Trump’s Potemkin Economy


July 1, 2018

by Dr. Paul Krugman

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According to legend, Grigory Potemkin, one of Catherine the Great’s ministers (and her lover), created a false impression of prosperity when the empress toured Ukraine. He supposedly did this by setting up fake villages, or possibly just facades, along her route, then dismantling them after she passed, and setting them up again further down the road.

There probably isn’t much if any truth to the story — among other things, Catherine was too smart and tough-minded to be that easily deceived — but never mind: the legend has become a byword for the general idea of prettifying reality to please a tyrannical ruler. And it seems highly relevant to some of the economic “news” coming out of the Trump administration the past few days.

Just to be clear, the U.S. economy is still doing quite well overall, continuing the long expansion that began during Obama’s first term. Those of us who thought the economy would be hurt by political uncertainty have been wrong so far.

But Trump’s actual policy initiatives aren’t doing so well. His tax cut isn’t producing the promised surge in business investment, let alone the promised wage gains; all it has really done is lead to a lot of stock buybacks. Reflecting this reality, the tax cut is becoming less popular over time.

And the early phase of the trade war that was supposed to be “good, and easy to win” isn’t generating the kinds of headlines Trump wanted. Instead, we’re hearing about production shifting overseas to escape both U.S. tariffs on imported inputs and foreign retaliation against U.S. products. It’s really worth reading the submission by General Motors to the Commerce Department, urging a reconsideration of a tariff policy that “risks undermining GM’s competitiveness against foreign auto producers” and “will be detrimental to the future industrial strength and readiness of manufacturing operations in the United States.” In other words, “Don’t you understand global supply chains, you idiot?”

Actually, I’m waiting to hear that GM is really a Democratic company in league with the deep state.

But meanwhile, how is the administration responding? By making stuff up.

Now, making stuff up is actually standard operating procedure for these guys. We’re talking about an administration that’s taking children away from their parents and putting them in cages in response to a wave of violent immigrant crime that doesn’t, you know, actually exist. Trade policy itself is being driven by claims about the massive tariffs U.S. products face from, say, the European Union — tariffs that, like the immigrant crime wave, don’t actually exist.

But these are negative fictions, tales of wrongdoing by others. When it comes to Trump’s own economic policies, by contrast, it’s all puppies and rainbows — happy stories with no basis in reality.

Some of these come from Trump himself. For example, he declared that the head of U.S. Steel called him to say that the company was opening six new plants. It isn’t, and as far as we can tell the phone call never happened.

Meanwhile, reports say that the Council of Economic Advisers did an internal report concluding that Trump trade policy will cost jobs, not create them; Kevin Hassett, the chairman, pressed on these reports, said that he could neither confirm nor deny them; in other words, they’re true. But meanwhile Hassett is declaring that last year’s corporate tax cut has led to a “massive amount of activity coming home” — which is just false. Some companies are rearranging their accounting, producing what looks on paper like money coming back to the U.S., but this has no real effect on investment or employment.

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But the most Potemkinesque story of the past week was the declaration by Larry Kudlow, the administration’s top economic official, that the budget deficit is “coming down rapidly” as “those revenues come rolling in.”

Actually, the deficit is rising fast, mainly because of a plunge in corporate tax receipts — the direct result of the tax cut:

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The administration later tried to walk back Kudlow’s claim, saying that he was talking about great things that will happen in the future, not current events. Right.

OK, so Trump and company are making claims about the results of their policies that bear no relationship to reality. But reality has a well-known liberal bias. Will Trump’s habit of making things up, and his advisors’ willingness to celebrate imaginary policy triumphs, make any difference?

Actually, I think they might. The trade war is rapidly escalating, with our trading partners retaliating against US actions and reports that Trump wants to withdraw from the World Trade Organization. The best hope for breaking the cycle of retaliation would be for Trump to realize that the trade war is going badly, take a deep breath, and step back from the brink.

But who will tell him how things are really going? Given what we’ve seen the past few days, they’ll respond to plant closings and economic disruption with fantasies of triumph, while Trump will dismiss reports of problems as fake news. Reality will take a long time to break through, if it ever does. And by then the world trading system may be broken beyond repair.

 

2 thoughts on “Trump’s Potemkin Economy

  1. The simplest summary of Trump’s economic policy to date is four words long: There is no policy.

    And Larry Kudlow’s appointment as the administration’s top economic official is a joke. He knows nothing about economics. But he is very good in kissing ass. Yes, he did graduate from college. He graduated from University of Rochester with a degree in history in 1969. In 1971, he attended Princeton University’s Woodrow Wilson School of Public and International Affairs, where he studied politics and economics for the master’s degree. But he dropped out. Economics was to hard for him, I guess.

    • Actually, Trump has a policy – “dishonesty is my best policy”.

      If you see how his “policies” benefited his cronies and family businesses; the tax cuts that benefited himself and the elites; how he cannot get through a day without telling numerous lies. His best policy – front running the stock market. He will threaten trade war, bring the market down, and his accomplices load up on the cheap stocks. Then he announces the trade war is off, the market rebound and he and his accomplices laugh all the way to the bank. Same with war mongering – threaten to nuke North Korea, ratchet up the war talks and the market tanked. Again, his cronies will pick up the cheap stock. Then he announce peace talk and his desire for a Nobel Peace Prize and the market rebound. More millions and billions for his cronies.

      Who are his best friends? Dictators like Kim JU and Xi JP and Putin. And who are his enemies? Allies like Trudeau and Merkel.

      Yes, he has a policy afterall. Any bad policy is his policy.

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