Harvard professor on economic doom under Trump

STEVEN GRUZD

Lawrence spoke at a fundraiser for the King David Schools Foundation at Investec in Sandton on Tuesday morning.

This “Dynamic Davidian” matriculated from King David Linksfield as head boy in 1965. His illustrious CV includes sitting on a council of economic advisers to US President Bill Clinton, and giving trade advice to Thabo Mbeki and Trevor Manuel through the “Harvard Group” of economists. He is a regular drawcard at Davos.

“Trump ran on a platform with lots of rhetoric and very few specifics,” Lawrence said. He added that Trump’s narrative about America’s economic problems, and how he could solve them, was a tale of falling employment in manufacturing, especially for older, less educated white males.

Trump blames the North American Free Trade Agreement (NAFTA) with Mexico, and China’s entry into the World Trade Organisation.

“Disenchanted Germans in the 1930s blamed their troubles on the Jews. Trade agreements are Donald Trump’s ‘Jews’,” Lawrence said. Older Trump supporters bought his explanation, and the power balance shifted in the deindustrialised rust-belt battleground states.

Lawrence sought a deeper explanation. Manufacturing job losses predate NAFTA. There have been productivity gains, falling food prices and manufacturing job erosion across the developed world, and those countries didn’t sign NAFTA.

Today, products from iPhones to Boeings are not made in single countries; their components come from across the globe. So even if at most 1,5 million manufacturing jobs returned to America, it’s not enough to change the big structural problems.

Lawrence sees “a tremendous battle looming” with lobbyists who have taken advantage of special deductions from high corporate tax rates. Republicans’ proposals to tax products where they are produced, will impose tariffs and punish those manufacturing abroad. He noted how Trump threatens corporations on Twitter, and claims victory when they reverse decisions to invest offshore.

“It’s very dangerous if US policy is based on the president’s opinion, on whether he likes what a company does or not. We need rules,” Lawrence said. “But the rules of the game are unclear now. We’re on the verge of huge disruptions, in industries from automobiles to aerospace to textiles.”

Lawrence now sees “a replay of Reaganomics, with increased military spending and tax cuts, which means a ballooning deficit and rising interest rates”. As the dollar strengthens, borrower countries face rising debt burdens, which in turn will squeeze Western financial institutions.

He noted how protectionism and high tariffs in the 1930s provoked a trade war. “America First” means others will say ‘Us First’ as well… markets are on a sugar high, expecting big tax cuts and weaker regulation, but this optimism is most likely to wane.”

Is there a silver lining? He acknowledged the need to spend on crumbling infrastructure, an area where Congress stymied Barack Obama. He also agreed with Trump proposals to allow healthcare insurance to be purchased from another US state, and bargaining over pharmaceutical prices.

Lawrence said: “At least we know who’s in charge, and who to blame – a Republican president and Congress.”