All Commentary
Friday, March 9, 2018

Why Trump’s New Tariffs Are an Ominous Omen

A major bear market accompanied by high unemployment, authoritarianism, and populism is a combustible mixture.

Donald Trump surprised even his own advisors with his decision to impose tariffs on imported steel and aluminum “for a long period of time.” To be more accurate, as the professor Don Boudreaux puts it, “tariffs imposed by Uncle Sam are not imposed on imported steel, aluminum, or anything else. These tariffs are imposed on Americans who buy imports.”

“It’s not often,” observes Colin Grabow, “that leaders of advanced economies vow to engage in such brazen and wanton acts of economic self-destruction.”  

We seem to be victims of Donald Trump’s hubris and economic illiteracy. What if Donald Trump’s economic madness reflects our own? What if our own false beliefs are fueling the rise of protectionism?  

Trump believes that “trade wars are good, and easy to win.” Do Americans share his belief? Last July, 54 percent of Americans responding to a Bloomberg National Poll liked the idea of Trump managing trade, believing “Trump will manage to create trade deals more beneficial to the U.S.” Managing trade is about the only thing Americans give the president high marks on. How did we come to believe the president can and should manage the economy?

Endogenous vs. Exogenous Events

Many of us hold an outside-in view of the economy: exogenous events outside of our control happen, and the economy reacts.

This outside-in perspective is precisely the way most of us live our personal lives. For example, we wake in the morning feeling anxious and then look to our circumstances for a cause. Perhaps we anticipate today’s 11 a.m. meeting and the thought arises, “Peter will give me a hard time about the numbers in my presentation.” Thinking about Peter is the cause of our anxiety, more thoughts of the meeting arise, and our anxiety increases.

What if economic and social events are driven endogenously, too, via collective societal moods and beliefs?

This personal outside-in orientation carries over to how we view the economy. In January, Nobel laureate Robert Shiller was asked what will trigger the end of the stock market rise. Shiller replied, “Something will be invented to explain it once it happens.” As if to illustrate Shiller’s point, notice how one day a headline reads Rate Increase by the Fed Spurs Stock Market Rally and another day, Rate Increase by the Fed Triggers Sell-Off. Something exogenous is credited as the cause because that’s what outside-in thinking expects.  

Contrast an outside-in orientation with an inside-out orientation. In my 11 a.m. meeting example, from an inside-out orientation, anxiety is generated internally, endogenously, by our interpretation of events, not the events themselves. Indeed, the more we view “Peter” as troublesome, the more likely we will be in conflict with Peter.

What if economic and social events are driven endogenously, too, via collective societal moods and beliefs?

The Beliefs Behind Globalization

Libertarian financial analyst Robert Prechter has observed that during rising stock markets, human cooperation and free trade expands. Writing in 1992, Prechter observed during bull stock markets that societal beliefs are characterized by “a perceived brotherhood of men and nations…at a peak, it’s all ‘we’; everyone is a potential friend.”

Likewise, in bull markets, we see others as individuals whose humanity is as real as our own; a mindset that, in the words of philosopher C. Terry Warner, respects others’ “hopes and needs as we do our own.”

In contrast, during bear markets, we don’t see our common humanity with others. When blind to our common humanity, Warner observes, our fellow human beings are seen as “objects existing primarily for our use” and caring about others diminishes.

When we see others as people, trust grows, trade increases, and the economy expands.

In bear markets, Prechter observed, especially near a stock market bottom, the societal belief is “everyone is a potential enemy.” “Major bear markets,” Prechter writes, “are accompanied by a reduction in the size of people’s unit of allegiance, the group that they considered to be like themselves…When times are bad, intolerance for differences grows, and people build walls and fences to shut out those perceived to be different.”

When we objectify others to justify our objectification, we scream about such things as trade deficits.

In truth, that we run a trade deficit with China is no more relevant than that we run a personal trade deficit with our local supermarket or with Amazon.

From the inside-out orientation, when we see others as people, trust grows, trade increases, and the economy expands. Likewise, when we objectify others, trust fades, trade decreases, and the economy shrinks. In the extreme, North Korea exemplifies the inside-out orientation: running on its Juche doctrine of strict self-sufficiency and mistrust of outsiders, the resulting economy is barely functioning. 

Social Mood Governs Events

In his book, The Wave Principle of Human Social Behavior and the New Science of Socionomics, Prechter explained his hypothesis that it is endogenous mass psychology, social mood, that governs events. Prechter theorizes that the “trends and extent” of social mood helps “determine the character of social action, including the economic, political and cultural.”

A rising social mood is associated with hope and, at the peak, hubris. A declining social mood is associated with fear and, at the nadir, despair. Prechter’s idea that societal periods of rising and falling optimism are driven endogenously is challenging, and yet illuminating. If we no longer view ourselves as victims of external events, taking more responsibility is possible.

Is a Reversal in the Trend Toward Globalization Upon Us?

Socionomic researcher Alan Hall, in his paper, “A Developing Reversal in the Multi-Decade Trend Towards Globalization,” contained in the volume Socioeconomic Studies of Society and Culture, observes the positive impact of globalization:

A two-century trend towards positive social mood dating from the late 1700s ultimately impelled a widespread vision of the world is an integrated, inclusive, culturally tolerant marketplace. This ‘everyone is a potential friend’ attitude helped produce the greatest level of human interconnectedness and trading activity in its history. This phenomenon earned its own name—globalization.

Hall analyzes data compiled by economists Mohamed Nagdy and Max Roser to describe “a long period of worldwide poverty and limited trade that held sway prior to history’s ‘first wave of globalization,’ which began some time before the start of their data in 1870.”

Hall expects negative social mood will now drive a wave of de-globalization and potentially disrupt mankind’s long-term progress until optimism and the trend towards globalization resumes. Here is a partial list of what Hall expects during de-globalization:  

  • “fear of foreigners increase;
  • borders tighten; security and customs lines lengthen;
  • free trade policies roll back;
  • new tariffs and other impediments to trade introduced;
  • immigration policies tighten;
  • students studying abroad are sent home; international tourism declines;
  • cross-border capital flows slow;
  • countries reduce international cooperation;
  • countries increase border conflicts.”

Hall published his paper in August 2016, before the election of Donald Trump. From an inside-out orientation, Trump’s attacks on open borders and free-trade are manifestations—and not the cause—of America’s collective rising fear.

Authoritarianism is rising in China, too. Recently, China elevated President Xi’s pronouncements and policies to Mao-like status and granted him a lifetime term.

Inevitably, a bull market turns to a bear market, accompanied by rising levels of fear and distrust as optimism wanes. Authoritarian leaders will seek to blame others; and when they do, the fearful may feel temporarily relieved. Politicians will step up to assure the frightened that something will be done about economic problems.

At the bottom of long bear markets, with fear and despair mounting, the odds of a political miscalculation are greatest, and war can ensue.

In such an atmosphere, trade wars will escalate, and economic conditions will deteriorate further. At the bottom of the trend of waning social mood, the population will be in a state of despair. (Of course, there are variations in mood among individuals.)

At the bottom of long bear markets, with fear and despair mounting, the odds of a political miscalculation are greatest, and war can ensue. A major bear market accompanied by high unemployment, authoritarianism, and populism is a combustible mixture in a nation unmoored from principles.

The Good News

Since human beings are free to choose, the worst can be avoided. On a personal level, we can wake up and see that blaming other countries for rising levels of fear will not solve economic woes. Merely pointing out the shortcomings of Donald Trump is not enough since behind Trump are the millions of mistaken ideas of our fellow Americans.

A fearful social mood is a wake-up call. A failure to wake up will lead to economic destruction, if not war.

In his book, The Coming Aristocracy, contained in his collected works, FEE founder Leonard Read writes,

When we concern ourselves with the plight of humanity, particularly with the shortcomings of others that bear unfavorably on our own opportunities to live and advance, it behooves us to find out what we can and cannot do about enlightening them. It is agreed, I hope, that we are powerless to reform them, to make them over in our images. Once we recognize this limitation, we can, if we so will it, begin to realize our potentialities.

And what, pray tell, is the single tactic within our power? We can increase our own light which, if bright enough, will, on occasion, attract another to it. For it is light that brings forth the eye, that whets the spirit of inquiry, that stimulates the desire to know, that draws forth, arouses latent capacity.

To increase “our own light,” we must both embrace more deeply the fundamental truth that we are all part of the brotherhood of man and value the principles by which human beings flourish. These inside-out actions attract others, potentially restoring a social mood of optimism.

  • Barry Brownstein is professor emeritus of economics and leadership at the University of Baltimore. 

    To receive Barry's essays subscribe at his Substack, Mindset Shifts.

    His essays also appear at the American Institute for Economic Research, Intellectual Takeout, Learn Liberty, The Epoch Times and many other publications. Barry’s essays have been translated into many languages, most frequently Spanish and Portuguese. He is the author of The Inner-Work of Leadership.

    Barry holds a Ph.D. in economics from Rutgers University and a B.S. in mathematical statistics from CCNY.