Surplus recycling, currency unions and the birth of the Global Minotaur

In yesterday’s post, I began to tell the tale of how the USA planned and implemented a Global Plan for the world economy, placing the US administration at the heart of a global Surplus Recycling Mechanism. Today, I have two offerings: One is a brilliant paper by George Krimpas which states the case for such a Surplus Recycling Mechanism, as expounded by Keynes during the Bretton Woods conference in 1944. It is called The Recycling Problem in a Currency Union. Secondly, I am continuing today my own story of how the postwar Global Plan unravelled, giving rise to a brand new, terriblyunruly, yet puzzlingly effective Surplus Recycling Mechanism which I call the Global Minotaur (1971-2008). It comes from Chapter 4 of my forthcoming book (also entitled THE GLOBAL MINOTAUR). Enjoy. (As I am about to board a plane for Australia, and then Korea, my postings will be intermittent for a while.)The Global Plan’s Achilles HeelThe Global Plan unravelled because of a major design flaw in its original architecture. John Maynard Keynes had spotted the flaw during the 1944 Bretton Woods conference but was overruled by the Americans. What was it? It was the lack of any automated Global Surplus Recycling Mechanism (GSRM) that would keep systematic trade imbalances constantly in check.

The American side vetoed Keynes’ proposed mechanism, the International Currency Union (ICU), thinking that the US could, and should, manage the global flow of trade and capital itself; without committing to some formal, automated GSRM. The new hegemon, blinded by its newfangled superpower status, failed to recognise the wisdom of Ulysses’ strategy; of binding itself voluntarily to some Homeric mast.

Less cryptically, Washington thought that global trade imbalances would favour America in perpetuity, casting in stone the its economy’s status as the world’s surplus nation. Then, the power bestowed upon the United States by the surpluses it extracted from all over the world would be utilised benevolently and efficiently in order to manage the world economy along the lines of an enlightened hegemony. Indeed, this is exactly what the United States did: They recycled graciously the American surpluses in the form of capital injections into Japan, Germany and other deserving regions.

Alas, US policy makers failed to foresee that global imbalances could undergo a drastic inversion, leaving the United States in the unfamiliar position of a deficit country. During the heady days of the late 1940s, the Global Plan‘s architects ostensibly neglected to take seriously the possibility that the lack of self-restraint would lead Washington to codes of behaviour that would undermine their brilliant grand design.

The Global Plan unravels

The Global Plan‘s path was not laid with roses. A series of mishaps marked its evolution, with Chairman Mao’s triumph delivering the first blow. Quite impressively, it reacted creatively to adversity, often as a result of unintended consequences. We have already seen how the Korean War was exploited to shore up the Global Plan‘s far eastern flank. So, when the United States dragged itself into the Vietnam War, a similar wave of ‘creative destruction’ was on the cards.

Though it is a gross understatement to suggest that its persecution did not go according to the original plan, the Vietnam War‘s silver lining is visible to anyone who has ever visited South East Asia. Korea, Thailand, Malaysia and Singapore grew fast and in a manner that frustrated the pessimism of those who predicted that underdeveloped nations would find it hard to embark upon the road of capital accumulation necessary to drive them out of abject poverty. In the process, they provided Japan with valuable trade and investment opportunities which lessened the burden on the US authorities which, before the mid-1960s, had shouldered alone the burden of generating enough demand for Japanese factories in Europe and in the US itself. Years later, the same model was copied by Deng Xiao Ping and delivered the China we know today.

The problem with unintended consequences is that they are not reliably advantageous. Ho Chi Minh’s stubborn refusal to lose the war, and Lyndon Johnson’s almost manic commitment to do all it takes to win it, were crucial not only in creating a new capitalist region in the Far East, but also in derailing the Global Plan. The escalation of the financial costs of that war that were to be a key factor in its demise.

Setting aside the appalling human cost,[1] the war cost the US government around $113 billion and the US economy another $220 billion. Real US corporate profits declined by 17% while, during the period 1965-1970, the war-induced increases in average prices forced the real average income of American blue collar workers to fall by about 2%.[2] The war was taking its toll not only ethically and politically, as a whole generation of American youngsters were marked by the fear and loathing of Vietnam, but also in terms of tangible loss of working class income which fuelled social tensions. Arguably, President Johnson’s Great Society social programs were aimed, largely, at relieving these strains.

As the combined costs of the Vietnam War and the Great Society began to mount, the government was forced to generate mountains of US government debt. By the end of the 1960s, many governments began to worry that their own position, which was interlocked with the dollar in the context of the Bretton Woods system, was being undermined. By early 1971, liabilities in dollars exceeded $70 billion when the US government possessed only $12 billion of gold with which to back them up.

The increasing quantity of dollars was flooding world markets, giving rise to inflationary pressures in places like France and Britain. European governments were forced to increase the quantity of their own currencies in order to keep their exchange rate with the dollar constant, as stipulated by the Bretton Woods system. This is the basis for the European charge against the United States that, by pursuing the Vietnam War, it was exporting inflation to the rest of the world.

Beyond mere inflationary concerns, the Europeans and the Japanese feared that the build-up of dollars, against the backdrop of a constant US gold stock, might spark off a run on the dollar which might then force the United States to drop its standing commitment to swapping an ounce of gold for $35, in which case their stored dollars would devalue, eating into their national ‘savings’.

The flaw in the Global Plan was intimately connected to what Valery Giscard d’Estaing, President de Gaulle’s finance minister at the time, called the dollar’s exorbitant privilege: The United States’ unique privilege to print money at will without any global institutionalised constraints. De Gaulle and other European allies (plus various governments of oil producing countries whose oil exports were denominated in dollars) accused the Unites States of building its imperial reach on borrowed money that undermined their countries’ prospects. What they failed to add was that the whole point of the Global Plan was to revolve around a surplus generating United States. When America turned into a deficit nation, the Global Plan could not avoid going into a vicious tail spin.

On 29th November 1967, the British government devalued the pound sterling by 14%, well outside the Bretton Woods 1% limit, triggering a crisis and forcing the United States government to use up to 20% of its entire gold reserves to defend the $35 per ounce of gold peg. On 16th March 1968, representatives of the G7’s Central Banks met to hammer out a compromise. They came to a curious agreement which, on the one hand, retained the official peg of $35 an ounce while, on the other hand, left room for speculators to trade gold at market prices.

When Richard Nixon won the US Presidency in 1970, he appointed Paul Volcker as Undersecretary of the Treasury for International Monetary Affairs. His brief was to report to the National Security Council, headed by Henry Kissinger, who was to become a most influential Secretary of State in 1973. In May of 1971, the taskforce headed by Volcker at the Treasury presented Kissinger with a contingency plan which toyed with the idea of “suspension of gold convertibility”. It is now clear that, on both sides of the Atlantic, policy makers were jostling for position anticipating a major change in the Global Plan.

In August of 1971 the French government decided to make a very public statement of its annoyance at the United States’ policies: President George Pompidou ordered a destroyer to sail to New Jersey to redeem US dollars for gold held at Fort Knox, as was his right under Bretton Woods! A few days later, the British government of Edward Heath issued a similar request, though without employing the Royal Navy, demanding gold equivalent to $3 billion held by the Bank of England.  Poor, luckless Pompidou and Heath: They had rushed in where angels fear to tread!

President Nixon was absolutely livid. Four days later, on 15th August 1971, he announced the effective end of Bretton Woods: the dollar would no longer be convertible to gold. Thus, the Global Plan unravelled.

Interregnum: The 1970s oil crises, stagflation and the rise of interest rates

Soon after, Nixon dispatched his Secretary of the Treasury (a no non-sense Texan called John Connally) to Europe with a sharp message. Connally’s account of what he said to the Europeans was mild and affable:

We told them”, he told reporters, “that we were here as a nation that had given much of our resources and our material resources and otherwise to the World to the point where frankly we were now running a deficit and have been for twenty years and it had drained our reserves and drained our resources to the point where we could no longer do it and frankly we were in trouble and we were coming to our friends to ask for help as they have so many times in the past come to us to ask for help when they were in trouble. That is in essence what we told them.”


His real message is still ringing in European ears: It’s our currency but it’s your problem! What Connally meant was that, as the dollar was the reserve currency, i.e. the only truly global means of exchange, the end of Bretton Woods was not America’s problem. The Global Plan was, of course, designed and implemented to be in the interest of the United States. But once the pressures on it (caused by Vietnam and internal US tensions that required an increase in domestic government spending) became such that the system reached breaking point, the greatest loser would not be the United States itself but Europe and Japan; the two economic zones that had benefited mostly from the Global Plan.

It was not a message either the Europeans or Japan wanted to hear. Lacking an alternative to the dollar, they knew that their economies would hit a major bump as soon as the dollar would start devaluing. Not only would their dollar assets lose value but, additionally, their exports would become dearer. The only alternative was for them to devalue their currencies too but that would then cause their energy costs to skyrocket (given that oil was denominated in dollars). In short, Japan and the Europeans found themselves between a rock and a hard place.

Toward the end of 1971, in December, Presidents Nixon and Pompidou met in the Azores. Pompidou, eating humble pie over his destroyer antics, pleaded with Nixon to reconstitute the Bretton Woods system, on the basis of fresh fixed exchange rates that would reflect the new ‘realities’. Nixon was unmoved. The Global Plan was dead and buried and a new unruly beast, the Global Minotaur, was to fill its place.

Once the fixed exchange rates of the Bretton Woods system collapsed, all prices and rates broke loose. Gold was the first commodity discretely to jump from $35 to $38 per ounce, soon to $42 and then to float unbounded into the ether. By May 1973 it was trading at more than $90 and before the decade was out, in 1979, it had reached a fabulous $455 per ounce; a twelvefold increase in less than a decade.

Meanwhile, within two years of Nixon’s August 1971 bold move, the dollar had lost 30% of its value vis-à-vis the Deutschmark and 20% against the Yen and Frank. Oil producers suddenly found that their black gold, when denominated in yellow gold, was worth a fraction of what it used to be. Members of the Organisation of Petroleum Exporting Countries (OPEC), which regulated the price of oil through agreed cutbacks on aggregate oil output, were soon clamouring for coordinated action (i.e. reductions in production) to boost the black liquid’s gold value.

At the time of Nixon’s announcement, the price of oil was less than $3 per barrel. In 1973, with the Yom Kippur war between Israel and its Arab neighbours apace, the price jumped to between $8 and $9, thereafter hovering in the $12 to $15 range until 1979. In 1979 a new upward surge began that saw oil trade above $30 well into the 1980s. And it was not just the price of oil that scaled unprecedented heights. All primary commodities shot up in price simultaneously: Bauxite (165%), lead (170%), silver (1065%) and tin (220%) are just a few examples. In short, the termination of the Global Plan signalled a mighty rise in the costs of production across the world. Inflation soared as did unemployment: a rare combination of stagnation with inflation that came to be known as stagflation.

The conventional wisdom of what caused the 1970s stagflation is that the OPEC countries pushed the dollar price of oil sky high against the will of the United States. It is an explanation that runs against logic and evidence. For if the Nixon administration had truly opposed the oil hikes, how are we to explain the fact that its closest allies, the Shah of Iran, President Suharto of  Indonesia and the Venezuelan government, not only backed the increases but led the campaign to bring them about? How are we to account for the administration’s scuttling of the Tehran negotiations between the oil companies (the so-called Seven Sisters) and OPEC just before an agreement was reached that would have depressed prices?

Quoting an influential American observer of these crucial discussions, “…a split was announced in the talks in Tehran by a special US envoy, then-Under Secretary of State John Irwin, accompanied there by James Akins, a key State Department man on oil….[T]he real lesson of the split in negotiations with OPEC was that higher prices were not terribly worrisome to representatives of the State Department… the whole subject of what the negotiations were about began to focus not on holding the price line but on ensuring security of supply.”[3]

The question is thus begged: Why did the United States not oppose with any degree of real commitment the large increases in oil prices? The simple reason is that the Nixon administration, just like it did not regret the end of Bretton Woods, did not care to prevent OPEC from pushing the price of oil higher. For these hikes were not inconsistent with the administration’s very own plans for a substantial increase in the global prices of energy and primary commodities!

Recalling that the new aim was to find ways of financing the US twin deficits without cutting US government spending, or increasing taxes, or reducing US world dominance, American policymakers understood that they had a simple task: To entice the rest of the world to finance its deficits. But this meant a redistribution of global surpluses in favour of the United States and at the expense of the two economic zones they had built around Germany and Japan. Two were the prerequisites of the planned reversal of global capital flows which would see the world’s capital stream into Wall Street for the purposes of financing the expanding US twin deficits:

A. Improved competitiveness of US firms in relation to their German and Japanese competitors; and

B. Interest rates that attracted large capital flows into the Unites States

Prerequisite A could be achieved in one of two ways: Either by boosting productivity in the United States or by boosting the relative unit costs of the competition. The US administration decided to aim for both, for good measure. Labour costs were squeezed with enthusiasm and, at the same time, oil prices were ‘encouraged’ to rise. The drop in US labour costs not only boosted the competitiveness of American companies but, also, acted as a magnet for foreign capital that was searching for profitable ventures. Meanwhile, as oil prices rose, every part of the capitalist world was affected adversely. However, Japan and Western Europe (lacking their own oil) were burdened much more than the United States.

Meanwhile, the rise in oil prices led to mountainous rents piling up in bank accounts from Saudi Arabia to Indonesia, as well as huge receipts by US oil companies. All these petro-dollars soon found their way into Wall Street’s hospitable bosom. The Fed’s interest rate policy was to prove particularly helpful in this respect.

Turning to Prerequisite B, money (or nominal) interest rates jumped from 6%, were the Global Plan‘s final years had left them, to 6.44% in 1973 and to 7.83% the following year. By 1979 President Carter’s administration began to attack US inflation with panache. It appointed Paul Volcker as Fed Chairman with instructions to deal decisively with inflation. His first move was to push average interest rates to 11%.

In the following year, June of 1981 to be precise, Volcker raised interest rates to a lofty 20%, and then further up again to 21.5%. While his brutal monetary policy did tame inflation (pushing it down from 13.5% in 1981 to 3.2% two years later), its harmful effects on employment and capital accumulation were profound, both domestically and internationally. Nevertheless, Prerequisites A&B had been met even before Ronald Reagan had settled in properly at the White House.

A new phase thus began. The United States could now run an increasing trade deficit with impunity while the new Reagan administration could also finance its tremendously expanded defence budget and its gigantic tax cuts for the richest Americans. The 1980s ideology of supply-side economics, the fabled trickle-down effect, the reckless tax cuts, the dominance of greed as a form of virtue etc. were just manifestations of America’s new exorbitant privilege: the opportunity to expand its twin deficits almost without limit, courtesy of the capital inflows from the rest of the world. American hegemony had taken a new turn. The reign of the Global Minotaur had dawned.

The Global Minotaur


The United States had neither wanted nor resigned easily to the collapse of the Global Plan. However, once America lost its surplus position, US policymakers were quick to read the writing on the wall: the Global Plan‘s Achilles’ Heel had been pierced and its downfall was a matter of time. They then moved on very rapidly, unwilling to countenance the prospect of jeopardising global hegemony in a futile attempt to mend a broken design.

Perhaps the best narrative on the violent abandonment of the Global Plan comes from the horse’s mouth. In 1978 Paul Volcker, the man who was among the first to recommend that Bretton Woods be discarded, addressed an audience of students and staff at Warwick University. Not long after that speech, President Carter appointed him to the Chair of the Fed. One wonders if his audience grasped the significance of his words:

“It is tempting to look at the market as an impartial arbiter… But balancing the requirements of a stable international system against the desirability of retaining freedom of action for national policy, a number of countries, including the US, opted for the latter …”

And as if this were not sufficiently loud and clear, Volcker added the following:

“[A] controlled disintegration in the world economy is a legitimate objective for the 1980s.” (the emphasis is mine)

It was the Global Plan‘s best epitaph and the clearest exposition of the second post-war phase that was dawning. Volcker’s speech was a blunt proclamation of the future that US authorities envisaged: Unable to maintain reasonably well balanced international financial and trade flows any longer, America was planning for a world of rapidly accelerating asymmetrical financial and trade flows. The aim? To afford America the exorbitant privilege of running up boundless deficits and, thus, to entrench further US hegemony (not despite, but) courtesy of its deficit position. And how would such a feat be accomplished? The answer Volcker gave, with his usual bluntness, was: By choosing to fling the world economy into a chaotic, yet strangely controlled, flux; into the labyrinth of the Global Minotaur.

In the decades that followed, the days when the United States would be financing (directly, through war financing, or by the exercise of political power) Germany and Japan became a distant memory. America began importing like there was no tomorrow and its government splurged out unhindered by the fear of increasing deficits. As long as foreign investors sent billions of dollars every day to Wall Street, quite voluntarily and for reasons completely related to their bottom line, the United States’ twin deficits were financed and the world kept revolving haphazardly around its axis.

The Athenians’ gruesome tributes to the Cretan Minotaur were imposed by King Minos’ military might. In contrast, the tributes of capital that fed the Global Minotaur flooded into the United States voluntarily. Why? How did US policy makers persuade capitalists from all over the world to fund the superpower’s twin deficits? What was in it for them? The answer turns on four factors. To stick to the mythological narrative, let’s call them the Minotaur‘s charismas.

I shall be returning to these four charismas in my next posting.

[1] 2.3 million dead, 3.5 million seriously wounded, 14.5 million refugees.

[2] These estimates are due to New Deal economist Robert Eisner, Professor at Northwestern University and a one-time President of the American Economic Association.

[3] V.H. Oppenheim, V.H. (1976-77), ‘Why Oil Prices Go Up: We Pushed Them’, Foreign Policy, 25, 32-33

Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable

After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lacklustre U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to 10 ominous and risky trends.

The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the Covid-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.

Worse, the loss of income for many households and firms means that private-sector debt levels will become unsustainable, too, potentially leading to mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anaemic recovery than the one that followed the Great Recession a decade ago.

A second factor is the demographic timebomb in advanced economies. The Covid-19 crisis shows that much more public spending must be allocated to health systems, and that universal healthcare and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have ageing societies, funding such outlays in the future will make the implicit debts from today’s unfunded healthcare and social security systems even larger.

A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labour markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.

A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetised fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalisation and renewed protectionism will make stagflation all but inevitable.

A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the 21st-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.

This points to the sixth major factor: deglobalisation. The pandemic is accelerating trends toward balkanisation and fragmentation that were already well underway. The US and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions. The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labour, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.

The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.

This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.

Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.

A final risk that cannot be ignored is environmental disruption, which, as the Covid-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, Sars in 2003, H1N1 in 2009, Mers in 2011, Ebola in 2014-16) are, like climate change, essentially manmade disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalised world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.

These 10 risks, already looming large before Covid-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimise many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.

Nouriel Roubini is professor of economics at New York University’s Stern School of Business. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

Trump Opens Door to Cuts to Medicare and Other Entitlement Programs

The president signaled a willingness to scale back Medicare, a shift from his 2016 platform of protecting entitlement programs.

WASHINGTON — President Trump suggested on Wednesday that he would be willing to consider cuts to social safety-net programs like Medicare to reduce the federal deficit if he wins a second term, an apparent shift from his 2016 campaign promise to protect funding for such entitlements.

The president made the comments on the sidelines of the World Economic Forum in Davos, Switzerland. Despite promises to reduce the federal budget deficit, it has ballooned under Mr. Trump’s watch as a result of sweeping tax cuts and additional government spending.

Asked in an interview with CNBC if cuts to entitlements would ever be on his plate, Mr. Trump answered yes.

“At some point they will be,” Mr. Trump said, before pointing to United States economic growth. “At the right time, we will take a look at that.”

Mr. Trump suggested that curbing spending on Medicare, the government health care program for the elderly, was a possibility.

“We’re going to look,” he said.

The interview left many questions unanswered, including whether Mr. Trump would consider touching Social Security or what part of Medicare he would be willing to shave. The president veered from answering the question about entitlements to talking about the robustness of the American economy and how his policies have helped alleviate poverty and boost jobs for minorities, perhaps suggesting that the need for entitlement programs at their current levels had waned.

The president has already proposed cuts for some safety-net programs. His last budget proposal called for a total of $1.9 trillion in cost savings from mandatory safety-net programs, like Medicaid and Medicare. It also called for spending $26 billion less on Social Security programs, the federal retirement program, including a $10 billion cut to the Social Security Disability Insurance program, which provides benefits to disabled workers.

Spending on Social Security, Medicare and Medicaid is expected to cost the federal government more than $30 trillion through 2029, according to the Congressional Budget Office.

Mr. Trump’s willingness to consider such cuts marks a shift from four years ago, when he stood out in a field of deficit-minded Republicans in the 2016 primary race with a promise to shield entitlements from cuts.

In a tweet in May 2015, a month before he formally began his campaign, Mr. Trump discussed another Republican’s promises to keep entitlements intact, former Gov. Mike Huckabee of Arkansas.

Huckabee is a nice guy but will never be able to bring in the funds so as not to cut Social Security, Medicare & Medicaid,” Mr. Trump tweeted. “I will.”

In his formal campaign announcement that year, he said, “Save Medicare, Medicaid and Social Security without cuts. Have to do it. Get rid of the fraud. Get rid of the waste and abuse, but save it.”

Democrats are also wrangling over entitlement programs, which are among the fastest growing federal expense. Senator Bernie Sanders from Vermont and former Vice President Joseph R. Biden Jr. have been arguing for days over Mr. Biden’s past comments about cuts to Social Security, a reminder of how sensitive the issue is for voters.

Republicans have largely avoided talking about rolling back entitlement programs since Mr. Trump became president, assuming that doing so would be a non-starter. Following the $1.5 trillion tax cut that Republicans passed in 2017, some suggested that they would quickly turn to reduce the cost of Social Security, Medicare and Medicaid.

Those ideas gained little traction and federal spending has continued to grow.

The Treasury Department said last week that the federal budget deficit surpassed $1 trillion in 2019. It was the first calendar year since 2012 that the deficit topped that threshold. To help finance deficits, which require the government to sell debt, the Treasury Department plans to begin issuing 20-year bonds.

Other Trump administration officials have been more careful in discussing the need to cut spending on entitlement programs. Treasury Secretary Steven T. Mnuchin demurred earlier this month when pressed on CNBC about how to scale back spending on entitlements.

“All I’m going to say is that we talked about there needs to be bipartisan review of government spending and that’s something at the appropriate time we’ll look at,” Mr. Mnuchin said.

Donald Trump Is Not a Sinister Genius

His race-baiting is impulsive and unpopular, not a brilliant strategy to win white votes.

Some columns spring from inspiration, some from diligent research. And some you’re prodded into writing because of what the other columnists are arguing about.

This is the third kind. With the Democratic debates in the spotlight, there has been a lot written on this op-ed page about the Democratic Party’s ideological evolution, its leftward march on many issues, and how this might help Donald Trump win re-election. Which in turn has prompted a recurring argument from certain of my liberal colleagues that anyone writing about the supposedly extremist Democrats should be writing about Trump’s extremism and unpopularity instead.

So this will be, as requested, a column about Trump’s extremism and unpopularity. But it’s not going to be a mirror image of the columns about the Democrats’ move leftward, because I don’t think policy substance matters as much to Trump’s prospects as it might to the party trying to unseat him.

It matters less because Trump in 2020 won’t be a change candidate. Instead, like every incumbent, he’ll be a candidate of the policy status quo — only much more so in his case, because his legislative agenda dissolved earlier than most presidents and the prospects for continued gridlock are obvious.

That means Trump probably won’t be campaigning on what he promised across 2016 — the kind of infrastructure-building, “worker’s party” conservatism whose ambitions vanished with Steve Bannon. But he also won’t be campaigning on the Paul Ryan agenda that the Republican Congress pushed in his first year, or reviving unpopular Ryan-era ideas like entitlement reform on the 2020 trail.

Instead Trump’s policy argument in 2020 will be, basically, let’s keep doing what we’re doing. That status quo includes a

  • deregulatory agenda,
  • a tariff push and a
  • harsh border policy that are all unpopular.

But it also includes:

  • free-spending budgets,
  • easy money and a more
  • anti-interventionist (for now) foreign policy than past Republicans, all of which are relatively popular.

And in the context of a strong economic expansion, a Trump re-election effort that rested on this record while warning against Democratic radicalism could be plausibly favored.

Except that this isn’t the kind of campaign that Trump himself wants to run. He wants the

  • racialized Twitter feuds, the
  • battles over Baltimore and Ilhan Omar, the
  • media freak-outs and the
  • “don’t call us racist!” defensiveness of his rallygoing fans.

He feeds on it, he loves it, and he’s as obviously bored by the prospect of a safe, status-quo campaign as he is obviously uninterested in the conservative intellectuals trying to transform Trumpism into something intellectually robust.

And here I agree with the left that there’s a media tendency to give Trump’s race-baiting impulses more credit as a strategy than they actually deserve. After each Twitter outburst his advisers try to retrofit a strategic vision, to claim there’s a master plan unfolding in which 2020 will become a referendum on Omar’s anti-Semitic tropes or the Baltimore crime rate. And the press gives them credence out of an imprinted-by-2016 fear that the president has a sinister sort of genius about what will help him win.

But this is paranoia, and the retrofitting is Trumpworld wishful thinking. There was, yes, a sinister genius at work when Trump used birtherism to build a primary-season constituency in 2016. But since then, his race-baiting has clearly contributed to his chronic unpopularity, and his re-election chances would almost certainly be far better if he talked like George W. Bush on race instead.

Second, in 2016 Trump won many millions of voters who disapproved of him. But in recent 2020 polling, Trump is performing below his job approval rating in many head-to-head matchups, which suggests that voters who would be responsive to the “policy status quo” argument keep getting turned off by the president’s rhetoric. The supposedly-brilliant strategy of racial polarization, then, is probably just a self-inflicted wound.

None of this means that Trump cannot be re-elected. But it means that if he wins again, it will likely be in spite of his own rhetoric, not as the dark fruit of a white-identitarian campaign.

In this sense both NeverTrump-conservative and liberal columnists can be right about the basic situation. The liberals are right that Trump is defiantly outside the mainstream — that every day, in a particular way, he proves himself extreme.

But this is a fixed reality for 2020, and the NeverTrump side is right about the variable: The campaign may turn on how successfully the Democrats claim or build an anti-Trump center, as opposed to appearing to offer an unpalatable extremism of their own.