An anti-establishment leader takes power after a contentious election. His administration quickly proves itself remarkably corrupt; but he subverts the legal system and is able not only to suppress investigations into his corruption – his supporters denounce it all as a “witch hunt” – but also to consolidate his rule and undermine institutions (the “deep state”) that might have limited his power.
Am I talking about Donald Trump? I could be. But the figure I actually have in mind is Recep Tayyip Erdogan, president of Turkey, whose success in getting away with obvious corruption by politicizing law offers a disturbing preview of how Trump may become the authoritarian ruler he clearly wants to be. Not surprisingly, Trump, who basically seems to like dictators in general, has expressed admiration for Erdogan and his regime.
Authoritarian instincts and contempt for rule of law aren’t the only things Erdogan and Trump have in common. Both also have contempt for expertise. In particular, both have surrounded themselves with people notable both for their ignorance and for their bizarre views. Erdogan has advisers who believe that he is under psychic assault; Trump has advisers who yell profanities at each other while on trade missions.
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But does it matter? In America, stocks are up and the economy keeps chugging along. Erdogan has presided over an actual economic boom. Investors and markets don’t seem to mind the craziness at the top. The fact that economic policymakers have no idea what they’re talking about doesn’t seem to make any difference.
Until it does.
The truth is that most of the time the quality of economic leadership matters much less than most people – economic leaders included – believe. Really destructive policies, like those driving Venezuela into the ditch, are one thing. But run-of-the-mill policies like changes in tax law, even if they’re pretty big and clearly irresponsible, rarely have dramatic effects.
Last year, for example, Trump and his allies in Congress rammed through a nearly $2 trillion tax cut. That’s a pretty big number, even for an economy as large as ours. But aside from fueling an unprecedented wave of stock buybacks, the tax cut is having little discernible effect, good or bad. There’s no sign of the investment boom advocates promised, but there’s also no sign that investors are losing faith in U.S. solvency.
Basically, as long as the economy isn’t being hit by major shocks, political posturing hardly matters. Someone looking at U.S. growth in gross domestic product or employment over the past few years who didn’t know we’d had an election in 2016 would have no reason to suspect that anything important had changed.
But when big shocks do hit, the quality of leadership suddenly matters a lot. Which is what we’re seeing in Turkey now.
An aside: Even if the quality of economic leadership matters a lot only during crises, you might expect markets to think ahead and incorporate the risk of badly handled future crises into stock and bond prices. Somehow, though, that almost never happens.
What we get instead are long stretches of complacency followed by sudden panic. Students of international macroeconomics are fond of quoting “Dornbusch’s law” (named after my late teacher Rudiger Dornbusch): “Crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.”
What’s happening in Turkey is a classic currency-and-debt crisis, of a kind we’ve seen many times in Asia and Latin America. First, a nation becomes popular with international investors and runs up substantial foreign debt – in Turkey’s case, largely debt owed by domestic corporations.
Then it starts, for whatever reason, to lose its luster: Right now, emerging markets in general are being weighed down by a rising dollar and rising U.S. interest rates. And at that point a self-reinforcing crisis becomes possible: External factors cause a loss in confidence, which causes a country’s currency to drop, but the falling currency causes the domestic value of those foreign debts to explode, worsening the economy, leading to further declines in confidence, and so on.
At such a time, the quality of leadership suddenly matters a great deal. You need officials who understand what’s happening, can devise a response and have enough credibility that markets give them the benefit of the doubt. Some emerging markets have those things, and they are riding out the turmoil fairly well. The Erdogan regime has none of that.
So is the turmoil in Turkey a preview of what will happen under Trump? Not in detail: Although America borrows a lot abroad, it borrows in its own currency, which means that it isn’t vulnerable to a classic emerging-markets crisis.
But there are lots of ways things can go wrong, ranging from foreign policy crises – that Nobel Peace Prize doesn’t look too plausible now, does it? – to trade wars, and it seems safe to say that the Trump team isn’t ready for any of these possibilities. Maybe it won’t have to deal with any really serious challenges. But what if it does?