I referred somewhat flippantly in a recent column here to America becoming an emerging market. You might say correctly that the world’s largest economy is in a different league. I meant it differently, though, and not, of course, as a compliment. For along with things that investment managers assure us of, including high economic growth and better prospective investment returns, emerging markets also present higher risks. These normally boil down to some combination of a dysfunctional political system and weak standards of economic governance.
So, while the US is at the moment economically head and shoulders above the likes of Brazil, Turkey, Russia, and in most respects China, the question is whether it is converging with them politically. And if so, will that eventually threaten to compromise America’s economic heft? Is the US, in effect, compromising political and institutional progress made over many years?
President Trump and his entourage of billionaires and generals are having a palpable adverse impact on Washington politics, threatening US institutions including the media and the legal system, and railing against neighbouring countries and commercial allies. The governance problems that have erupted since the beginning of the year may have been predicted in general terms, but they have nonetheless come as a shock to America’s system, and to the rest of the world. The behaviour of the US administration is not so different from what we often expect in some emerging markets.
Far from “draining the swamp” in Washington, Trump has, if anything, filled it to overflowing. Few autocrats and one-party states behave differently. Wall Street’s influence in the White House remains strong. Allegations abound about links between ex-aides of Trump, who now work for big Washington lobby groups, and the hiring of ex-lobbyists into the Administration to win favour with commercial interests. There is much reported obfuscation about the public roles and private interests of members of the Trump family. Many journalists have been pursuing the Russia investigations, and looked into alleged lobbying by senior officials on behalf of foreign governments, the grey lines between Trump’s commercial and America’s political interests in foreign countries, and the use by senior members of the government of private jets.
"Far from 'draining the swamp,' Trump has, if anything, filled it to overflowing"Washington was certainly not the epitome of squeaky clean government before 2017. We have data-based governance evidence that demonstrate how America has fallen in the rankings over the last few years. Annual surveys by the World Bank, Transparency International and the Fraser Institute, for example, show that the US has been losing previous top spots in an array of indicators designed to measure the efficiency, quality and intrusiveness of government, the quality of the legal and regulatory systems, openness to international trade and capital, political stability and the independence of institutions. In its defence, the US can still boast top rankings among over 150 nations, and other advanced economies have fallen back a bit also since the financial crisis.
Yet, in some respects, the scale of the fall from the top of the tree, so to speak, has been remarkable because it is, after all, the US that we are talking about here. And it is almost certain that America’s governance will continue to deteriorate when you consider the polarisation of and dangerously sharp edge to US politics, spurred in so many ways by the President and his Administration, the withdrawal of the US from global leadership, and the turn against trade and towards narrow interest economic and social programmes. There is clearly something badly amiss when George W Bush and Barack Obama find common cause, as they did last week, to launch a broadside against the ways in which Trump has changed US political leadership, including the “politics of division” and “casual cruelty and bigotry.”
The White House has unquestionably been advocating regressive economic and illiberal social policies. The repeal of Obamacare has not succeeded (yet) but not for lack of trying. The much touted infrastructure plan is nowhere to be seen. Tax reform is now about to move centre-stage with the Senate voting 51:49 last week to pursue a budget plan that will cut taxes for companies and disproportionately for higher income individuals, and add at least $1.5 trillion to US public debt over the next decade.
"The fall from the top of the tree has been remarkable—after all, this is the US that we are talking about"The economy looks in relatively good shape at the moment with Wall Street reaching for new heights on the back of seemingly robust corporate profits. This may not strike you as a problem. Trump certainly sees these as weathervanes of his own success. Yet, they also speak to deep-seated flaws that are not untypical of emerging markets.
High profits should, strictly speaking, be competed away after a while but they haven’t been. High levels of industrial concentration, and the rising share of revenues generated by the top four companies in a wide range of sectors, speak to the corrosion of competition and the failure of anti-trust watchdogs. The world’s biggest free market economy shouldn’t be like this.
In its trade policies, the US does have some justifiable complaints about how China and others go about things, but “America First” thinking means that the US sees trade as a zero-sum game, when in fact it is anything but. This is a capitulation to the type of thinking that permeates many emerging markets (albeit sometimes for good reason). Moreover, the removal or dilution of banking and finance regulations adopted after the financial crisis to try and limit financial risk in products and institutions is also high up on the government’s agenda. The President’s keenly awaited appointments to the Chair of the Federal Reserve and other vacancies at the central bank may also point to new forms of political interference.
All things considered, the US still has core economic and commercial strengths, and viable political and regulatory institutions. These could suffice to see the US through the potential harm that could be inflicted by the Trump Administration—and a still compliant Republican Congress—on the country’s governance structure and ultimately economic performance. That doesn’t mean, though, that we should take our eyes off what looks like a startling descent in standards, to those we think of as unremarkable in emerging economies.
