President Trump on Monday called for the Federal Reserve to cut its benchmark interest rate by 1 percentage point, a move that would typically be considered only when the U.S. economy is on the brink of a recession, and again criticized his own central bank chairman for a “horrendous lack of vision.”
In a pair of tweets Monday morning, the latest in a series of attacks Mr. Trump has levied against Fed Chairman Jerome Powell, the president said a combination of a reduced interest rate and a resumption of the Fed’s crisis-era bond-buying stimulus would improve the economy both in the U.S. and globally. “Good for everyone!” Mr. Trump tweeted.
Mr. Trump, who returned Sunday from a 10-day vacation at his golf course in Bedminster, N.J., has repeatedly attacked Mr. Powell for the state of the economy, even as he and his advisers have projected optimism that the decadelong economic expansion will continue. Mr. Trump has repeatedly called on the central bank to lower interest rates more than it has, saying that would further boost growth. U.S. economic growth slowed to 2.1% in the second quarter from 3.1% in the first three months of the year.
Last Wednesday, on a day when the Dow Jones Industrial Average slumped 800.49 points, or 3%, the president spent much of the day attacking the Fed chairman on Twitter.
White House and campaign aides acknowledge privately that a recession would threaten Mr. Trump’s 2020 re-election campaign, which has made a booming economy a central selling point. On Tuesday, the White House has arranged a call in which National Economic Council Director Larry Kudlow is expected to reassure state and local officials about the state of the economy.
Asked in an interview on Fox News about possible economic alarm bells, White House counselor Kellyanne Conway on Monday played down the chance of a slowdown.
“It’s nice to have the mainstream media finally covering the economy, but they only cover it when they can use Sesame [Street’s] Grover word of the day, ‘recession,’ ” she said. Pointing to strong employment numbers, she said the economy’s “fundamentals are very strong.”
The last time the Fed reduced rates by a full percentage point was during the 2008 financial crisis.
For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been berating the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.
In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election. When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.
This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.
Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.
But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.
Second, since the crisis, central banks have repeatedly fallen short of their inflation targets. While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools. Any hint of further easing seems to encourage financial risk-taking more than real investment. Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.
Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark. That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they
- failed to prevent the financial crisis and paid no price; they are
- failing now to meet their mandate; and they
- seem to know no more than the rest of us about the economy.
It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.
Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.
A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower. In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.
Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future. Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.
What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy. Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.
Neither tax cuts nor tariffs are working.
Donald Trump has pursued two main economic policies. On taxes, he has been an orthodox Republican, pushing through big tax cuts for corporations and the wealthy, which his administration promised would lead to a huge surge in business investment. On trade, he has broken with his party’s free(ish) trade policies, imposing large tariffs that he promised would lead to a revival of U.S. manufacturing.
On Wednesday, the Federal Reserve cut interest rates, even though the unemployment rate is low and overall economic growth remains decent, though not great. According to Jay Powell, the Fed’s chairman, the goal was to take out some insurance against worrying hints of a future slowdown — in particular, weakness in business investment, which fell in the most recent quarter, and manufacturing, which has been declining since the beginning of the year.
Obviously Powell couldn’t say in so many words that Trumponomics has been a big flop, but that was the subtext of his remarks. And Trump’s frantic efforts to bully the Fed into bigger cuts are an implicit admission of the same thing.
To be fair, the economy remains pretty strong, which isn’t really a surprise given the G.O.P.’s willingness to run huge budget deficits as long as Democrats don’t hold the White House. As I wrote three days after the 2016 election — after the shock had worn off — “It’s at least possible that bigger budget deficits will, if anything, strengthen the economy briefly.” And that’s pretty much what happened: There was a bit of a bump in 2018, but at this point we’ve basically returned to pre-Trump rates of growth.
Republican faith in the magic of tax cuts — and, correspondingly, belief that tax increases will doom the economy — is the ultimate policy zombie, a view that should have been killed by evidence decades ago but keeps shambling along, eating G.O.P. brains.
The record is actually awesomely consistent.
- Bill Clinton’s tax hike didn’t cause a depression,
- George W. Bush’s tax cuts didn’t deliver a boom,
- Jerry Brown’s California tax increase wasn’t “economic suicide,”
- Sam Brownback’s Kansas tax-cut “experiment” (his term) was a failure.
Nevertheless, Republicans persist. This time around, the centerpiece of the tax cut was a huge break for corporations, which was supposed to induce companies to bring back the money they’ve invested overseas and put the money to work here. Instead, they basically used the tax savings to buy back their own stock.
What went wrong? Business investment depends on many factors, with tax rates way down the list. While a casual look at the facts might suggest that corporations invest a lot in countries with low taxes, like Ireland, this is mainly an illusion: Companies use accounting tricks to report huge profits and hence big investments in tax havens, but these don’t correspond to anything real.
What about the trade war? The evidence is overwhelming: Tariffs don’t have much effect on the overall trade balance. At most they just shift the deficit around: We’re importing less from China, but we’re importing more from other places, like Vietnam.
And there’s a good case to be made that Trump’s tariffs have actually hurt U.S. manufacturing. For one thing, many of them have hit “intermediate goods,” that is, stuff American companies use in their production processes, so the tariffs have raised costs.
Beyond that, the uncertainty created by Trump’s policy by whim — nobody knows what he’ll hit next — has surely deterred investment. Why build a manufacturing plant when, for all you know, next week a tweet will destroy your market, your supply chain, or both?
Now, none of this has led to economic catastrophe. As Adam Smith once wrote, “There is a great deal of ruin in a nation.” Except in times of crisis, presidents matter much less for the economy than most people think, and while Trumponomics has utterly failed to deliver on its promises, it’s not bad enough to do enormous damage.
On the other hand, think of the missed opportunities. Imagine how much better shape we’d be in if the hundreds of billions squandered on tax cuts for corporations had been used to rebuild our crumbling infrastructure. Imagine what we could have done with policies promoting jobs of the future in things like renewable energy, instead of trade wars that vainly attempt to recreate the manufacturing economy of the past.
And since everything is political these days, let me say that pundits who think that Trump will be able to win by touting a strong economy are almost surely wrong. He most likely won’t face a recession (although who knows?), but he definitely hasn’t made the economy great again.
So he’s probably going to have to do what he’s already doing, and clearly wants to do: run on racism instead.
NEW HAVEN – Blinded by a surging stock market and a 50-year low in the unemployment rate, few dare to challenge the wisdom of US economic policy. Instant gratification has compromised the rigor of objective and disciplined analysis. Big mistake. The toxic combination of ill-timed fiscal stimulus, aggressive imposition of tariffs, and unprecedented attacks on the Federal Reserve demands a far more critical assessment of Trumponomics.
Politicians and pundits can always be counted on to spin the policy debate. For US President Donald Trump and his supporters, the art of the spin has been taken to a new level. Apparently, it doesn’t matter that federal deficits have been enlarged by an estimated $1.5 trillion over the next decade, or that government debt will reach a post-World War II record of 92% of GDP by 2029. The tax cuts driving these worrying trends are rationalized as what it takes to “Make America Great Again.”
Nor are tariffs viewed as taxes on consumers or impediments to global supply-chain efficiencies; instead, they are portrayed as “weaponized” negotiating levers to force trading partners to change their treatment of the United States. And attacks on the Fed’s independence are seen not as threats to the central bank’s dual mandate to maximize employment and ensure price stability, but rather as the president’s exercise of his prerogative to use the bully pulpit as he – and he alone – sees fit.
There are three basic flaws with Trump’s approach to economic policy.
- First, there is the disconnect between intent and impact. The political spin maintains that large corporate tax cuts boost US competitiveness. But that doesn’t mean deficits and debt don’t matter. Notwithstanding the hollow promises of supply-side economics, revenue-neutral fiscal initiatives that shifted the tax burden from one segment of the economy to another would have come much closer to real reform than the reduction of the overall revenue trajectory has. Moreover, the enactment of fiscal stimulus in late 2017, when the unemployment rate was then at a cyclical low of 4.1% (headed toward the current 3.6%), added froth to markets and the economy when it was least needed and foreclosed the option of additional stimulus should growth falter.
Similarly, Trump’s tariffs fly in the face of one of the twentieth century’s greatest policy blunders – the Smoot-Hawley Tariff of 1930, which sparked a 60% plunge in global trade by 1932. With foreign trade currently accounting for 28% of GDP, versus 11% in 1929, the US, as a debtor country today, is far more vulnerable to trade-related disruptions than it was as a net creditor back then.
Ignoring the cascading stream of direct and retaliatory taxes on consumers and businesses that stem from a tariff war, Trump extols the virtues of tariffs as “a beautiful thing.” That is painfully reminiscent of the 1928 Republican Party platform, which couched tariffs as “a fundamental and essential principle of the economic life of this nation … and essential for the continued prosperity of the country.” Trump ignores the lessons of the 1930s at great peril.
The same can be said of Trump’s recent Fed bashing. The political independence of central banking is widely regarded as the singular breakthrough needed to achieve price stability following the Great Inflation of the 1970s. In the US, passage of the so-called Humphrey-Hawkins Act of 1978 gave then-Fed Chairman Paul Volcker the political cover to squeeze double-digit inflation out of the system through a wrenching monetary tightening. Had Volcker lacked the freedom to act, he would have been constrained by elected leaders’ political calculus – precisely what Trump is doing in trying to dictate policy to current Fed Chair Jerome Powell.
2) The second critical flaw in Trump’s economic-policy package is its failure to appreciate the links between budget deficits, tariffs, and monetary policy. As the late Martin Feldstein long stressed, to the extent that budget deficits put downward pressure on already depressed domestic saving, larger trade deficits become the means to fill the void with surplus foreign saving. Denial of these linkages conveniently allows the US to blame China for self-inflicted trade deficits.
But with tariffs likely to divert trade and supply chains from low-cost Chinese producers to higher-cost alternatives, US consumers will be hit with the functional equivalent of tax hikes, raising the risk of higher inflation. The latter possibility, though seemingly remote today, could have important consequences for US monetary policy – provided, of course, the Fed has the political independence to act.
Finally, there are always the lags to keep in mind in assessing the impact of policy. While low interest rates temper short-term pressures on debt-service costs as budget deficits rise, there is no guarantee that such a trend will persist over the longer term, especially with the already-elevated federal debt overhang projected to increase by about 14 percentage points of GDP over the next ten years. Similarly, the disruptive effects of tariffs and shifts in monetary policy take about 12-18 months to be fully evident. So, rather than bask in today’s financial-market euphoria, politicians and investors should be thinking more about the state of the economy in late 2020 – a timeframe that happens to coincide with the upcoming presidential election cycle – in assessing how current policies are likely to play out.
There is nothing remarkable about a US president’s penchant for political spin. What is glaringly different this time is the lack of any pushback from those who know better. The National Economic Council, established in the early 1990s as an “honest broker” in the executive branch to convene and coordinate debate on key policy issues, is now basically dysfunctional. The NEC’s current head, Larry Kudlow, a long-standing advocate of free trade, is squirming to defend Trump’s tariffs and Fed bashing. The Republican Party, long a champion of trade liberalization, is equally complicit. Trump’s vindictive bluster has steamrolled economic-policy deliberations – ignoring the lessons of history, rejecting the analytics of modern economics, and undermining the institutional integrity of the policymaking process. Policy blunders of epic proportion have become the rule, not the exception. It won’t be nearly as easy to spin the looming consequences.
it’s useful to understand how the systemworks and the key turning point is avery remarkable period it’s WilliamJennings Bryan William Jennings Bryan in1896 was a fairly young 36 year oldNebraskan who got up in the middle ofthat particular I guess you could sayAssociation of then the Democratic Partyand it was the one of thoseextraordinary events which turnspolitics around the Democratic Party wasa highly conservative party prior tothem and essentially it’s characterizedby presidents who thought that the leastgovernment the best it was essentiallylazy fair he got up Bryan got up andmade this extraordinary speech which isnow historical and then cross of goldspeech about the American worker and theAmerican farmer of being crucified on across of gold called being the goldstandard and that propelled himstrangely enough into the head of theparty he got nominated he never becamepresident because he kept losingyou think he went three times and failedeach time but left a very majorindelible stamp which led to WoodrowWilson and all the way through toFranklin Roosevelt and I you know Ilooked at Bryan as the root of FranklinRoosevelt’s New Dealthat’s fascinating cause I think mostpeople that part of it’s often beingobscured in history it’s again one ofthe reasons why this book is sointeresting is it throws up thesecreating the existing tax pattern [M]yview is that that’s the right thing todo provided you funded the result ofthat is a bit of variance is going to bea very large federal budget deficit andfederal budget deficits invariably downthe road out qualification in genderinflation at the moment we have thetightest labor market I have ever seenthat is the number of job openings issignificantly greater than the number ofpeople looking for work and that mustinevitably begin to push on wages italways has and always will but it’salways delayedand my told you that is something hasgot to give and that’s I don’t knowwhere it all comes out well your blyatcomes out with inflation well theproblem basically is if we do nothingwe’re going to end up with probablystagflation which is an inflation rate Ishould say it’s partly stagnation whichas mentioned was very significantlyslowed output per our output per hournow which used to be 3/4 percent peryearback in the early post-world war iiperiod it’s now well under 1% whichbrings me very nicely on to the nextquestion from the audience which issomeone has asked for you to share yourthoughts about president Trump’s recentcriticism of Jay Powell and the Fed Ilike him to answer that with all theanswers I think it’s very short-sightedthe issue of the Federal Reserve isrequired by the Congress to maintain astable currency which means no inflationno deflation and the policy they’reembarked upon at the moment seems verysense it will be caused as I mentionedbefore the wage rates are beginning toshow signs of moving and you cannot havereal wages rising without it ultimatelythink if they continue on the road wouldthat we willgoing Pretlow I should say that thepresident wants to go we’re gonna end upwith a very significant budget deficitand very significant inflationultimately not not in the short termthat it takes a whilepolitical system doesn’t care aboutdeficits what they do care about isinflation when the inflation rate was 4%in the 1970sPresident Nixon imposed wage and pricecontrols were nowhere near there yet butit’s wrong our wayif we are though heading towards apotential rise in inflation rise in debtat a time of growing populism do youthink there’s a chance that the FederalReserve will lose independence I’mtrying to follow you which I mean wellcheating is a chance at Congress or thepresident will try to control theFederal Reserve or take away some of itsindependence I really don’t know one ofthose forecasting aspects which isdifficult another question from theaudience as the Federal Reserve’s reachgrows do you think that leged ofoversight will become necessary againthat’s above my pay gradeor do you think that Congress shouldexert more control or oversight of theFed I think the Federal Reserve is bystatuteremember the Federal Reserve Act of 1913which essentially did something veryunusual we had a long period wediscussed this in the book in whichfinancial crises kept surging up andthen collapsing which is a typical cyclewithwhich went on to a decade upon decadeand the populism that evolved as aconsequence of this looked atever-increasing lead to find a way tosolve the problem of why the crisesoccur and the general solution was ifthe economy is accelerating and it’srunning out of gold species and you’regoing to get into a situation in whichthey are always going to be crises sowhat the Federal Reserve Act actuallydid was very very interesting itsubstituted the sovereign credit of theUnited States for gold and then if no westayed on the gold standard technicallythat was a major change in Americanfinancial history and debate the basicconsequence of that is that FederalReserve determines what in effect is asensible level of money supply expansionand one of the reasons the FederalReserve Act was actually passed was toprevent the political system whenbecoming so very dominant in determiningmonetary policy which is exactly whatyou don’t want to happen and I mean Iwas you know eighteen and a half yearsas you mentioned getting letters fromeverybody who won very littlecongressmen or otherwise who wants it’sa the issue of and don’t worry about theissue of inflationand nobody was well when I would begetting people who say we want lowerinterest rates I got tons of that mail Inever got a single letter saying pleaseraise them and it tells you that thereare some views which go against realityand reality always wins but if you lookat that the history of populism some ofthe worst populism you got was in the1970s some of the work that the angerthat was generated by inflation in thenineteen seventies were roiled right theway through the political systemeventually leads to the rise of ofRonald Reagan because and who comes inand then you know crushes crushesinflation so inflation is is not asolution to populism it drivers it makespeople very angry do you think thecurrent populism is going to get worsechairman Greenspan well let’s rememberwhere populism comes from it’s I don’tknow whether this is a generalproposition but I find it’s difficult toget around the answer that when theinflation rate or that must theinflation ratings as much as the levelsof income slow down when you getproductivity for example which is thatthe major determinant of income and youget productivity slowing down you get amuch lower increase in JD GDP and grossdomestic income and wages and salariesalike and there’s a great deal of uneasein the population which is saying thingsare not good somebody come help us andsomebody necessarily on the white horsebecause comes up and says I’ve got a wayto handle this and if you look at LatinAmerica the history ofgoodly part of Latin America is aremarkable amount of people like Peroncoming in and all the subsequent postWorld War two governments in LatinAmerica and it’s really quiteunfortunate and surprising it’s not thatthey try it and it fails which it doesalways it always fails but it doesn’teliminate the desire to do it in otherwords of Peru Brazil and like they’veall undergone very significant periodsof huge inflation and collapsing andnobody wears a lessonyeah well we’re almost out of time butthere’s one other question from theaudience which I think cuts to the heartof a lot of what we’re talking aboutright now which is this does the successof capitalism come at the cost ofenormous wealth disparity is it possibleto have this vision of creativedestruction of capitalism of dynamismwithout having massive income inequalityI doubt it and I doubt it for the reasonI said earlier namely that we’ve got theproblem that human beings don’t changebut technology as it advances and it’sembodied in the growth of an economy isalways growing and when you havesomething that’s growing and the otherthing that’s flat you get obviouslyinequality and the politicalconsequences of that can I qualify thatjust a little bit I mean there – thereare different sorts of inequalitythere’s a there’s the inequality thatyou get from suddenly like Bill Gates orSteve Jobs producing a fantastic newinnovation and idea which means thatthey reap a lot of rewardfor that but which means that society asa whole gets richer and better off andthere’s the inequality that comes fromcrony capitalism from people usingpolitical influence blocking innovationand and sucking out and do rewards forthemselves so I think we need to beabsolutely very very sensitive to thewrong source of inequality whilecelebrating the right sort of inequalityand also had that Joseph Schumpeter thatgreat man once said that the the natureof capitalist progress doesn’t consistof Queens having a million or twomillion pairs of silk stockings itconsists of what used to be theprerogative of a queen being spreadthroughout the whole of society silkstockings you know that become somethingthat go from being very rare and onlyworn by Queens to being worn by allsorts of people all over the place soit’s the nature of capitalism is tocreate new innovations which are atfirst rare but spread throughout thewhole of society and everybody uses soif you think think of the the iPhone orsomething like that some that wassomething that was incredibly rare and afew people had those sort ofcommunications vais now everybodycarries them around all the time and thegreat capitalists the Bill Gates theSteve Jobs don’t get rich by selling onereally really good iPhone to one purposeand they get into selling their productsto all sorts of people so there’s asense in which there is no realtrade-off between very rich peoplegetting very rich and the rest ofsociety getting getting better off youknow they only get rich because theycreate things which everybody mostpeople want to have and buy you knowit’s it’s it’s it’s the Silk Stockingquestion really I you know I accept thatqualifications let me just say one thingyou going back to his mentioning hereWalter Isaacson’s book on innovation hewrote that book and I remember readingit and my final conclusion was and Iasked him why is it that most innovationis in the United Statesit’s American and he said you know I’venever thought of that I don’t think hewas aware of the fact that he here andall these innovationto developers and they all turned out tobe American which leads me to concludethat there’s something fundamental inthe psyche of American history in theAmerican public which creates it it’snot an accident which is why I won in itwho too often so which is what you ofcourse you sought to explain the book soif you had a chance to take this bookinto the Oval Office today or into theTreasury and give it to the Presidentand say this is a history of Americahere are the key lessons what is a topbit of advice that you would give to theadministration today to keep capitalismgrowing in America well you know we dohave we haven’t mentioned that there’san underlying financial problem which wehaven’t addressed in the best way todiscuss it as when I first became awareof itI would haven’t been looking at data andaccidentally created a chart whichshowed the relationship betweenentitlements spending which is socialbenefits in the rest of the world andgross domestic savings and I’m from 1965to the current period the ratio ofentitlements to the sum of those two isflat as a percent of gross domesticproduct which means or at least impliesthat one is crowding out the other andwhen you look at the individuals theyare actually looking different andenable one goes up the other goes downand so forth and I think that’ssuggestively the fact that there issomething in the sense of when we saythat entitlements by which a rising andthe baby boom generation is essentiallycrowding out gross domestic savingswhich in turn coupled withthe borrowing from abroad is how wefinance our gross domestic investmentwhich is the key factor in productivityright so entitlement reform well I lookforward to a tweet about entitlementreform I look forward to this veryimportant book being part of thediscussion about how to keep AmericaAmerica’s economy great and growing butin the meantime thank you both very muchindeed for sharing your thoughts it isindeed a fascinating book and quite anachievement and best of luck in gettingthis very important message out so thankyou both very much indeed[Applause]
The U.S. and Chinese governments both sent signals ahead of their trade talks in Washington last week that a pact was so near they would discuss the logistics of a signing ceremony.
In a matter of days, the dynamic shifted so markedly that the Chinese deliberated whether to even show up after President Trump ordered a last-minute increase in tariffs on Chinese imports because the U.S. viewed China as reneging on previous commitments.
Inside the cloistered Zhongnanhai government compound in Beijing, President Xi Jinping and his close advisers discussed how to respond to the tariff increase, given the talks were just days away, according to Chinese officials with knowledge of the decision-making process.
After huddling Tuesday to analyze a press conference given by the U.S.’s two top negotiators, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, Chinese officials concluded that they should travel to at least avoid a rift that could be difficult to repair.
The recommendation went to China’s chief negotiator, Liu He, and ultimately to Mr. Xi. He decided to send the team even though Beijing was fully aware that the trip held little prospect of progress, given how quickly problems had arisen. “The goal was simply to keep the talks going,” said one of the Chinese officials with knowledge of the matter.
By the end of the week, that was as much as both sides could cite for their efforts: the avoidance of a serious rupture that would doom any prospect of a future deal and a commitment to stay near the negotiating table.
So far, the trade talks have provided little evidence that the two nations have found a formula for how to negotiate successfully since Messrs. Trump and Xi met in Buenos Aires Dec. 1, which paved the way to Washington last week.
China didn’t immediately impose new strictures on U.S. businesses, as it has done when things weren’t going well in the past. Mr. Liu is expected to brief Mr. Xi on the discussions he had in Washington before Beijing decides on the next course of action, according to the officials familiar with the process.
.. Bridging the trade rift may ultimately depend on the personal chemistry between President Trump and President Xi and their willingness to push matters forward after months of negotiations that have been full of positive intentions but thwarted by miscalculations, accusations of backtracking and unfulfilled expectations.
“The more heated moments have been in situations where we thought we had something and suddenly there was some backsliding,” said one person involved in the discussions on the U.S. side.
“We’ve expressed some pretty serious frustration at times,” this person said. “It’s been a necessary ingredient to success. You can be nice to someone, but sometimes you need to say ‘stop screwing me.’ ”
.. “We were in the process of planning for a signing summit with President Trump and President Xi upon the completion of this agreement,” Mr. Mnuchin later told reporters. One of the issues was where to hold the celebratory moment: Washington or Mr. Trump’s golf estates in Mar-a-Lago, in Florida, or Bedminster, N.J., say Trump aides.
To the Chinese, this was a matter of honor: The U.S. should trust Beijing to make the changes they said they would make, even if that meant changing regulations rather than laws. Besides, the U.S. was being unfair in refusing, upon the signing of a deal, to remove tariffs that had been assessed in the yearlong fight, the Chinese believed.
“There is a real desire on our end to keep the tariffs on,” one White House official said. “That is a sticking point.”
Shortly after Mr. Trump’s announcement of the tariff increase, Beijing’s trade negotiators, who had booked Air China tickets to Washington, received an urgent order: Stay put until further notice. “Looks like we’re not going,” one of them said early Monday morning.
Up until that moment, China’s leadership had expected the trip to bring months of negotiations to a close, according to Chinese officials close to the negotiation process, given that Chinese diplomats were already in discussion with their American counterparts about a possible summit between Messrs. Xi and Trump to finalize a trade agreement.
Now, the pressing question for Beijing became: Should it pull out of the planned talks to adhere to its longstanding public position that China doesn’t negotiate under threat? Or should China bite the bullet and still send the delegation to avoid a complete collapse of negotiations?
The Chinese side wanted more information from Washington before making the decision. But senior officials knew news of Mr. Trump’s tweets would inevitably cause market anxiety. The first order of business Monday morning: China’s central bank sped up a plan to release more funds for banks, a stimulus measure aimed at calming jittery investors and businesses.
State-backed funds were also instructed to buy what was necessary to prevent a free fall of shares. China’s Foreign Ministry spokesman released a statement at Monday’s regular press briefing that said only that the Chinese delegation was “preparing to travel to the U.S.” The spokesman didn’t say when the team would depart or give additional details.
On Tuesday morning, a group of officials at the vice minister level, including Liao Min, a trusted aide to Mr. Liu and a vice Finance Minister, and Wang Shouwen, a vice Commerce Minister, reached the conclusion the talks should proceed, a position endorsed by Mr. Xi though expectations of a positive result had fallen sharply.
The U.S. side made some calls that turned off the Chinese, too. By insisting that it wouldn’t remove any tariffs upon closing a deal, the U.S. gave Beijing little incentive to accept tough conditions. The U.S. position remained firm: no tariff removal until Beijing showed it would carry through on the commitments it made under the deal. On top of that, the U.S. wanted China to pledge not to retaliate if the U.S. were to reimpose tariffs if it found China in violation of some provisions.
Mr. Trump on Thursday let it be known he didn’t want the U.S. to appear soft on China, according to one person briefed on the matter.
The two days of negotiations went amicably nonetheless, according to people tracking the talks. Messrs Lighthizer and Mnuchin, who both were in the discussions, took Mr. Liu to a working dinner at the Metropolitan Club, a ritzy private club near the U.S. Trade Representative’s headquarters that is a Lighthizer favorite. Mr. Liu continued the talks on Friday despite the U.S. implementing the higher tariffs very early Friday morning.
Later that morning, Mr. Lighthizer greeted the Chinese envoy at the door of the USTR office—a gesture he rarely makes, but one which he could be sure would be captured by photographers and camera crews waiting outside.
By then, though, the U.S. team went into the talks not expecting to do a deal, figuring they would have a “non-meeting,” according to one person briefed on the discussions. U.S. officials at least wanted to make sure they didn’t leave with a complete break. The goal of the meeting was to be able to say the U.S. negotiators were still trying, this person said.
In an interview with Chinese media Friday, Mr. Liu disputed U.S. accounts that China reneged on commitments it had already made as part of the trade talks. “We are very clear that we cannot make concessions on matters of principle,” Mr. Liu said. “We hope our U.S. colleagues understand this.”
The hardened battle lines were prompted by Beijing’s decision to take a more aggressive stance in negotiations, according to the people following the talks. They said Beijing was emboldened by the perception that the U.S. was ready to compromise.
- In particular, these people said, Mr. Trump’s hectoring of Federal Reserve Chairman Jerome Powell to cut interest rates was seen in Beijing as evidence that the president thought the U.S. economy was more fragile than he claimed.
- Beijing was further encouraged by Mr. Trump’s frequent claim of friendship with Chinese President Xi Jinping and by Mr. Trump’s praise for Chinese Vice Premier Liu He for pledging to buy more U.S. soybeans.
An April 30 tweet, in which Mr. Trump coupled criticism of Mr. Powell with praise of Chinese economic policy, especially caught the eye of senior officials. “China is adding great stimulus to its economy while at the same time keeping interest rates low,” Mr. Trump tweeted. “Our Federal Reserve has incessantly lifted interest rates.”
“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. If the U.S.’s resolve was weakening, the thinking in Beijing went, the U.S. would be more willing to cut a deal, even if Beijing hardened its positions.
That assessment, however, flies in the face of a strong U.S. economy. Gross domestic product in the first quarter rebounded from the end of 2018, with growth clocking in at a seasonally adjusted annualized rate of 3.2%, up from 2.2% the prior quarter. The jobs report for April, released on Friday, showed the unemployment rate falling to 3.6%, the lowest in nearly 50 years.
But at the same time, China’s economy has stabilized this year following months of weakness. Although China’s exports dropped unexpectedly in April, its first-quarter growth came in at 6.4%, beating market expectations. The generally improving economic picture gave Beijing more confidence in trade talks, as did a recent conference on the country’s vast infrastructure-spending program, called the Belt and Road Initiative, which was attended by about 40 heads of government and state.
Chinese leaders saw the conference turnout “as China has more leverage to improve relations with other countries and with the U.S. business community,” said Brookings Institution China specialist Cheng Li. “It made them play hardball.”
If China misread the signals—and vice versa—it wouldn’t be the first time.
The history of U.S.-China trade negotiations is filled with misunderstandings, as the two nations, with very different political systems, struggle to figure out each other’s intentions.
.. In another apparent sign of mixed signals, Trump administration officials had thought they had made it clear that they were weary of negotiations and that it was time for Beijing to make specific commitments to change laws, including adding protections for intellectual property and barring the forced transfer of U.S. technology.
As talks resume Thursday, one big question mark is whether China will agree to U.S. demands for changes in Chinese law to implement the trade deal. Beijing maintains this would impinge on Chinese sovereignty and take too long to implement, but Beijing had made similar commitments in prior trade deals, including those it signed to join the WTO in 2001.
U.S. officials say Beijing has failed to make good on those commitments, while China has promised to further liberalize its economy.
“The U.S. is correct to seek a multiprong approach of not relying solely on commitments but also actually changes to the laws, so as to ensure Chinese leadership intentions are fully conveyed down to all local levels of government,” said Harvard Law Professor Mark Wu.