Tuesday, February 7, 2017

The New England Patriots Win Shows Why Steve Bannon Gets Prosperity Wrong

By John Tamny
Real Clear Markets
February 7, 2017

No matter who is in the White House, there are always members of the electorate who feel the existing occupant is “trying to wreck the U.S. economy.” This was true for Barack Obama’s presidency, and it will similarly be true for Donald Trump’s.

About Obama’s policies, no doubt many were inimical to prosperity. Economies are merely collections of individuals, and individuals are weakened when more of their work is regulated and taxed away. Whatever one’s opinion of the 44th president, his years in office weren’t defined by stupendous economic growth.

Still, presidents don’t aspire to the office because they want to be average, or fail. They want their years in office to be seen by historians as economically fruitful. Successful economic presidents are broadly seen as “great” in a country like the U.S. that’s full of the ambitious. So while Obama’s economic policies were less than ideal, it seemed a reach for anyone to suggest that he purposely proposed policies meant to render members of the electorate worse off economically. Such a goal would be self-defeating.

Applied to Trump, and his chief policy strategist, Steve Bannon, both have ideas about the policies necessary for prosperity, and both surely believe they’re excellent. Indeed, if the economy falters under Trump, historians will judge both the president and his top adviser negatively. Rightly so, since economic growth is so simple. It’s about removing or reducing the four main governmental barriers to production: taxes (a penalty placed on work and investment), regulation (a tax on production that fails, almost as a rule), floating money values (a tax on trade and investment), along with tariffs (a tax on work).

Trump and Bannon get the first two broadly right, but on money and trade they miss in a big way. Money is merely a lubricant that makes trade (the purpose of our work) and investment (the direction of capital to future wealth creation) more frequent, but Trump’s been explicit in his desire for a weaker dollar that will render both less common. And as workers we’re all importers, by definition (why else would we work?), which means tariffs tax the reason we’re working to begin with.

Trump’s support of tariffs is rooted in a belief that is strongly held by Bannon. An economic nostalgist, or as he puts it about himself, an “economic nationalist,” Bannon believes as Trump does that “Protection will lead to great prosperity and strength.” The latter explains their support of tariffs. They believe barriers to the entrance of foreign goods and services will lead to stronger U.S. companies. Yet on this point these two surely well-meaning individuals get the nature of growth precisely backwards.

To understand why, we need only consider the New England Patriots numerous Super Bowl victories. It was quite literally a lack of protection that made them possible; specifically a vicious hit back in 2001 that forced former Patriots quarterback Drew Bledsoe to the sidelines in favor of Tom Brady. The Patriots were a good team with Bledsoe calling signals, but not a great one. And while no sane individual would ever wish an injury upon anyone, it was Bledsoe’s injury that unexpectedly brought the Patriots prosperous future into an abundant present. Seven Super Bowls later, including five wins, Brady and Patriots head coach Bill Belichick are now properly seen as the best quarterback and head coach in the history of the game.

A similar scenario helps explain the Atlanta Falcons rise to NFC dominance, and possible Super Bowl victories in the future. While the Falcons were an occasionally good team under former head coach Mike Smith, they only realized their Super Bowl potential when Smith was fired. Dan Quinn was hired to replace Smith in 2015, and two years later his team came within inches of winning it all. Does anyone think the Falcons would have been playing into February of 2017 if Smith were still running the show?

All of which brings us to the business angle of protection (or lack thereof), which helps explain why economies grow. In last Friday's Wall Street Journal, frequent editorial page contributor Andy Kessler noted that the failure rate among Silicon Valley start-ups is roughly 90 percent. Silicon Valley is the most economically prosperous region in the world, yet its economy is defined by a total lack of protection. Businesses fail there with great constancy.

Importantly, the failures are the source of its abundant economic strength. Put in football terms, there aren’t any Bledsoes and Smiths overseeing precious resources without endpoint. Thanks to persistent failure in the Valley, the bad ideas are exposed quickly so that poorly run businesses are rapidly deprived of their ability to ritually misuse what is once again precious. If the businesses in the Valley were protected by governments through bailouts and/or tariffs, what is not working would continue to exist at the expense of much more talented Brady and Quinn equivalents waiting in the wings; their skills wasted thanks to protection.

Even more important, it’s easy to see the predictable results of protection when we shift our gaze to other parts of the United States; Detroit in particular. Detroit was “Silicon Valley” long before the real one, and its impressive economic vitality resulted from a lack of substantial protection from government. Figure that in the early part of the 20th century, over 2,000 carmakers were incorporated. Nearly every single one failed. But far from impoverishing cities like Detroit, this fast, Valley-like failure authored its economic renaissance. Once again, where failure is frequent success becomes more likely simply because the bad are quickly replaced by the good.

Fast forward to the present; Bannon and Trump believe that protection of U.S.-based industries is necessary if the U.S. economy is to grow at faster rates. In truth, their policies promise stagnation if implemented. Protection is once again what calcifies what isn’t working, along the sporting lines of former Alabama Crimson Tide head coach Mike Shula keeping his job forever instead of the school replacing him with Nick Saban.

Bannon and Trump surely mean well, but their stated support of protectionism will, if imposed, visit endless sluggishness on the U.S. economy. We can never forget that failure is our economy’s strength, and if they succeed in restraining failure through artificial, governmental means, Americans will be less likely to know what “winning” is.

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