Trump's assault on institutions will be a litmus test of their importance

Do institutions matter? Donald Trump's sustained assault on them will give us an answer

Institutions matter. They are the foundation on which growth, investment, and economic stability must be built. Or is it the other way around? Is it economic shifts that give rise to modern institutions? Economists have sought to identify the causal relationship between these two for a long time; last year, three economists won the discipline’s Nobel Prize for work that seemed to demonstrate how institutions that were supportive of investment, and not extractive, could lead to decades, indeed centuries, of growth. 

We are living in the middle, however, of a great experiment. We owe this to American President Donald Trump, who in his second administration has chosen to break free of the shackles that apparently constrained his first, and dismantle multiple institutions that long defined the American economy and the presidency. Will the United States’ (US’) economic out-performance survive this effort? Can the world’s strongest and deepest economy retain its momentum even when the foundation on which it is built is dismantled? The answer awaits us in the coming decade. 

The actions that have made the most headlines outside the US since President Trump took office are the tariffs that he has threatened, announced, or implemented against multiple counties, including India. Lost in this discussion is the basic fact that Mr Trump is going further than constitutional propriety allows. The US’ system of checks and balances does not assign the making of trade policy to the chief executive. That is the privilege of the legislative branch — of the US Congress. In taking it upon himself to not just implement emergency safeguarding tariffs but indeed to completely rewrite the code book, this President has attacked the very basis of the separation of powers. Yes, Congress could step in at any point and so bears its share of responsibility. After all, it is highly unlikely that in an anonymous, conscience vote of its members, the legislature would agree that the Trump tariffs are a good idea. But its cowardly complicity in the process of undermining itself does not change the institutional damage that has been done. An accountable and deliberative legislature, a fast-moving but constrained executive: This has been the policy-making system that has delivered growth and flexibility to the US. Can growth continue without it? 

Another pillar of the US economy has been the excellence, rapidity, and transparency of its data. We know from month to month how well the economy is doing, in part through what is known as the jobs report. Of course, as with all statistics, later and more accurate results can differ in some important essentials from interim results that are partly based on leads and extrapolation. But after one such revision in the jobs report recently that caused embarrassment to administration, the head of the agency responsible for compiling these official statistics was fired. The replacement named by Mr Trump neither has the background fit for the job nor a history of independence that could maintain trust in official statistics. US policy-making — as well as investment into its economy — has been eased by the availability of high-quality data. The Indian economy, which has lost many of its most effective data series, or had to endure them being rendered incomparable across time, is a cautionary tale of how the absence of good statistics can lead to suboptimal policy choices. It also shows how investors and firms that are forced to grope in the dark or rely on their own high-frequency sources and formulae to figure out the state of the economy. Will the US economy suffer correspondingly? And will it reduce the scale or accuracy of investment? 

And then there is the question of central bank independence. Since the 1970s, we have understood the importance of a separate monetary authority. If the fiscal authorities are given a free rein to print money, then its incentives are misaligned. Controlling inflation over time requires a central bank that responds to real signals from the economy, and not to political pressures. India’s recent economic history seems to support this thesis; monetary targeting that was introduced a decade ago has anchored inflation expectations and helped the government keep its lenders in the bond markets in control. 

Governments always want growth to happen on their watch. And they want to spend money now, because inflation, if it follows, will happen later. Thus their own choices on interest rates are always biased downwards: They want lower rates than might be optimal for a particular inflation-growth mix. This has played out many times in the past in India and in other countries. It is now visible in the US as well, where Mr Trump has threatened to fire one governor of the Federal Reserve, and appointed another whose main distinguishing feature is personal loyalty to the President. His main target continues to be Fed Chairman Jerome Powell; investors today cannot be sure that the chair can survive, or even if the Fed board’s apparent move towards looser monetary policy is based purely on the merits or because they are giving in to pressure. 

The US has long prided itself on its institutions. It has also been one of the most reliable sources of sustained and consistent economic growth for the world. It is natural for our intuition to link these two facts. That intuition will now be tested. But we have already learned one thing. The US’ institutions, at least, were not designed as well as many have long claimed. They are not prepared to withstand a President who sees disagreement, or even uncomfortable statistics, as a conspiracy rather than the normal process of politics. Richard Nixon was indeed paranoid about independent institutions — but he was dethroned thanks to the disapproval of right-thinking members of his own party. Thus the US’ institutions also depend upon crucial individuals — regulators, centrist members of Congress, judges, investigators — doing their jobs properly and without colluding with each other. Perhaps that is true of all institutions; but I suspect the US’ are in fact more dependent on personal integrity than others.  They appeared stronger than others not because of their design but because they have so rarely been tested. It is sobering to consider that the last time that all these many cogs in the machine of the federal government abandoned independence en masse to serve a higher partisan and sectional calling was more than 150 years ago, in the runup to the Civil War.