100 days of Donald Trump: demolishing to rebuild

Paul Dans, the author of Project 2025, the grand plan prepared by the Heritage Foundation in anticipation of Trump's victory in the 2024 elections, argues that Trump is the quintessential builder who has to demolish first before he can rebuild.

What needs to be demolished is the present edifice of government. It costs $7 trillion to run it with a budget deficit forecast of $1.9 trillion. More importantly, it delivers little to the people. It is of the bureaucracy and for the bureaucracy, an unelected and unaccountable lot whom Trump is now bringing to heel:

But what exactly does the American citizen get for $7trn? A country falling apart and potentially unable to defend itself.

Supply shocks from covid-19 underscored the strategic danger of a hollowed-out industrial base in the 21st-century global economy. Next came depletion of weapons stocks during the Ukraine war, raising concerns that we might no longer be able to defend ourselves because we lack productive capacity. America may lead in innovation and intellectual property, but what about good old-fashioned gunpowder? We have a single factory in all of America that produces it. And steel and heavy industry? Following a push under Barack Obama’s Environmental Protection Agency, America dismantled many of the coal- and nuclear-power plants required to sustain the electric load needed to power that production. How can a country serve as the arsenal of democracy when it takes seven years to restock the stinger missiles sent to Ukraine?

The economy needs to remade with manufacturing being brought back to the US in a big way. The bureacuracy will not do the job, so it has to be demolished first. 

That sounds plausible. But Dans takes the argument further. Apart from the bureacuracy, who is coming in Trump's way? Well, it's an activist judiciary:

Historically courts preserved their own legitimacy by abstaining from political questions decided by the other two branches of government. District courts have now crossed this red line and stepped into a constitutional minefield, imposing their political views on issues that are clearly the province of the executive.

The judiciary can afford to be activist because it has the support of the universities and Big Law (which is the big legal firms that fight pro bono for the establishment ranged against Trump).

Now, you begin to understand why Trump has gone after top law firms and why he is swinging his axe at the nation's top universities: they are a threat to his attempt to remake the United States.

The remaking of the US is not just about remaking the economy with pride of place for manufacturing. It's also about remaking the important political institutions of the country, including the judiciary. 

You have to give this to Dans: he's pretty clear about what Trump's followers want to accomplish.

Scott Bessent talks tough to IMF and World Bank

Treasury Secretary's address at the IIF is worth reading. It lays out basic principles of American economic policy and also has clear ideas on reforms needed at the IMF and World Bank.

I cannot do better than quote from the address:

Trade imbalances 

The status quo of large and persistent imbalances is not sustainable. It is not sustainable for the United States, and ultimately, it is not sustainable for other economies.

China’s current economic model is built on exporting its way out of its economic troubles. It’s an unsustainable model that is not only harming China, but the entire world.....China can start by moving its economy away from export overcapacity and toward supporting its own consumers and domestic demand. Such a shift would help with global rebalancing that the world desperately needs.

....Europe has already taken some long-overdue initial steps that I applaud. These steps create a new source of global demand and also involve Europe stepping up on the security front.

IMF reform

The IMF’s mission is to promote international monetary cooperation, facilitate the balanced growth of international trade, encourage economic growth, and discourage harmful policies like competitive exchange rate depreciation.  

.....Instead, the IMF has suffered from mission creep. The IMF was once unwavering in its mission of promoting global monetary cooperation and financial stability. Now it devotes disproportionate time and resources to work on climate change, gender, and social issues. These issues are not the IMF’s mission.

....The IMF must refocus its lending on addressing balance of payment problems, and its lending should be temporary.

World Bank reform

We encourage the (World) bank to go further in giving countries access to all technologies that can provide affordable baseload generation. The World Bank must be tech-neutral and prioritize affordability in energy investment. In most cases, this means investing in gas and other fossil fuel-based energy production. In other cases, this may mean investing in renewable energy coupled with systems to help manage the intermittency of wind and solar.

....Going forward, the bank must set firm graduation timelines for countries that have long since met the graduation criteria. Treating China, the second-largest country in the world, as a developing country is absurd.

The World Bank should also implement transparent procurement policies based on best value. It must help countries move away from procurement approaches that prioritize only the lowest-cost bids.

......

That is as clear-headed an agenda as can be. Bessent has emerged as the voice of reason and calm in the current Trump administration. His choice is significant because of his vast experience in financial markets as a celebrated fund manager. The big challenge for President Trump in reorienting the US economy is to ensure there are no major convulsions in the financial markets. In selecting Bessent as Treasury Secretary, Triump has chosen well- a tribute to his judgement of people.

US universities face challenges but will not lose dominance

 

The battle lines are drawn. More than 200 American universities and colleges have united in opposing what they regard as overreach on the part of the Trump administration.  A statement signed by, among others, the presidents of Columbia, Princeton, Brown and Harvard, says:

As leaders of America’s colleges, universities, and scholarly societies, we speak with one voice against the unprecedented government overreach and political interference now endangering American higher education. We are open to constructive reform and do not oppose legitimate government oversight. However, we must oppose undue government intrusion in the lives of those who learn, live, and work on our campuses. We will always seek effective and fair financial practices, but we must reject the coercive use of public research funding.

The pushback comes as the Trump administration demands sweeping changes in the way American universities are run, in particular, their response to alleged antisemitism on campuses. The US government is mounting pressure on universities in three ways: withholding federal grants, looking into their tax-exempt status, monitoring international student enrolment (which is a source of funding as well as diversity of talent).

The large universities have huge pools of endowment. Harvard sits on over $50 bn in endowments. Does the US government withholding around $ 2bn matter? How material is government funding for American universities? The Economist has some useful data and points to make.

Federal research grants account for a double-digit share of the revenue of most prestigious private universities, so losing them permanently would be a body-blow for any of them. They make up 11%, 15% and 18% of the income of Harvard, Yale and Princeton universities respectively. Columbia, at 20%, is especially vulnerable.

The proportion may be higher for small universities, rendering them even more vulnerable to government pressures. Can the leading universities use their endowments to tide over the cutbacks? It's not easy:

Universities’ endowments are not as much help as their billion-dollar valuations would suggest. For a start, much of the money is reserved for a particular purpose, funding a specific professorship or research centre, say. Legal covenants often prevent it from being diverted for other purposes. In any case, the income from an endowment is typically used to fund a big share of a university’s operating costs. Eat into the principal and you eat into that revenue stream.

 What is more, eating into the principal is difficult. Many endowments, in search of higher income, have invested heavily in illiquid assets, such as private equity, property and venture capital. That is a reasonable strategy for institutions that plan to be around for centuries, but makes it far harder to sell assets to cover a sudden budgetary shortfall. 

There is also the threat to the tax-free status. The previous Trump administration had imposed a tax of 1.4 per cent on endowments larger than $500,000 per student-it affected only 52 institutions. Moves are afoot to lower the endowment threshold and increase the tax rate. Why not tax the richer universities and use the money to fund public education, many argue.

American universities are in no mood to bend before the US administration's demands, so they do face challenges in respect of their finances. The Economist warns in another report:

The MAGA plan to remake the Ivies could have terrible consequences for higher education, for innovation, for economic growth and even for what sort of country America is. And it is only just beginning. 

Well, the Economist exaggerates the threat. US universities will find ways to raise resources- through debt, more endowments, more projects, higher fees. Even if there is some hit to the income, the scale of research funding will dwarf what is available in the rest of the world. Government departments, such as the Pentagon, will continue to fund projects of importance to them, entirely out of self-interest- they need the cutting edge that American universities alone can provide. 

American leadership of higher education is so dominant that it's hard to see it reduce in the foreseeable future. The Trump administration's moves pose headaches but are unlikely to pose any major threat to American universities. 

 

Indo-US bilateral trade talks: India caught between the US and China

I want to flag two excellent reports on the state of play in the ongoing Indo-US trade negotiations. One report is in the Economist and it's about India having to balance pressures from the US and China.

The US's key objective is to secure greater access to the Indian market. It has a second objective that is part of a larger global plan, namely, to deny China greater access to the Indian market. It certainly doesn't want to China to make India a manufacturing base from which to export to the US. It would like India's trade relationship with China to lessen. 

Keeping the Chinese out of manufacturing in India can be done and is being done. India runs a large trade deficit with China. A year ago, the thinking in some policy making circles was that one way to reduce the trade deficit would be to let Chinese firms into India so that they could make in India for the Indian market. Some suggested Chinese firms could be let into non-sensitive or non-strategic sectors- we could keep them out of defence and telecommunications, for instance, but they could come into renewable energy. But the suggestion hasn't travelled far. India's security experts are wary of dependence on Chinese firms entering into Indian market and with a large complement of Chinese nationals. 

Lessening the trade relationship with China, is harder to accomplish, as the Economist notes:

But the idea of expanding American trade with India, while also isolating China, runs into a giant problem. Many Indian exports to America (and elsewhere) depend on Chinese components. The pharmaceutical sector, one of the biggest exporters to America, relies on China for 70% of precursor chemicals. The smartphone industry, a rare success story in Mr Modi’s scheme to attract foreign manufacturers with generous subsidies, needs China too. Phones are assembled largely from imported components, including many from China......I don’t see any alternative to China emerging in at least a decade,” says Mr (Ajay) Srivastava (a trade expert). 

In short, India can find ways to increase America's access to the Indian market but will not be able to meet the American demand to curtail dependence on China.

The second report is from the FT and it's about American pressure in another area- giving America's e-commerce giants, Amazon and Walmart (which owns Flipkart), a bigger piece of the Indian market. The two giants are allowed to sell other producers' goods but not their own, unlike India's own e-commerce players. They are mounting pressure on the Trump administration to get India to change its rules for them. That would happen at the expense of players, such as Reliance, a group that doesn't lack political clout.

If the idea is simply to reduce India's trade surplus with the US, that can be arranged. India can buy more oil and defence equipment from the US and these two items alone could help reduce the trade surplus. But the US wants a great deal more- it wants more access for a range of American goods and it wants China to be denied access. Indian trade negotiators have their work cut out for them.

The ABC of Trumponomics

I have written quite a few pieces about President Trump and his approach to tariffs. I wrote one this week for the Hindu titled Trumponomics deserves to be taken seriously. 

Mr Trump's approach to economic policy-making is intuitive. It's the intuition of a businessman who can latch on to things that academics may not be readily aware of. It's also the intuition of a mass leader who can see how polices are playing out at the grassroots, again in a way that intellectuals cannot readily discern.

The establishment, which includes influential sections of the media (such as the NYT, FT and the Economist), likes to portray Mr Trump as a giant wrecking ball that will leave the US and the world and in ruins. They like to portray him as an ignoramus who will act according to his whims and fancies and without regard for basic principles of economics.

What Mr Trump is attempting is a fundamental reset of the US economy. It's impossible to predict how exactly his initiatives will play out. But I'm reasonably clear that Trumponomics is more carefully thought through than Mr Trump's detractors imagine. Scott Bessent, the Treasury Secretary, who is one of Mr Trump's leading economic advisers, is not the sort of person who will embark on economic policies without a careful evaluation of their implications. He's a financial markets person, somebody who understands very well the interplay between macro-policies and the financial markets. It is important not to rush to judgement on Mr Trump's initiatives based on short-term movements in the stock markets or bond markets.

Trumponomics deserves to be taken seriously

While Donald Trump’s detractors believe that he has embarked on the impossible, the fact is that this is a mission that the world will need to adjust to

T.T. Ram Mohan is a former Professor at IIM Ahmedabad

“To me,” United States President Donald Trump has famously said, “tariff is the most beautiful word in the dictionary”. Mr Trump has shown that he means it. By imposing tariffs of varying degrees on a wide range of countries, he has initiated a trade war, the likes of which the world has not seen since the Second World War.

Following turbulence in the American bond market, Mr. Trump has announced a 90-day pause on tariffs on all countries except China. Hardly anybody thinks that Mr Trump will back off from tariffs for fear of visiting serious dislocation on the U.S. economy and the world at large. Trumponomics is a mission to fundamentally remake the American economy. It deserves to be taken seriously if only because the world will need to adjust to it.

First, the propositions

Trumponomics rests on a few key propositions. The first is that America needs to bring back manufacturing, lost to China and other economies over the past several decades. It needs to do so for several reasons.

Globalisation and the offshoring of manufacturing in the U.S. have meant the loss of millions of jobs. Estimates of jobs losses in manufacturing vary. Stephen Miran, Chair, Council of Economic Advisers, The White House, cites a study that estimates jobs lost in manufacturing between 2000 and 2011 at two million (Stephen Miran, A User’s Guide to Restructuring the Global Trading System). Robert E. Lighthizer, who was the U.S. Trade Representative in Mr. Trump’s first term, says five million manufacturing jobs were lost in the period 2000-09.

Job losses have been concentrated in particular areas. Thriving industrial centres have been reduced to ghost towns and whole communities hollowed out. There are other social costs: homelessness, rising crime, drug abuse, and broken families. America’s services sector has absorbed a portion of those who lost jobs in manufacturing. But these are low-wage jobs. For the vast majority of American adults, manufacturing remains the sole route to a high-wage job.

Trumponomics argues that America also needs manufacturing for the purpose of national security. It cannot afford to have its defence sector rely heavily on imports of steel, aluminium, and semi-conductors. In a crisis, American military capabilities could be seriously compromised. As Mr. Trump puts it, “If you don’t have steel, you don’t have a country”.

A second key proposition of Trumponomics is that free trade is not necessarily fair trade. Imports from China are cheaper because China provides subsidies to its firms in various forms, uses slave labour to drive down costs, invests funds in state-owned technology companies, and indulges in industrial espionage and theft of intellectual property. It makes no sense to have American companies wiped out by competitors that do not adhere to the rules of a free market economy.

The third proposition is that America’s chronic trade deficits are unaffordable as the flip side is foreigners using their trade surpluses to acquire more and more American assets. In recent years, trade deficits have been of the order of $500 billion to $1 trillion a year.

Trade deficits are said to be self-correcting. When a country runs a trade deficit, the exchange rate of its currency is expected to depreciate. Exports will then rise and imports will fall, leading to a reduction in the trade deficit. Mr. Miran argues that the principle does not apply to the U.S. economy because the dollar happens to be the world’s reserve currency. Nations park much of their foreign exchange reserves in U.S. government securities. This results in an overvalued dollar.

An overvalued dollar means more imports, less exports and hence a persistent trade deficit. As Mr. Miran puts it, America runs a trade deficit not because it imports more; it imports more because it is the provider of reserve currency to the world.

Impetus for domestic manufacturing

How to restore manufacturing to the U.S. and reduce America’s trade deficit when faced with “unfair” trade and an overvalued dollar? Enter tariffs on imports. Tariffs will raise the cost of imports and cause imports to fall, thereby reducing the trade deficit. They will spur domestic manufacturing by protecting American manufacturers from import competition.

Economists fret that tariffs run counter to the principle of economic efficiency. Tariffs, they say, will spell higher costs for American consumers, an increase in the inflation rate and an inefficient manufacturing sector. Trumponomics says these concerns are based on first-round effects. Look farther and the outcomes change.

By raising the cost of imports, tariffs will result in fewer imports. A fall in imports will result in an appreciation of the dollar. If the “currency offset” to tariffs is perfect — say, a 10% tariff is offset by a 10% appreciation in the dollar — the dollar price of imports after tariffs will remain unchanged. The American consumer does not pay anything extra. Since the exporting country’s currency has weakened, it earns fewer dollars than it did earlier.

Mr. Trump has been ridiculed widely for saying that the exporting nation, and not the American consumer, will pay for U.S. tariffs. Once you take into account the currency offset to tariffs, Mr. Trump’s statement makes terrific sense.

To be sure, if the currency offset is not perfect, there will be costs to the American consumer and an increase in the inflation rate. Mr. Miran estimates a one-time impact on the inflation rate of about 0.3-0.6 percentage points, an impact that is eminently bearable. This assumes there are no retaliatory tariffs.

Tariffs can lead on to other favourable second-round effects. As input costs rise, American manufacturers will look for ways to enhance efficiency and lower costs. Tariffs will compel American and foreign companies to move operations to the U.S. and this will enhance efficiency and output in the U.S. economy. There are signs that major U.S. companies are already making such a move.

The other ‘Trump cards’

More importantly, tariffs are but one of four elements in Trumponomics. There are three other elements: tax cuts, deregulation and more drilling of oil. Tax cuts, made possible by tariff revenues, will compensate companies for the higher costs of imports. Deregulation will drastically reduce compliance and operational costs. More drilling of oil will help lower oil prices and counter the inflationary effects of tariffs. Taken together, the four elements constitute a plausible alternative to the current economic model.

Trumponomics is driven by the principle that efficiency cannot be the sole or even overriding consideration in economic policy-making, a principle that India’s policymakers had wisely embraced decades ago. Mr. Trump’s detractors believe that he has embarked on Mission Impossible. Well, Mr. Trump does not think so. He is determined to pursue his vision of MAGA (Make America Great Again) regardless of the short-term cost to the U.S.. As for the rest of the world, Mr. Trump does not give a damn.

A Supreme Court judgement that could impact the US Fed's independence

Can Trump fire US Federal Reserve Chairman, Jerome Powell? Trump's statement that Powell's "termination can't come fast enough" has fuelled fresh speculation about the possible fate of the Fed Chair.

There is a case before the US Supreme Court that could conceivably have some bearing on the Fed Chair's position, according to some legal experts. See this report in FT and this one from Bloomberg. Here is a brief summary of the issues.

In 1933, President Franklin Roosevelt fired William Humphrey, head of the Federal Trade Commission, for opposing New Deal policies. After he died, Humphrey's Executor pursued the case in order to recoup wages. The Supreme Court ruled that Roosevelt had fired Humprhey without "cause". That phrase has been interpreted to mean inefficiency, neglect or malfeasance.  Himphrey's Executor has come to be seen as a landmark ruling. 

If the US Fed Chair differs from the President on a matter of policy, say, cutting interest rates, can that qualify as inefficiency, neglect or malfeasance? Well, it doesn't sound like it does but a President might contend that the Chair is seriously hurting the economy through gross incompetence .... and then what happens? We are in uncharted waters.

That brings us to the case now before the US Supreme Court. In January, President Trump fired two ladies, the heads of two independent agencies, the National Labor Relations Board and the Merit Systems Protection Board. The two heads moved the courts that ordered their reinstatement. The US government went on appeal to the US Federal Court of Appeals which upheld the orders of the courts. The government then moved the Supreme Court. In early April, the SC Chief Justice John Roberts issued orders asking the two ladies not to attend office until the SC ruled in the case. A ruling is expected in the coming days.

There are some who argue that the law only talks about Governors of the Fed, it doesn't say anything about the Chairman. Some legal scholars argue that the President can remove Powell as Chairman but leave him on the board as Governor- a demotion of sorts!

There are others who say that the Fed cannot be compared with other independent agencies. A ruling that favours the Trump administration in the present case cannot,therefore, be used to remove the Fed Chair. There is some support for this view in a 7-2 ruling last year in favour of the head of the Consumer Protection Bureau.Even the dissenting judges said at the time that the Fed was a unique institution that would merit different treatment.

Fed Chair Jerome Powell himself has opined that any SC ruling relating to the case that involves the two lady heads of agencies would not apply to the Fed.

What if President Trump, nevertheless, removes Powell and the case goes to the Supreme Court? Remember that, in a recent case that involved the US government's illegal deportation of a citizen, the government has said it cannot do anything to bring back the citizen....

Did the bond market really humble Donald Trump? Well, the the story doesn't wash.

Within hours of 'Liberation Day' day reciprocal tariffs going into effect on April 9, President Trump announced a 90-day pause on reciprocal tariffs on all countries except China. The baseline tariff of 10 per cent would stay as would the tariff of 25 per cent on aluminium, steel and autos.

Market analysts celebrated Trump's supposed retreat as a triumph of the bond market. They said that there was a bond market sell-off prompted by fears of stagflation brought on by Trump's tariffs. Bond market yields started rising. This raised concerns about a possible financial meltdown. 

How would such a meltdown happen? Well, one reason would be that government bonds are pledged as collateral in various trades. When bond prices fall, margin calls go up. To fund the margins, traders have to stump up cash. They would do so by selling government bonds which are the most liquid securities one can have. That would cause a further fall in bond prices, more margin calls.... a vicious spiral would emerge.

There are various other trades that could lead to the same outcome. The Economist explains these very well. 

Plausible as the explanation seems, there are serious flaws in it:

i.  Government bond yields can rise any time, sometimes very sharply. Does that mean that every time that happens, we would have a financial crisis because government bonds are pledged as collateral in trades? 

ii. Trump announced his pause on April 9. Yields did not fall immediately thereafter. The yields on on 10 year US government bonds actually rose from 4.39 per cent on April 9 to 4.49 per cent on April 11. They have since fallen to 4.33 per cent. The pause is not a material change in the tariff situation, by any stretch of imagination. Apart from the tariffs that remain in place, the tariff war between the two principal economies, US and China, has escalated to a point where Trump has announced a 245 per cent on Chinese imports! I cannot see how the 90-day pause can be construed as a win for the bond market.

iii. There had been a much bigger jump in 10-year bond yields earlier. The 10-year yield jumped from 4.18 per cent on 4.18 per cent  on December 5, 2024 before the results of the presidential elections were known to 4.8 per cent on January 13, 2025, ten days before Trump was sworn in as President. It was a much bigger jump that what we saw around Lberation Day- from 3.99 per cent on April 4 to 4.39 per cent on April 9. We should have had a financial meltdown in January if the story about rising bond yields is true.

Trump seems to have sensed that there was no tearing hurry for him to take on all economies at one go. Better to focus on the main problem, China. If that brought comfort to the markets and calmed things down for a while, it was welcome. There doesn't seem to anything more to the pause. 

The bond market story is a convenient stick with which to beat Trump- it serves the purpose of showing up Trump as an ignoramus who understands little about how markets work. Well, that's a pretty stupid assumption to make about a billionaire businessman.