Playing with Economic Matches

PRINCETON – At this time last year, the International Monetary Fund reported disappointing global GDP growth of 3.1% in 2015, and promised that growth would increase in 2016 and 2017. But that expectation was unrealistic, as I explained at the time. And, sure enough, in 2016, it is estimated that global GDP again grew by only 3.1%, while world trade growth slowed substantially, from 2.7% to an anemic 1.9%. These figures describe a troubled world economy.

And yet the IMF is again forecasting that global GDP growth will significantly improve over the next two years, and that world trade growth will double. The IMF attributes much of the expected improvement in the global economy, especially in 2017, to stronger GDP growth in the United States. This optimism about the US economy is based on positive business- and consumer-confidence indicators and rising stock prices, in anticipation of fiscal stimulus and deregulation.

But this enthusiasm overlooks a deeper disruption that is now underway. US President Donald Trump’s administration will hinder economic growth when it starts to reverse trade agreements, and growth will take an even bigger hit when the US begins to destroy the norms and institutions that govern markets. Worse, Trump will be changing the rules of the game at a time when the global economy is already fragile, China is confronting a massively inflated bubble in its financial sector, and Europe is asleep at the wheel of a slow-motion train wreck in Italy’s banking sector.

To be sure, international trade agreements, propped up by powerful interests, have become increasingly intrusive. As Vermont Senator and Democratic primary contender Bernie Sanders pointed out when he opposed the 12-country Trans-Pacific Partnership (TPP), such deals tend mainly to protect large multinational corporations’ interests. The Harvard economist Dani Rodrik shares that view, and has been sharply critical of some of his fellow economists for endorsing the “propaganda” that describes such deals as “free-trade agreements.” These deals benefit only a select few, while damaging economically vulnerable people’s livelihoods.