The 2008 financial crisis, the Covid-19 lockdowns, Donald Trump’s tariffs. These events create radical uncertainty — a technical term that means an event to which it was impossible to put a probability (and are sometimes therefore called “black swans”).
The three have different features, to be sure. The collapse of Lehman Brothers, which triggered a loss of confidence in financial markets, emerged from many panicked human decisions. The pandemic was more like an earthquake or volcano, a natural phenomenon we know will happen but can’t predict when, though the impact of the phenomenon was heavily affected by human decisions. The tariffs chaos is the result of a powerful man in a powerful position making shocking and unexpected decisions.
When radical uncertainty strikes the normal response is to galvanise collective humanity to find solutions to manage it. The financial crisis was brought under control thanks to fast and globally co-ordinated interventions by regulators and politicians. The Covid-19 pandemic led to a global race to develop and distribute vaccines that was unprecedented in our history. So the question I find myself pondering now is just what the response to the Trump-created black swan will be.
One of the features of the Trump tariff debacle is the continual flip-flopping. Tariffs are on, then suspended for some finite period, then specific exemptions are carved out, and so on. The original formula for the calculation of tariff levels, dividing by two the ratio of exports to the US by the imports from it, which results in SA’s level of 36%, has no grounding in any economic theory (tariffs do have a role in economic theory, but not this way of calculating or implementing them). So the question is, how does Trump make his decisions? If we can answer that we can begin to analyse and understand how to manage this crisis.
There are few policy changes in history that have been as universally condemned by the economics profession than the tariff war. What is perhaps unique about this event is the imperviousness to expertise. While the financial crisis and Covid-19 pandemic galvanised technocratic interventions, a feature of the Trump policy attack is its rejection of advice. It is reminiscent of Britain’s Brexit decision, with proponents declaring that the public “have had enough of experts” because the majority of economists considered Brexit a bad idea.
A feature of the Trump approach is the anti-intellectualism. No major political leader has attacked expertise and scientific knowledge the way Trump has. His epistemology, as he told the Washington Post in 2018, is “I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me”. He is setting science back many years, for example in defunding the National Institutes of Health and the National Oceanic and Atmospheric Administration. The pendulum appears near its maximum amplitude since the end of the Cold War, a period that in retrospect was an apotheosis in commitment to science and expertise, from state craft to the space race.
As former treasury secretary Larry Summers put it on CNN earlier this month, “now my primary concern is a lack of basic competence”. I think this is the core of the crisis we now face. The tariffs debacle is a symptom. The cause is that the US administration is running without expertise. That is likely to lead to other shocks. The presence of expertise would normally provide a level of predictability in policy development and risk management. Decisions that are guided by evidence may still be driven by ideology or politics, but evidence helps connect the decision to its likely effects.
The problem with Trump is it is not clear what state of the world he considers desirable, and even if we knew, his choice of policies appears arbitrary. He wants to “make America great again” yet the baseline seems pretty great already. US GDP has never been higher, unemployment has been at lows not seen since the 1960s and until this started the stock market was at record highs. So what is meant to get better?
The trade war is ostensibly an attempt to reindustrialise America, but why would that be so great? While Trump’s election reflects a clear dissatisfaction with the status quo, I hardly think American workers manning menial industrial assembly lines is what is really desired. There is clearly a lot of identity politics at play in US voting behaviour, but beyond that, the vision of America Trump wants to bring about is hard to see. There are certainly losers in the US economy’s shift into services and particularly tech, but unshifting it is likely to make things worse.
When a government is so obdurate it is often the financial markets that instil discipline. It was the markets that forced Jacob Zuma to back down from appointing Gupta stooge Des van Rooyen as finance minister. British prime minister Liz Truss reversed course on a disastrous unfunded budget after bond markets cratered. Trump’s tariff flip-flops are at least in part driven by watching an alarming spike in US treasury yields in the face of the tariffs crisis. In both the Zuma and Truss examples markets did not recover confidence even when the main policy misstep was reversed. They only began to regain confidence when the person responsible was kicked out.
I think there is a low probability of the Trump administration recovering any respect for expertise. It is going to be run by gut instinct. Decisions will be hard to predict. They will change only when faced with hard power such as that inflected by the financial markets. Ultimately though, when a leader of a major economy tosses aside any role for evidence in policymaking, it is the leader who falls. While it is hard to see a way to an early end to the Trump administration, it is harder still to see Americans tolerating a leader who cannot connect policy to outcomes, and who continues to generate radical uncertainty about the future of the American economy.
• Stuart Theobald is chair of research-led consultancy Krutham.
This article first appeared in Business Day.
This image was originally posted to Flickr by Gage Skidmore at https://flickr.com/photos/22007612@N05/39630669575 (archive). Licensed under CC BY-SA 2.0.
