Worst Economic Experiment Ever
No matter how this plays out, America will lose
The hard-working staff here at Drezner’s World is fully aware of all the extralegal moves that the Trump White House have made in recent months weeks days that will have serious effects on the U.S. economy — and, by extension, the global economy. I just haven’t been terribly interested in writing about it.
In part this is due to the utterly depressing reality of the current situation. But it’s mostly because at this point things can only play out in one of two very bad ways — and both pathways wind up at the same endpoint.
First, let’s consider the ongoing policy fiascoes:
The massive ratcheting up of U.S. tariffs will accomplish little beyond harming U.S. businesses and U.S. consumers.
The slashing of government funding for research and development, combined with the multi-pronged assault on U.S. research universities, will harm long-term productivity and threaten U.S. leadership in science and technology.
The One Big Beautiful Bill Act is the macroeconomic equivalent of a hollow point bullet that will bust the U.S. budget deficit wide open.
The deployment of National Guard troops into DC, along with Trump’s intent to deploy such troops elsewhere, are surefire ways to depress the service sector of major urban economies.
The firing of the head of the Bureau of Labor Statistics presages a world in which no one will be able to trust the reliability of U.S. economic data.
In the past ten days the Trump administration has doubled down on piss-poor economic policy. Last week the president announced that the federal government was acquiring a ten percent equity stake in Intel. The company confirmed the deal on its own website, explaining, “The government’s equity stake will be funded by the remaining $5.7 billion in grants previously awarded, but not yet paid, to Intel under the U.S. CHIPS and Science Act and $3.2 billion awarded to the company as part of the Secure Enclave program.” This comes on the heels of Trump’s other attempts to extort profits from U.S. firms, demand “golden shares” from foreign takeovers of U.S., firms, and browbeat companies into firing people he doesn’t like and squelching criticism he doesn’t want to hear. Little wonder that economic conservatives are disgusted and the Financial Times has dubbed Trump the “Dirigiste-in-Chief.”
Meanwhile, Secretary of Commerce Howard Lutnick continues to say extremely stupid things about government control over the U.S. economy.1 In a CNBC interview he suggested creating a Putin-style national and economic security fund. In that same interview he said the government should acquire equity stakes in defense contractors, stating, “what’s the economics of that? I’m going to leave that to my secretary of Defense and the deputy secretary of Defense. These guys are on it and they’re thinking about it.” To put it gently, Secretary of Defense Pete Hegseth has bankrupted two NGOs already, so I’m not sure he’s the guy you want to be thinking about this question.
And then there is what Lutnick said at yesterday’s cabinet meeting:
Finally, there is Trump’s assault on the Federal Reserve. In claiming to have fired Fed Governor Lisa Cook without any kind of valid procedure — or evidence — the administration is obviously threatening the independence of the Fed. Cook is not going anywhere, so we will have to see how the Supreme Court bends the knee to Trump this time around the judiciary handles this case. Paul Krugman aptly describes the stakes:
If Powell caves, or the Supreme Court acts supine again and validates Trump’s illegal declaration, the implications will be profound and disastrous. The United States will be well on its way to becoming Turkey, where an authoritarian ruler imposed his crackpot economics on the central bank, sending inflation soaring to 80 percent.
And the damage will be felt far beyond the Fed. This will mark the destruction of professionalism and independent thinking throughout the federal government.
So what will happen? Look, none of this is rocket science. Any decent social scientist would be able to explain why someone with Trump’s leadership style will crash and burn an economy if there are no constraints on his power.
The question is what happens now. There are two possible outcomes, neither of them is good, and both of them arrive at the same ending.
The first possible outcome is that Trump triggers an escalating financial crisis. Markets have already reacted to Trump’s assault on the Fed by betting on lower short-term interest rates but higher long-term interest rates. The combination of Trump’s misbegotten economic policies will lead to an extremely unpleasant stagflationary cycle. And a lot of people will suffer.
The second possible outcome is even more disturbing: financial markets will be copacetic to Trump’s idiocies for a much longer period than anyone expected and then collapse. Nathan Tankus explained why this was possible in Politico:
The second Trump administration has been consumed by two central themes. The first theme is the unprecedented pace at which this administration has attacked the rule of law and the constitutional system on which it is built. The second theme is the unprecedented weakness of the response from major institutions to the Trump administration’s actions. Wall Street’s passivity amid Trump’s unprecedented attack on the Fed is only the latest example….
Traders have continued to have undue confidence in the Fed’s, and specifically Powell’s, capacity to uniquely withstand attacks from Trump. Additionally, there is genuine uncertainty and confusion on Wall Street about the potential consequences of a Trump-controlled Fed. The erratic back and forth on tariffs have, ironically, opened the door to soothing illusions regarding how bad Trump’s personal dominion over government and the economy really is for the corporate bottom line. Wall Street’s aphorism that “Trump Always Chickens Out” (TACO) has also helped to sustain the stock market highs….
The threat to the rule of law emanating from a second Trump term was clearly not part of investors’ calculations. It’s important to pause on this point. Stock market traders are neither legal experts, nor scientists. But for too long, “market judgment” has been treated as, if not infallible, at least the best judgment given the evidence and information available. The response of the stock market to events of the past year shows how false that is. The reality of Trump’s threat to the very system that investors depend on has failed to become the conventional wisdom among traders, and thus Wall Street continues its muted response to the cataclysmic.
In this scenario, markets are not leading indicators but lagging indicators of how government policy affects the real economy. Which means, in the end, a somewhat different path to the same end: a weak, unproductive U.S. economy.
It is this equifinality that makes Trump’s policies such a bad economic experiment. The question is not what will happen due to Trump’s array of statist, corrupt policies; it is how we all wind up worse off.
Is there a world in which this degree of state intervention produces superior economic growth? Perhaps, but it is not this world, in which the state is run by presidential whim and U.S. state capacity has been weakened so badly.
Sadly, all true. The point made by Tankus is particularly relevant. This deferral to short term traders (who by the way are most definitely not long term investors) as if they knew something is particularly gaulling. Most have less than zero appreciation for the importance of the rule of law and good governance. The widespread hostility to good securities regulation and corporate law (for instance, Delware chancellry and Tesla) and embrace of cyrpto nonsens alone makes it abundantely clear than most investors have no understanding for the fundamental importance of good rules, made carefully, properly enforced. Fools with money are still fools, and the mere fact that someone runs money does nothing to prove that they are not a fool (and often does prove that they are shallow and emotionally challenged). Markets did not crash in Turkey or Hungary in 3 months. But in 3 -10 years, the corrosive impact of bad governance rots everything.
In a comment on one of the posts in this newsletter a couple of months ago I mused about what sort of cultural revolution we were convulsed by (or "convulsed in" if these violent spasms were induced by some sort of internal failure).
But whatever the source of these spasms, the condition has become a totalizing one as the Administration demolishes our cultural, legal and now our apex economic institutions, and attempts to comprehensively remake American society’s moral, aesthetic, historical, and administrative foundations so that every act of production reflects the regime’s worldview.
And what is this worldview? To reaffirm a monolithic vision of American greatness. That means a suppression of any and all means that existed (a) to promote and celebrate diversity, (b) increase our awareness of our checkered history, and (c) encourage critical thinking in all facets of our educational system which, despite its shortcomings, has served us very well.
The nouns "cancellations", "defunding", "restrictions", "takeovers", "purges", "bans", have become part of our everyday conversation. There was some of this when the dominant liberal ideology reigned but it was never on this scale and never imposed with such speed and brutality.
But what makes this project a totalizing one is that its ambition is not merely to quash dissent but to reshape the total symbolic and moral order so that alternative ways of thinking cannot easily regenerate. And in its ambition to both destroy and remake it seems far more radical than the silencing and censorship that was experienced in Francoist Spain or Pinochet's Chile, and closer to the total cultural overhaul we saw in Mao's Cultural Revolution and the Russian Revolution in its late Bolshevik period when all pluralism was abandoned under Stalin's Socialist Realism dictates.
And, then, of course we have Nazi Germany. This might be premature but the parallel with that period and that place is not just the extirpation of “degenerate” ideas, but also to generate a new, self-reinforcing culture aligned with a singular vision. We do not yet have anything like Hitler's racially pure Volksgemeinschaft (and maybe we never will ) but we are moving closer to that regime's Gleichschaltung (coordination) — where every cultural production from literature to film to the sciences needed to be brought into ideological alignment. And how much longer before we get to state intervention in the economy, never in ownership of the means of production, but where businesses become state-controlled managers (Betriebsführer), implementing directives on production, pricing, and distribution received from government agencies?