America is the world's scariest emerging market economy
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According to an old Wall Street joke, the longest river in the emerging market countries is “De Nile.” However, looking at the United States economy today, especially after the September 2008 Lehman bankruptcy crisis and the November 2016 election of Donald TrumpDonald John TrumpDems win from coast to coast Falwell after Gillespie loss: 'DC should annex' Northern Virginia Dems see gains in Virginia's House of Delegates MORE, one has to wonder whether it is perhaps not we in America who are in denial about the underlying state of our country’s economy. Might we now not be choosing to turn a blind eye to the fact that the U.S. is increasingly coming to resemble those major emerging market economies like Brazil, Russia, Turkey and Ukraine in terms of its poor economic governance, its dysfunctional politics and the general direction of its economic policies?

During my many years of experience working at the International Monetary Fund on troubled emerging market economies in the 1980s and 1990s, I learned that that at the heart of their repeated bouts of poor economic performance was their weak economic governance. All too often in these countries, a handful of powerful oligarchs managed to capture the reins of government while economic policy came to be made mainly in the interest of the favored few at the expense of the many.

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Looking now at President Trump’s cabinet of billionaires and at his predilection for promoting regressive policies in the areas of health care and tax reform, can we really say that we are qualitatively different from the Russias and the Ukraines of the world? Looking at Goldman Sachs’s seeming lock on the job of U.S. Treasury secretary over the past 20 years or at the repeated successes of the special interest groups in blocking legislative initiatives that a majority of the public might favor, can we really say that narrow corporate interests do not have excessive power in U.S. economic policy making?

 

Another glaring weakness of the emerging market economies is their general lack of market competition and the domination of their economies by a handful of conglomerates. Here too it is difficult to say that the U.S. economy is not steadily drifting in that direction. Indeed, it is estimated that two-thirds of all U.S. economic sectors today are very much more concentrated than they were in the 1990s while U.S. corporations today are far more profitable than at any time since the 1920s.

Meanwhile, the antitrust legislation that the U.S. might have on its books has for all intents and purposes become a dead letter of the law as the Amazons, Apples, Facebooks and Googles of the world go on unchecked buying sprees. Where is a trust-busting Teddy Roosevelt when we so sorely need him? If there is one common thing that characterizes the run-of-the-mill emerging market economy it is distrust of free trade and predilection of policymakers for high tariff walls that might benefit the favored few.

With the U.S. now championing an “America first” strategy and with the Trump administration seemingly casting off the U.S. leadership role of the past seventy years for an open global economy, can we seriously say that the U.S. is qualitatively different from the emerging markets with respect to trade policy? Yet other characteristics of the emerging markets that all too often lead them down the road to economic and financial market ruin are their disdain for disciplined budget policies and their disregard for adequate financial market regulation.

Should we therefore not be concerned that, at a time when the U.S. economy is close to full employment, the Trump administration is proposing unfunded tax cuts and increased infrastructure spending that would almost certainly increase the budget deficit and raise the public debt? Should we also not be concerned that at the very time when there already appears to be financial market excesses, the Trump administration keeps pushing for the rolling back of financial market regulation that would take us back to the pre-2008 crisis days of inadequate banking sector regulation?

Despite the seeming growing similarities between the U.S. and the emerging market economies, the one thing that still distinguishes the U.S. economy from the emerging market economies is its very size. After all, the U.S. still remains the world’s largest economy. This means that what happens to the U.S. economy continues to be of far greater consequence for the global economy than what might be happening in the emerging market economies. For which reason, it is not only in the U.S. interest but also in that of the global economy as a whole that we must hope that the U.S. will soon start to arrest its seemingly inexorable drift to emerging market status.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director of policy development at the International Monetary Fund and the chief emerging markets economic strategist at Salomon Smith Barney.


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