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Trump’s attacks on democracy will have repercussions for the economy

Economists: Trump’s attacks on democracy will be bad for the economy, too

Trumponomics: VICE Money comments on the economics of the Trump era.

Political scientists, economists, and philosophers have long noted that healthy democracies are often rich countries too.

But over time, the explanation of that relationship changed.

Starting in the late 1950s, the thinking went that as incomes rose, countries grew into established democracies through a “modernization” process. That essentially meant the development of industrialization, urbanization, education, and communication leading to increased political organization and ultimately, democracy.

But others have argued that the relationship runs the other direction. An influential paper published in 2008 sums up the idea well: “Perhaps democracy causes income rather than the other way ’round.”

Economists who now champion that idea, such as Massachusetts Institute of Technology’s Daron Acemoglu, argue that key institutions of a functioning democracy also happen to be good for long-term economic growth. Those ingredients — which include a strong judiciary, fair elections, an independent civil service, and a free press — all helped make the United States the world’s greatest economic success story.

They’re also ideas Donald Trump has spent the first 10 weeks of his presidency attacking. Many economists worry that Trump’s broadsides on those institutions, including the barrier between public policy and the private wealth of the president, his family, and his close advisors, could prove damaging to the economy over time.

Even before his inauguration, Trump made a habit of trouncing the norms and niceties of American politics — from calling for the imprisonment of his political opponent Democrat Hillary Clinton to refusing to release his tax returns as nearly every presidential candidates over the last 40 years has done.

Once he took office, Trump declined to divest himself from his business interests. He installed his children in the White House despite anti-nepotism laws. He continues to accept money from foreign governments as an owner of the Trump International Hotel in Washington, D.C. — and his company wants to open  another hotel in the nation’s capital. The acceptance of those payments puts him in violation of the Constitution, according to a bipartisan group of constitutional scholars currently suing him.

And those are just the questionable actions that involve Trump directly. Recent stories have highlighted business negotiations between the family of Trump’s special adviser and son-in-law, Jared Kushner, and a Chinese insurance company with close connections to the country’s ruling Communist party; Trump’s former campaign manager Paul Manafort’s dealings with oligarchs tied to Russian President Vladimir Putin; and how Trump’s regulatory adviser and activist hedge fund investor Carl Icahn stands to benefit directly from some of the regulations on which he advises.

“This is what a banana republic looks like,” said MIT’s Acemoglu, the co-author of Why Nations Fail. “Trump and [his] entourage are true to the signals they’ve sent so far: nothing less than total repudiation of everything that set apart the United States from countries like Turkey, Russia, and Venezuela.”

Banana republics look like this for good reason, according to New York University political science professor Alastair Smith. A co-author of The Dictator’s Handbook, Smith argues that, given their druthers, all political leaders would prefer to maintain power by relying on a small group of political insiders. That’s because managing a small group is easier and cheaper than managing a larger group. In such a system, establishing a crony-based or kleptocratic economy, where political insiders benefit from their direct connections to the leader, is a relatively straightforward way to make the few political players that the leader needs happy.

“It’s a way of rewarding relatively small numbers of people,” Smith said.

But not large numbers of people. Crony-based systems aren’t good for generating broad economic growth, which doesn’t matter if the leader  only needs to keep a few generals happy. But it does matter if the leader depends on winning over millions of voters to stay in power.

Of course, throughout its history, the U.S. hasn’t been immune to crony capitalism and corruption. During the 19th century, cronyism was a key feature of both U.S. politics and economics. But beginning in the progressive-era, the establishment of institutions — such as an independent civil service, the much maligned “administrative state” (including regulatory agencies such as the Food and Drug Administration), and a nonpartisan press — kept the worst crony excesses at bay in the American system. Trump represents a new test of that system.

“Our laws and regulations on corruption and conflict may be generally effective in dealing with misconduct by other officials, but our system really isn’t set up to deal with the kind of problem that Trump presents, where the president of the United States is also the patriarch of a family business empire,” said Matthew Stephenson, a law professor at Harvard Law School, who focuses, in part, on anti-corruption law. “We’ve seen this in other countries, like Italy and Thailand, but not here.”

Italy provides perhaps the guide for the the U.S. under Trump. In Italy, wealthy businessman Silvio Berlusconi had a lengthy stint as the prime minister of the well-established democracy. Both he and Trump began their terms in office with broadsides aimed at independent institutions, including the judiciary. Both have surrounded and insulated themselves with a tight circle of trusted advisors. Both seemingly despise the advice of experts, such as economists. And both see little difference between acting as an executive of a private-sector company and as the executive of a democratic state.

But running a country is different from running a company. Italy’s economy, not the most robust, decelerated during Berlusconi’s stint in power — a slowdown that came despite a series of tax cuts and government spending aimed at shoring up both growth and political support. As a result, the country’s debt-load shot higher, leaving Italy with one of the heaviest burdens on Earth and setting the stage for the European debt crisis. That, along with a conviction for tax fraud, ultimately helped drive Berlusconi from power but left the economy limping.

Paolo Manasse, a professor of economic policy at Italy’s University of Bologna, has studied Berlusconi’s impact on the economy. And he has a message from Italy for the U.S.: “Everybody seems to agree on what is in store for you.”

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