aren’t big fans of NAFTA or TPP per se, but they do believe in open borders and free competition – survival of the fittest should in their view determine who sells what here, not where a product comes from.
My guess is that Mr. Trump, if not his new team, will move flexibly between these two opposing trade camps to pick economic nationalism when it suits him – auto manufacturing for example – and libertarianism when it doesn’t – on drug imports as an immediate case in point. As a result, who makes which decision below Mr. Trump and how advocates present their views will be even more critical than usual in determining who wins and who loses.
Fiscal policy is similarly divisive. Economic nationalists will go big-time for an infrastructure spending plan, including one through an infrastructure bank eerily reminiscent of the one President Obama tried to advance. Libertarians not so much – they want not only a balanced budget, but also as small a federal fiscal presence as can possibly be squeezed from current spending. Infrastructure expenditures are as anathema to libertarians as welfare – see all the discussion of the Ex-Im Bank in the last Congress and talk of “corporate welfare” to see why.
Near-term regulatory decisions for the financial-services industry have similar divides. Economic nationalists do not care much about a ten percent leverage rule for all their disdain of Dodd-Frank regulatory burden. What they want is a bigger, better, and if necessary even badder banking system that makes America even greater without resort to foreign capital. For all their deregulatory zeal, libertarians are strong advocates of tough big-bank rules because they believe that these will force big banks to splinter into the small-town, free-enterprise finance that will make America great again as finance moves from the coasts into every small town by way of far smaller, freer financial companies.
Talking about the gold standard may remind you of a long-gone economics class, but think again. Libertarians truly believe in an end to “fiat currency.” Economic nationalists believe that a great America needs a strong currency, albeit one that gains its potency from a robust economy, not by contrast to other, arguably under-valued currencies. Would economic nationalists favor fixed exchange rates and find common ground with libertarians even if the dollar isn’t fixed to gold? Maybe, and we’re in for a debate not seen since 1972.
The real victors in the battle between economic nationalists and libertarians under Donald Trump could echo one trait Mr. Trump has also shown throughout the election: pragmatism. Congress may force this on the new Trump Administration if the President does not take an occasionally-expedient decision. And of course, many in the incoming Administration are, for all the rhetoric, profound pragmatists in their hearts. This will likely be the saving grace over political and economic ideology – Americans have long eschewed political ideology in favor of getting as much as they can for those they love regardless of the label on the can in which it comes.
A course between economic nationalism and libertarianism that abandons cultural divisiveness for creative economic thinking could do some real good as long as “big” solutions are not accompanied by large amounts of unintended damage.