Is Summers Right about Trump?

by Jim Staudt

Copyright 2016, all rights reserved

Professor Larry Summers’ recent Financial Times article “The economic consequences of a Trump win would be severe” is misleading.  He forecasts that he expects that if Trump were elected, he “would expect a protracted recession to begin within 18 months.”  Regardless of who is elected president, a major recession is a near certainty (more on this later).  First, I will examine the charges Summers levels against Trump.

I am no fan of Mr. Trump, who has made misogynistic and racist comments that are unworthy of a presidential candidate.  But, there are numerous holes in Professor Summers’ arguments.  First, the claim of concern over a $10 trillion tax cut over the next few decades is off.  Even if such a tax cut and deficit increase were to happen, the United States has been running deficits for decades.  While I personally believe this has been an irresponsible policy that has enabled reckless behavior by our government, such as the Iraq War, such a policy would not be a major change from policies that Mrs. Clinton has herself advocated as a US Senator.  Moreover, Congress actually holds the purse strings in the US government.  A President Trump cannot act without the help of Congress.  Regarding the second and third concerns of Professor Summers regarding trade and security policies, Professor Summers fails to recognize that a President Trump cannot on his own end trade agreements or treaties.  Again, a President Trump needs Congress, specifically, the US Senate. Regarding the fourth concern about Mr. Trump’s authoritarian style, here Professor Summers conveniently assumes away the US legal system, which is in place to prevent the abuses Professor Summers alleges a President Trump would commit, such as torture.  Professor Summers also forgot that in October 2006 then Senator Clinton stated to the New York Daily News that she was in favor of exceptions to the no torture policy, especially when there is a “ticking time bomb”.   The final charge about lack of business confidence is pure conjecture, and ignores the fact that Mr. Trump’s own fortune would be adversely impacted by a loss of business confidence.  So, while I do not relish the thought of a President Trump, Professor Summers’ charges are entirely baseless.

As for why a recession is a near certainty over the next few years regardless of who wins the election in November, here are the arguments.  The first reason is timing.  We are long overdue.  The average time between recessions is about 6-7 years, and we are on year eight with every economic indicator sputtering and flashing yellow.  Moreover, since the beginning of financial deregulation in the US, we have had a banking crisis roughly every ten years, each of increasing severity.  If the trend continues, that means 2018 is time for the next banking crisis.  But, these past trends do not guarantee future behavior.  The second reason is that the fundamentals point toward another recession.  Every economic indicator is flashing yellow - from employment statistics, to productivity, to outlook of CEOs.  It is clear that after decades of central bank intervention to achieve the “great moderation” prior to 2008 and the inability of central bankers to achieve sustainable growth since the 2008 crisis, Hyman Minsky’s concerns (published decades ago) about financial instabilities associated with what he calls “Ponzi finance” are prescient.  Ponzi finance is where  “cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations”, and a unit must sell assets or borrow.  As Minsky stated in 1992, “over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.”  Our government and much of the private economy has been practicing Ponzi finance for decades.  In fact, much of our economic growth over the past several decades has been the result of Ponzi finance – enabled by central bank interventions to prevent market corrections - with total debt to GDP in the US rising from under 150% in the 1950s through 1970s to well above 300% in the post 2000 period.  Ponzi finance is not sustainable, and therefore corrections are inevitable.  We are at the end of what some call a debt supercycle that was enabled by our central banks, and history shows that there is no easy way out of this.  In my book, Grand Collusion, I discuss the challenges we face and some solutions.  But, like a cancer patient facing surgery or chemotherapy, there is no easy path back to good health.  I’m afraid that a recession, or worse, is a near certainty regardless of whether Mr. Trump or Mrs. Clinton wins in November.

Our nation has reached this point - deeply in debt with growth highly elusive and a wealth disparity unlike any other western nation one would want to live in - thanks to policymakers, including Mrs. Clinton, who have misled the public over the past several decades.  Many Americans instinctively know that something in Washington really stinks - even if they can't put their finger on the precise cause.  It is clear that Washington is not working for most Americans.  That is what has powered the unlikely rise of Bernie Sanders and Donald Trump.

Sadly, in the forty years I've been voting, this is the worst choice the two parties have offered us in a presidential race.  It is a choice between bad and horrible.