Barry Eichengreen: ‘Isolationism’ A Major Threat to US Global Economic, Geopolitical Power

In the critical upcoming US presidential elections, inflation tops the list of American voters’ concerns. Yet, neither Vice President Kamala Harris nor former president Donald Trump has presented a coherent, comprehensive plan to tackle the country’s greatest economic challenges: the dual scourge of the huge deficit and debt.

American economist and economic historian Barry Eichengreen who is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley,.

In an exclusive interview with To Vima on Sunday, famed international economist and public intellectual Barry Eichengreen – who since 1987 has taught at the University of California, Berkeley and is a renowned economic historian – stresses the dangers of the isolationism and tariffs that Mr. Trump is advancing.

While underlining that confronting economic inequality remains one of the country’s major challenges, he also notes that Ms. Harris has yet to sufficiently explain how she intends to finance the generous social policies that are a major part of her platform.

Eichengreen says that as regards the US-China economic and geopolitical rivalries, the US cannot successfully confront these challenges on its own.

He says this can only be accomplished by building and enhancing strong partnerships with its global allies, much as it did after WWII.

What is the state of the US economy today and which are the big picture problems it must address immediately and which in the medium-to-long term?

The US has performed well in terms of productivity growth relative to other advanced countries (relative to Europe).  It is a leader in developing successful Big Tech firms and now in AI.  It has a thriving venture capital industry.  (The Draghi Report has just highlighted how Europe falls short in these respects.)

The two big negatives for the US are inequality (not everyone shares in the productivity and income gains I just described) and a potentially unsustainable public debt.  The first problem is chronic and ongoing.  The second is a problem for the future (a problem for the medium and long term, as you put it).  But there is no solution to the latter apparent on the political horizon.

Inflation is a scourge for tens of millions of Americans who feel the pain at the supermarket counter. Are there any measures that a president and the executive branch take to rein it in even somewhat?

The simple answer is No.  Inflation is determined by the policies of the Federal Reserve, not by the Administration. The Fed was slow to respond to the inflation that followed on supply chain disruptions due to Covid.  But no one should want deflation that brings prices back down to where they were in 2020, since this would be highly disruptive macro-economically.  In any case, inflation is now largely in the rear view mirror; the current rate has already fallen to close to 2 percent.

The president could push for rent controls, but this would only lead to housing shortages.  Policies that determine how quickly new homes can be build are set at the state and local levels, not by the president or Congress.  As for “price gouging,” most economists (including yours truly) think this is a largely imaginary phenomenon.

The two presidential candidates have articulated very different positions (rather platitudinous one might say) on the economy. What would a victory for each mean for the economy and the middle class?

Neither candidate has a plan for reining in the budget deficit and the debt, which pose the most serious threat to the US economy in the medium term.  Were Trump able to implement his tax cut plans, he would blow up the deficit still further.  Harris’s social policies imply significant increases in federal spending, but her plans for increasing the corporate tax rate and taxes on high-income individuals (with taxable incomes over $400,000) would finance at least part of what she proposes.

As for the middle class (no one is called working class in the US – everyone is referred to as middle class!), Trump’s tariff’s would lead to a significant increase in the cost of living and a decline in living standards.  Harris’s proposals for an increased child tax credit, early childhood education and related social programs for the middle class would be positive steps.  But, to repeat, they need to be financed.

What is America’s place in the world economy, particularly as regards the growing US-China rivalry?

There clearly has been a fundamental transformation in US views of China. Whereas one upon a time American leaders and the US intelligence community thought that cooperation and collaboration were possible, now the dominant view is that China is competing with the West for geopolitical dominance.  Most US policymakers understand that the US can’t outcompete China economically by acting alone, but rather that it needs to head up a Western alliance, as it did after World War II.

How important are US economic ties with the EU, and is the US turning its back on Europe and looking to the Pacific?

There was supposed to be a “pivot to Asia” under Obama.  But Europe turned out to be too important, and too troublesome, for that pivot to take place.  With Russia’s attack on Ukraine, most (not all) U.S. politicians understand that America can’t turn its back on Europe – that were Russia to succeed in Ukraine, owing to inadequate US support for the latter, other European countries would be next.

The worry is not that the US will now turn its attention from Europe to Asia but, rather, that a future isolationist president will turn his back on both continents.

How do America’s alliances internationally impact on its global economic power?

Alliance politics have always been central to America’s global economic power.  For example, in the 1960s, when the stability of the dollar’s peg to gold was in question, West Germany and Japan, which valued the presence of U.S. troops stationed within their borders, committed to defending the dollar, by not converting their dollars into gold, as a quid pro quo for this US defense commitment.

France, which was a reluctant member of the US led alliance, and not a member of NATO, cashed in its dollars to avoid losses, by way of contrast.  More generally throughout history, we see countries holding and using the currencies of their alliance partners in international transactions (better to use the currency of an ally than a rival or potential enemy who can bar access).

Currently the issue is to slow China’s acquisition of state-of-the-art semiconductor technology.  This is not something the US can do alone, since it has no monopoly on that technology.  Indeed it is a follower rather than a leader when it comes to semiconductor manufacturing.  So cooperation with its alliance partners Taiwan and the Netherlands is essential.

This makes Donald Trump’s skepticism regarding NATO and our support for Taiwan and America’s friends in Europe worrisome.