Imagine a society made up of farmers who produce what they need to live but also trade extra to one another for things they do not produce. This is not the most efficient society, but as long as everyone is self-sufficient, it works. At the minimum, each farm produces enough food for the family, even in lean years. Perhaps like the Amish, they voluntarily come together on larger projects that are shared by everyone and individual projects that require a lot of hands.
One day, someone comes along with an offer to one of the farmers. Instead of that farmer trading with the other farmers, this stranger will buy the excess for what the farmer wants in trade. He makes this deal with other farmers and before long he makes his living as the middleman. He does the trades between the farmers, keeping a little extra for himself in the process. Before long there are others doing similar and they all live in what they call town.
Now, imagine all the farmers decide to quit farming altogether and move to town to be traders and merchants. Obviously, that cannot work as now there are no farmers to produce the things the traders are trading, and the merchants are selling. Some of the farmers can quit, but not all. Additionally, some can begin to specialize to the point where they are no longer self-sufficient. They now rely on the traders and merchants in town to get the things they need to live.
In other words, the original model works just fine, but it is not efficient. The farmers are all just above the sustenance line. The introduction of middlemen makes for more efficient use of farm labor, so everyone can do a little better. Specialization in farming and in trading increases productivity. Somewhere in this model there is a mix of farmers, traders, merchants, and specialization that attains the maximum amount of productivity for this society.
That productivity, however, must benefit everyone. Otherwise, we get the problem of the farmers looking at the townspeople and deciding they would prefer to be a trader, rather than a farmer. There also must be a balance with regards to specialization, as this could make the productive class overly dependent upon the middlemen, who can then maximize their profits from the productive class. A society with a small number of people controlling all the profit is inherently unstable.
Therein lies the problem Trump inherits in terms of the economy. Starting in the 1970’s with the microprocessor revolution, the American economy has been hellbent on maximizing efficiency. Wherever technology can increase the output from labor, it has been done, often overdone. In fact, the data shows that efficiency has gone up far faster than wages, so we tipped past the happy balance long ago. While the overall economy continues to grow, it grows only for a minority of citizens.
On top of that, we long ago blew past the balance between producers and middlemen described in that prior scenario. A couple of generations of Americans have been trained to work in the middleman economy, often doing busy work related to boutique beliefs like diversity of climate change. Meanwhile, the productive sector atrophied or was shipped off to other parts of the world. The American economy is more like a global counting house now, rather than a self-sufficient economy.
The global bank model has run its course. The rest of the world, for various reasons, is disconnecting from the American model. The rest of the world is unwilling to do like the farmers in that model and turn everything over to the middlemen. That town full of merchants and middlemen is noticing that the farmers are not coming to town to trade their goods as much they did in the past. Suddenly, the skim from the work of the farmers is getting too small to sustain the townsfolk.
It is not a perfect way to think about it, but it helps understand the economic problems Trump inherits as president. It is why he is convinced that shifting from a tax system focused on labor to one focused on trade is a winner. It will help shift labor from busy work in cubicles back to doing productive things because the cost of imports will rise relative to locally produced items. Foreign producers will adjust by investing in production inside America.
The practical problem Trump inherits is the American economic model evolved to favor the middleman over the producer. Over time it led to the imbalance we see between producers and facilitators. It also led to a narrowing of profit to a shrinking number of players in the economy. In some ways, the American economy has become a digital version of the Bronze Age palace economies in that everything flows through financial and information centers that operate as skimming houses.
Fixing the imbalances within the rules of the system is impossible. This post by an economist calling himself Jack Rasmus explains how the tools available to government no longer work to address the practical imbalances. The people controlling Joe Biden poured almost four trillion in extra money into the system, but it did nothing to mitigate the problem of shrinking middle-class budgets. Prices keep rising while wages remain static, which means most people are getting poorer.
The only way out of the current trap is through systemic changes. That is why Trump is fixated on tariffs as an economic and policy tool. On the one hand this brings costs back in line with prices, so the market regains some coherence. If the real cost of an item is in the price of the item, then people will reward the genuinely lower cost items. In the current model, the cost of cheap goods turns up in the loss of social capital, delayed family formation and, of course, high crime.
A simple example is prepared food. These are cheap for the consumer but are packed with hidden costs. The refrigeration units used to be made in America, but those plants were shipped abroad by the miracle or tariff free trades deals. Of course, the plants are often staffed with cheap foreign labor, the cost of which turns up in your property taxes, the crowded schools, and the healthcare system. That frozen pizza turns out to be vastly more expensive than the price on the box.
Multiply this out all over the economy and it is easy to see the problem. Fifty years ago, middle-class families could get by on one income. Today, it takes two-incomes which is why there are far fewer families. Ours is an economy that looks prosperous on the outside, but the internals are littered with hidden costs. The only way to remedy this is to bring the costs back to the front of that frozen pizza and that can only be done through systemic change.
There are three challenges. One is the small number of people profiting from the current model will fight reform. That is not insurmountable. Trump having some of the richest men on earth in his corner will help a great deal. The bigger problem is the transition cost, which will come in the form of recession. There is no escape from it. The early 1980’s were the cost of transitioning from the productive economy to the middleman economy, so expect similar as we transition back.
The biggest challenge in this project is a dysfunctional managerial class that sees any change as a challenge to their position. The middleman economy was very good for the sorts of people who have a long list of impressive sounding credentials but view tangible accomplishment as a disqualifier. The army of managers in the managerial state cannot survive a transition out of a middleman economy. Like the aristocracy in 18th century France, they will not go quietly.
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