What is Trumponomics, and how would it affect Israel?

WHOM WILL Americans choose as their president on November 8? Arguably America's choice for president is as important for the people of Israel as their own prime minister. He or she will impact Israel's foreign policy, economy, defense and even internal politics. Democratic candidate Hillary Clinton's policies and platform are more or less transparent. She has been highly visible for some 24 years, serving as US senator, secretary of state and an active first lady, beginning with Bill Clinton's election in 1992. She first visited Israel 35 years ago and has been back many times since. In contrast, the Republican candidate Donald J. Trump, host of the popular reality show “The Apprentice” for 11 years, is rather opaque. As a BBC commentator noted, when Trump announced he was running for president on June 16, 2015, he was widely mocked by pundits. They are laughing no longer. Though Trump trails Clinton in the polls, political analyst Nate Silver, who correctly predicted the results of the 2012 presidential election in all 50 states, gives him a 38 percent chance to win. And there are still three months left until the election. Trump regularly foregoes teleprompters and written speeches, preferring to improvise. This makes it hard to nail down what he believes and will implement. But it is possible to piece together a fairly coherent picture of Trumponomics – the Trump view of business and economics. For months I've been reading mountains of columns by economists and experts vilifying Trump and scorning his views. A closer look at his speeches and statements reveals that there is a reasonably consistent worldview known as Trumponomics and it is not at all stupid. Moreover, Trump has growing numbers of counterparts in Europe as well whose beliefs match his. Even if he loses the election, Trump and his ideas will powerfully impact politics in the US, the world and, perhaps, even in Israel. Who is Donald J. Trump? Trump is largely known for his fierce opposition to immigration and his call for a wall on the Mexican border to be built and paid for by Mexico. Despite this, Trump himself is the son and grandson of immigrants. His mother, Mary, was born in Scotland, immigrating to the US when she was 18. Trump's father Fred, a real estate developer, was the son of immigrants from Kalistadt, Germany. Trump's third wife, Melania, emigrated from Slovenia. Trump was the fourth of five children. He had to leave school at 13 because of bad behavior and was sent to the New York Military Academy. He has an undergraduate degree in finance and commerce from the University of Pennsylvania, an Ivy League school. In college, he got four draft deferments, including a medical deferment, which kept him from fighting in Vietnam. How wealthy is Trump? It's hard to say. He refuses to reveal his income tax returns, the first presidential candidate to refuse since 1976. Trump says he is worth over $10 billion. Forbes magazine estimates his wealth at $4.5b.; Bloomberg, $2.9b. In any event, he is a billionaire. One of his main assets is his name. Trump claims his Trump brand is worth about $3b. (Forbes says it is worth only $200 million). His name appears, or appeared, on such products or services as an airline business, bottled water, trail mix, hats, gum balls, gummy bears, tea, pan pizza, a video game, a university, steaks, vodka, wine and many others. Cynics have suggested that Trump's presidential candidacy enormously boosts his brand value, win or lose, and that is his major goal. Why is Trump against globalization? Globalization is the process of eliminating national economic borders and fostering free trade and movement of goods, services, capital, information and people across countries. It accelerated with the fall of the Berlin Wall in November 1989 and the reunification of Germany, leading to the European Single Market, and with the admission of China to the World Trade Organization in 2001. Globalization has created enormous wealth for some individuals, businesses and countries, especially in Asia. For two decades, world trade grew twice as fast as the world economy. Those able to compete in world markets became wealthy. But it also created enormous loss and suffering for many, and rampant financial speculation led to the 2008 global collapse that the world is still struggling to deal with. Trump thinks America has lost out in free trade. He opposes NAFTA (the North American Free Trade Agreement that lowered or eliminated tariffs between the US, Canada and Mexico) and opposes the Trans Pacific Partnership (TPP), which would do the same for US-Asia trade. The global retailer Wal-Mart has some 6,000 suppliers in China. As a result, American consumers can buy inexpensive products made in China. This is a major gain. But, on the other hand, Pittsburgh steel workers have lost their jobs and so have many other blue-collar American workers ‒ Chinese workers now have the jobs and the pay. And the Americans? They work at far lower pay for Wal-Mart and McDonald's. Economists claim, opaquely, that free trade and globalization are “paretooptimal.” That means the net gains from it exceed the net losses. If, they say, the losers were compensated fully, there would still be wealth and income left over. That is small comfort to the millions of people whose job skills are now obsolete. They have not been compensated at all for their losses and their incomes have stagnated. They are Trump's constituency. And these losers are not only Americans. Many Israelis, too, have lost out through globalization. Israel as a nation has gained a lot, because it has leveraged its entrepreneurship, innovation and hi-tech skills into powerful growth engines, made possible by free trade and access to world markets. But only 8 percent of the Israeli labor force is hi-tech. What about the other 92 percent? If Trump were speaking in Hebrew about how globalization has hurt the lower middle class, he would find responsive listeners in Israel. Globalization of capital markets has enabled the wealthy to double their money effortlessly every decade. Low and even middle-class people who possess little or no wealth cannot. So, for the first time in decades, globally, the wealthiest 1 percent of the world hold more wealth than the poorest 99 percent. Though he is among the one-tenth of 1 percent of the wealthiest, Trump plays on this chord and finds it resonates with his supporters. If elected, Trump has threatened to slap tariffs on Chinese imports. He claims, with good reason, that China's currency, the renminbi, is kept undervalued (too cheap) by Chinese purchases of dollars. As I write this, you can get 6.69 Chinese renminbi (“money of the people” in Mandarin) for one dollar. That will buy you a lot of Chinese goods. The true purchasing-power value of the renminbi is about four per dollar. This means that everything China sells to the world is one-third cheaper (in dollars) than it would be if its exchange rate were set in open free markets. If China stopped buying dollars, its currency would rise to around its true purchasing power level. Moreover, the renminbi exchange rate has moved (or has been moved) in the wrong direction since 2014, when you got only six renminbi per dollar; instead of getting more expensive it is getting cheaper. A US tariff on Chinese imports will ignite a trade war, with China inevitably retaliating. This would hurt Israel because it depends crucially on its exports and free trade, and a reversal of globalization would entail large economic damage for Israeli exporters. Chinese purchases of US treasury bonds are in part how borrow-and-spend America has paid for excessively high levels of consumption and trade deficits, now exceeding (according to Trump) $800b. Do Americans understand that they have been living on borrowed money and borrowed time, and that Trumponomics may signal an end to this party? Strangely, Trump's opposition to globalization is supported by the research of one of history's greatest economists – the late MIT professor Paul Samuelson, a Nobel laureate. Long ago, Samuelson proved, in a very dense theoretical paper, that in direct contradiction to conventional Economics 101, free trade does not benefit both trading partners. If one partner (US) cedes its manufacturing to another (China) through trade, by importing manufactured goods, China reaps all the gains from productivity increases inherent in manufacturing and America loses them. And this is precisely what has happened. But a coalition of powerful wealthy interests, largely Republicans, supports free, open trade, Trump notwithstanding, because they have gained immense fortunes from it. Trump speaks for those largely silent until now, who have been big losers. It is a huge irony that it took a billionaire to speak for the blue-collar underclass and an even greater irony that it is a right-wing Republican who is blasting the destructive impact of globalization and free trade. Is Trump a business genius? The Washington Post newspaper summed it up thus: “Trump is a mix of braggadocio, business failures and real success.” Trump's hotel and casino businesses have declared bankruptcy four times in two decades, during 1991-2009. Trump once told Newsweek magazine in 2011, “I do play with the bankruptcy laws ‒ they're very good for me” as a tool for trimming debt. Israeli tycoons, too, have been known to trim debt with so-called “haircuts” that have cost pension funds and banks billions of shekels. But they are not running for the highest political office. Does Trump have a coherent economic plan? No – but show me a politician who does. Trump wants to cut corporate taxes to 15% from 35%, and cut personal income taxes to between zero and 25%. He also wants to pay off the national debt, slash the budget deficit and boost defense spending. The last candidate who promised this was Ronald Reagan, in 1980. In his two terms as president, Reagan both cut taxes sharply (in 1982, and again in 1987) and boosted defense spending, as he promised. The result was a spurt of Keynesian deficit-spending growth that led to an economic boom. Reagan was no Keynesian – but nobody cared, the end result was good, and to this day Republicans revere the Reagan presidency. Does Trump support Israel? Trump does have a Jewish connection. His daughter Ivanka is married to Jared Kushner and converted to Judaism before her marriage. Trump told this year's AIPAC convention and later, CNN, “Not only do I have Jewish grandchildren, I have a Jewish daughter; and I am very honored by that.” Trump is largely unfamiliar with the Middle East quagmire, but part of his “Make America Great” program appears to involve making countries pay their fair share of defense capabilities, and this bodes ill for the massive annual defense aid paid to Israel, now under negotiation. Even if Israel does agree to the proposed Obama defense assistance agreement, Trump could rescind it if he becomes president. In his best-selling 1987 book The Art of the Deal, actually written by ghost-writer Tony Schwartz, Trump admits he uses “truthful hyperbole.” Hyperbole – exaggeration – is by definition untruthful. In gaining the Republican presidential nomination, Trump made outrageous statements and gained attention in this way. Now, as presidential candidate, every word Trump speaks will be weighed and fact-checked. But Trump has shown no inclination of mending his ways. It may well be that truthful hyperbole will be his undoing. But in his closing speech at the Republican National Convention, Trump skipped the hyperbole and gave a reasoned talk, which he uncharacteristically read. “America has lost nearly one-third of its manufacturing jobs since 1997, following the enactment of disastrous trade deals supported by Bill and Hillary Clinton. Remember, it was Bill Clinton who signed NAFTA, one of the worst economic deals ever made by our country. Or frankly, any other country. Never, ever again. “I am going to bring our jobs back to Ohio and Pennsylvania and New York and Michigan and all of America, and I am not going to let companies move to other countries, firing their employees along the way, without consequences. Not going to happen anymore… I will make individual deals with individual countries. No longer will we enter into these massive transactions with many countries that are thousands of pages long and which no one from our country even reads or understands. “We are going to enforce all trade violations against any country that cheats. This includes stopping China's outrageous theft of intellectual property, along with their illegal product dumping, and their devastating currency manipulation. They are the greatest currency manipulators ever. Our horrible trade agreements with China, and many others, will be totally renegotiated,” he said. This is the essence of Trumponomics ‒ “individual deals with individual countries” means good-bye globalization, whose essence was the most-favored nation General Agreement on Tariffs and Trade deal. It stated that what is offered to one trading partner must be offered to all. If Trumponomics happens, it would be bad for Israel's economy. Trumponomics seeks to limit world free trade. Israel's main growth engine is trade; limiting trade will do damage. Trump is a symptom. Even if he loses, his anti-free trade ideas are spreading. Israel should prepare for a world in which economic borders and walls are restored. It sounds fanciful, but perhaps Israel should seek associate membership of the European Union, as a preventive measure. Small trading nations need to join large powerful clubs in a world of deglobalization. ■ The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com

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