Paul Krugman: Who you gonna call when the market melts?
The economic climate is far from being a threat-free zone for the next US president
For make no mistake about it: The world economy is still a dangerous place. Financial reform has, I’d argue, made our system somewhat more robust than it was in 2008, but fumbling the response to a shock could still have disastrous consequences.
Back in 2008, one of the ads Hillary Clinton ran during the contest for the Democratic nomination featured an imaginary scene in which the White House phone rings at 3 a.m. with news of a foreign crisis, and asked, “Who do you want answering that phone?” It was a fairly mild jab at Barack Obama’s lack of foreign policy experience.
As it turned out, once in office Obama, a notably coolheaded type who listens to advice, handled foreign affairs pretty well – or at least that’s how I see it. But asking how a would-be president might respond to crises is definitely fair game.
And military emergencies aren’t the only kind of crisis to worry about. That 3am call is one thing; but what about the 8am call – the one warning that financial markets will melt down as soon as they open?
For make no mistake about it: The world economy is still a dangerous place. Financial reform has, I’d argue, made our system somewhat more robust than it was in 2008, but fumbling the response to a shock could still have disastrous consequences. So what do we know about the shocks we might face, and how the people who might be president would respond?
Right now there are two fairly obvious potential economic flash points: China and oil. Many economists, myself included, have been pointing out for a while that China has a severely unbalanced economy, with too little consumer spending and unsustainable levels of investment.
So far, unfortunately, China hasn’t made much progress in dealing with this fundamental imbalance; instead, it has papered over the problem with a huge expansion of credit. Now, with capital fleeing the country at the rate of a trillion dollars per year, it may well be headed for a bust. And China is a big enough player that a bust there could have major spillovers to the rest of the world.
Then there’s a potential oil crisis, very different from the ones we used to have: the problem now is a glut, not a shortage, with many producers having run up large debts they probably can’t repay. You could say that shale oil is the new subprime.
Nobody knows how big these problems could become, or what other potential crises we’re missing. But it seems all too likely that the next president will have to deal with some kind of financial turmoil. How will she or he perform?
At this point there are three candidates who have a serious chance of receiving their party’s presidential nomination. Barring the political equivalent of a meteor strike, Clinton will be the Democratic nominee. Donald Trump is the clear front-runner on the GOP side, but if he falls short of an outright majority on the first ballot, Ted Cruz might still pull it out. So what do we know about their economic policy skills?
Well, Clinton isn’t just the most knowledgeable, well-informed candidate in this election, she’s arguably the best-prepared candidate on matters economic ever to run for president. She could nonetheless mess up – but ignorance won’t be the reason.
On the other side, I doubt that anyone will be shocked if I say that Trump doesn’t know much about economic policy, or for that matter any kind of policy. He still seems to imagine, for example, that China is taking advantage of America by keeping its currency weak – which was true once upon a time, but bears no resemblance to current reality.
Oh, and coping with crisis in the modern world requires a lot of international cooperation. Things like currency swap lines (don’t ask) played a much bigger role than most people realise in avoiding a second Great Depression. How well do you think that kind of cooperation would work in a Trump administration?
Yet things could be worse. The Donald doesn’t know much, but Ted Cruz knows a lot that isn’t so. In a world in which gold bugs have been wrong every step of the way, repeatedly predicting runaway inflation that fails to materialize, he demands a gold standard to produce a “sound dollar.”
He chose, as his senior economic adviser, Phil Gramm – an architect of financial deregulation who helped set the stage for the 2008 crisis, then dismissed warnings of recession when that crisis came, calling America a “nation of whiners”.
Cruz is, in other words, a man of firm economic convictions – convictions that are utterly divorced from reality and impervious to evidence, to a degree that’s unusual even among Republicans. A financial crisis with him in the White House could be, let’s say, an interesting experience.
I don’t know how much play the candidates’ readiness for economic emergencies will get in the general election. There will, after all, be so many horrifying positions, on everything from immigration to Planned Parenthood, to dissect. But let’s try to make some room for this issue. For that 8am call is probably coming, one way or another.