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May 26, 2019

Lessons from history in support of Trump thinking

Primarily Australian and German lessons

To this day it is widely accepted in Australia that R.G. (Bob) Menzies (later Sir Robert Menzies) was our greatest Prime Minister. He was the Prime Minister of Australia from 1939 to 1941 and again from 1949 to 1966. He is Australia's longest-serving prime minister, serving over 18 years in total. He ran Australia in the '50s and most of the '60s in what many now look back upon as a golden age. (I do. I was there). There was great embarrassment if unemployment exceeded 2% and life was generally tranquil, though Communist unions did their best to make trouble.



Doing nothing can be a good policy

But when people say what a great man Bob was, a common response was:  "But what did he DO?"  And that is a hard question to answer.  Whenever people came to Bob and suggested something that the government should do,  Bob would reply:  "But if we do that, that will create another problem here".  So Bob would send the suggestions away, saying that the best thing to do was nothing. 

People are always calling on the politicians to do something so it takes great political talent to do nothing.  And doing nothing means that the size of the government stays pretty small -- unlike what mostly happens today when the government never ceases to expand.

So Bob's talent was to let the people of the nation create any change they desired, with little or no government interference.  If enough people backed the change it would happen.  If it had little backing it would not happen.  So prosperity and quality of life increased almost entirely through private initiatives.

So the torrent of legislation to which all governments subject us was a comparative trickle under Menzies. He generally resisted the urge to meddle. And under him Australia was peaceful, calm and secure -- with unemployment negligible and living standards steadily rising. Contracts were enforced, criminals were punished and taxation was a fraction of what it is now. There was welfare for those who really needed it

Bob was however of Scottish origins and he inherited the great Scottish reverence for education.  So he saw it as a real problem that poor families could not send their children to university.  So, for once, he DID something about that. He instituted a scheme where the Federal government would send to university all children from poor families who had scored in the top third of High School grades.  The government not only paid the tuition fees but even gave the kid a living allowance.  It was called the Commonwealth Scholarship Scheme and I was one of its beneficiaries.

 So Australian conservatives today only have to remember the world of Menzies in the 1950s and 1960s to realize that their ideal of a much smaller and fairer government is far from an impossible dream.

"Honest" Frank Nicklin



But Bob was rare even among conservative politicians for his ability to do next to nothing.

So let me mention another such rarity: "Honest" Frank Nicklin.  Would you believe a politician with the nickname "Honest"?  In WWI he was a war hero and after the war he was a banana farmer.  In 1957, he became the Premier of my home state of Queensland and ran Queensland for around 10 years in the 60s.  Frank was by all accounts a very nice man:  A pre-Reagan Reagan.  He got on well with the bureaucracy and even the unions.  So life in Queensland was very tranquil in his time.

How Frank did it can perhaps be gleaned from the words of a unionist who had just gone to see him with some request.  He was asked afterwards what had happened with his request.  He answered:  "Mr. Nicklin can say No in the nicest possible way"!

But, like Bob Menzies Frank did do something:  He spent a lot on upgrading the infrastructure -- roads and bridges etc.

Eisenhower



And then we come to an example that older Americans will know about: Ike.

Ike didn't like to rock boats and mainly just wanted to let people get on with their own lives.  He kept the government low-key and tried to reduce government financial deficits.  But he too did SOMETHING.  Like Frank Nicklin, he spent a lot on building up infrastructure -- a big network of high quality interstate highways.  That network is in rather bad repair these days but if all the money wasted on the global warming myth had been spent the way the three men above operated, there would be no such problem today.

But it is wrong to say that conservatives favour the status quo.  Conservative-run legislatures legislate as energetically as any  but mostly that is just to undo the damage caused by previous Leftist policies.  It is Leftist changes that they oppose, not all change.  But, as we see above, even the three champion conservative leaders did also make positive changes: carefully considered changes that generated broad consensus

Trump looks to be going down a similar road.  He is mainly unwinding Obama-era initiatives rather than launch initiatives of his own.  But he too has the one big thing he wants to accomplish:  The Wall

East Germany and the virtue of stability



But the  Communist State of East Germany (the DDR or Deutsche Demokratische Republik) also has something to tell us about change. The regime is now long gone but its demise is particularly instructive.

When the Gorbachev reforms in Russia allowed it, thousands of East Germans breached the Berlin wall, leading to the downfall of the East German regime and a peaceful takeover of the Eastern lands by the West Germans in 1990.

Easterners had not generally foreseen any negative consequences of reunion but some soon emerged. In particular, the businesses and industries of the East were not remotely competitive with their Western counterparts and rapidly went broke.  This led to very high levels of unemployment and economic depression generally in the East and there very soon emerged among some people "Ostalgie" -- a longing for the old Communist regime, a longing that continues among some to this day

What Easterners miss from the old regime was stability, particularly stability of employment, but they also missed the orderly and predictable availability of goods and services as well.  You didn't have to compete for anything.  All was provided, albeit at a low level. So there was a brotherly feeling among Easterners and that is missed by some too.

So it is clear that some of the aspects of extreme socialism were and are appreciated by some people. The entire developed world does have a degree of socialism (welfare measures etc.) so there is clearly something basic in the appeal of socialism.

The great discovery of 18th and 19th century Britain, however, was that individualism was also beneficial -- particularly for generating wealth.  Money talked and it talked loudly.  Britain did have its socialist system (Workhouses, poorhouses, church schools etc) but they left plenty of room for individual enterprise.  And the rest is history, as they say.  In the developing, mostly European, world of the 19th century, Britain became the model and socialism took a back seat to individual enterprise because of its obvious advantages

So an obvious question is whether capitalism can deliver some of the things that socialists like.  The extensive welfare provisions already in existence already go some way towards that but is there more that we can do without wrecking our successful economic model.

East Germany gives us the clue.  The one thing that "Ossis" particularly liked was stability, the absence of change.  In particular they liked economic stability -- confidence that you would have a job tomorrow and that the job is easy to do.

That is in fact a thoroughly conservative wish.  Stability and an absence of change are good conservative values.  So where have we gone wrong?  Why did it take a Communist state to put conservative values into practice?  The answer is that all of life is a tradeoff.  Only feminists think you can have it all. And we have traded too much for economic liberty.  East Germany was poorer but more secure and relaxed and that tradeoff suited many people.

Menzies and tariffs

And there is a robust Anglo-Saxon democracy with all the traditional liberties that did offer something like East German tradeoffs.  Again we come to Australia in the 1950s under the long running Prime Ministership of the very conservative R.G.  Menzies.

Australia was very autarkic at that time.  It made its own cars and kitchen appliances plus much else.  Some goods were imported, chiefly from Britain, but Australian manufacturers were encouraged and were readily given tariff protection.  If you made toasters in Australia you did not have to worry about overseas competition.  A nice little tariff would protect you.

So businesses and their employees could relax.  Their factory would just keep running year after year.  The workers could plan their savings and their holidays with no fear that their job would suddenly vanish due to a new competitor entering the market and selling the product at a cheaper price.

And under that system there was very little unemployment. Anyone who wanted one could get a job.  Unemployment was always under 2%.  It was a crisis if it seemed likely to rise to 2%.  There is nowhere like that in the world today.

So Australia at that time was a capitalistic economy with East German characteristics.  Despite its tariffs, Australia was in the '50s one of the most prosperous places in the world. 

Australia is a major primary producer so there was often steak on the dinner table, most houses had a substantial backyard where you could grow most of your fruit and vegetables if you were so inclined, you could get on a steam train and go interstate to visit family and friends at vacation time, there was always the family car for local trips, the newspapers had lots of interesting news, particularly from overseas,  you could hear all the latest songs on the radio, the ladies had pretty dresses and even in small towns there were several bars where one could drink cold beer after a hard day's work.  What else is there?

But that is lost today.  Australia is now a normal nation with few tariffs and unemployment around 5%.  And you can buy things for pocket change that once would have been a serious hit on the budget.

Trump's tariffs

But there is hope. Trump  too looks like going down something like the Menzies road.  American unemployment has sunk to levels way below anything expected. So Trump has got an amazingly successful recipe for American prosperity.  Whatever he has been doing must be given great credit for creating a multitude of new jobs

Yet what Trump has been doing runs completely against conventional economic wisdom.  Economists preach free trade as the highroad to prosperity -- but Trump has been a champion of tariffs and import restrictions.  Yet Trump has recently said that he learned the free trade story while he was at Wharton and still regards it as the ideal.

So it is clear that free trade alone is not enough for prosperity in the real world we have at the present.  You actually have to sponsor jobs -- by protections if necessary -- in order to get good job growth.  There was striking evidence of that in the 19th century -- when American industry prospered mightily behind high tariff walls. 

So how do economists explain the 19th century boom?  It is to them a classic case of the "infant industry" exception.  American technology and industry were still very new and well behind the mature industries of the old world. So it had to be given time to catch up. And that does seem to be what happened.  So the 19th century experience is not necessarily a guide to the 21st century.  It gives us no assurance that Trump's policies will continue to succeed. As initial optimism wears off and the costs become evident, one could argue that America will rebound to the old 5% level of "frictional" employment.  You cannot square the circle for long.

Logical that may be but the Menzies precedent offers hope that Trump's success with jobs will NOT be ephemeral

Robert Menzies was a very conservative man. So what were his economic policies?  They were very protectionist and focused on creating and preserving Australian jobs. And Menzies stuck to his high tariff policies for the whole of his long Prime Ministership. So that sounds a lot like Trump's policies, does it not?  So what was unemployment like in the Menzies era?  It was almost always UNDER 2%.  It was regarded as a political crisis if it looked like it would go over 2%.  Frictional unemployment barely existed.

So the lesson is clear:  Maximum jobs requires some protection of industry.  Both Trump and Menzies have demonstrated that.  It could be called the "Trump/Menzies Rule": That there is a trade-off between tariffs and unemployment such that as tariffs go up unemployment goes down.  And the Australian precedent says that we can even hope for 2% under Trump.  How good is that?

So WHY is an actively protectionist administration needed for businessmen to be maximally enterprising?  It's dead simple.  It gives businessmen throughout the country the feeling that government has got their back.  It gives them the feeling that government will at least be on their side if there is a push for change of any sort.  Democrat administrations are, by contrast, enemies of business -- and blind Frederick can see that. Hence up to 9.6% unemployment under Obama compared with 3.8% under Trump. Businessmen are people too.  They respond to incentives and recoil from attack. So that is the theory:  Tariffs stimulate business confidence and confident businessmen go on a hiring spree in their keenness to make money

Trump has an economics degree from the Wharton school so he knows the downside of tariffs.  He knows that his tariffs are impoverishing to a degree but he also knows that stability is a neglected but important value. Money is not everything. It is unlikely that America will ever come near to East Germany in an offering of stability but Mr Trump is rebalancing American priorities in that direction, which should make America a better place overall.

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This note originated as a blog post. For more blog postings from me, see
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