While there’s been a ton of coverage of the meltdown of the Turkish economy, I’ve not seen enough made of the similarities and differences between the United States under President Trump and Turkey under President Recep Tayyip Erdogan. In fact, their approach to managing their respective economies has some alarming commonalities, and yet, the results are clearly very different. Why is that?
First, some background. The most recent focus on Turkey stems from two phenomena: its refusal to release an American pastor from house arrest (on phony charges), and the sharp decline in the Turkish lira. However, Turkey’s economic problems go much deeper than those of other emerging economies. Its trade deficit is over 6 percent of GDP, inflation is in double digits, and its government and private companies owe billions to creditors whose loans were made — and this next bit is key — in dollars or euros.
That is, Turkey supported high GDP growth rates through borrowing cheap debt in other currencies. But now that its own currency has fallen so sharply — five years ago a dollar cost 2 lira; now it costs almost 7 — servicing that debt has become a huge burden.
Now, consider the common aspects of the Trump and Erdogan playbook:
• Both are pursuing debt-driven growth. As noted, debt-financed investments, often in infrastructure, have long boosted Turkish growth rates. Here in the United States, recent estimates suggest that deficit-financed tax cuts and spending could add 1 percentage point to GDP growth in the second half of this year.
• Though Erdogan has acted while Trump has only jawboned, both have gone after the independence of their central banks with the goal of keeping interest rates low — in Turkey’s case, regardless of inflationary pressures.
• When things don’t go their way, both cite “fake news,” while vilifying other countries and the media as the source of their woes. In a Trumpian flourish, Erdogan recently blamed “economic terrorists on social media” for spreading misinformation.
• Both manipulate “cultural animosities in a democracy to achieve power.”
• Both have appointed their sons-in-law to influential posts.
In one sense, this isn’t surprising, as the strongman, faux-populist leadership manual is pretty thin. History is replete with examples of such leaders pursuing shortsighted policies to generate growth without regard to its sustainability.
Yet, the economic outcomes couldn’t be more different. The dollar is gaining strength, inflation remains low (2 to 3 percent here, compared with 16 percent there), and capital is flowing into the United States and out of Turkey and other emerging markets with exposure to the Turkish economy. Turkey’s economy is clearly overheated by all that debt-fueled investment. While we are closing in on full capacity, our inflation gauges show no signs of overheating.
One of the main differences highlighted by this episode relates to the role of the dollar as the world’s premiere global currency. I’ve raised concerns about this privilege (it contributes to our own trade deficits and unproductive, incoming capital flows), but in this case, it keeps us out of the trap that emerging economies fall into far too often: borrowing in dollars that can, when their own currency tanks, be expensive to pay back. In fact, while U.S. public debt is uniquely high right now, debt service as a share of GDP remains low, although it is expected to rise as public debt and interest rates climb.
But could it happen here? Could Trump’s reckless economic stewardship, aided and abetted by a subservient congressional majority, tank the U.S. economy?
Of course, it’s possible, but it’s worth considering the insulating factors between here and there. I’ve already pointed out the role of the dollar. In fact, the combination of U.S. higher interest rates (which make the dollar a more attractive investment) and fears of the Turkish contagion has led currency investors to sell riskier currencies and buy dollars. There’s a downside to this: Our trade deficit could worsen as the stronger dollar makes exports expensive relative to imports. But it underscores that even in the age of Trump, we’re still a safe haven.
Another thing this U.S.-Turkish comparison makes glaringly clear is how essential it is to maintain the independence of the central bank. History is littered with economies laid low when central banks became a tool of the government.
At the end of the day, there’s just a lot that shields the $20 trillion U.S. economy from shortsighted economic stewardship, compared with the $850 billion Turkish economy. But there are still important lessons to be gleaned.
Unless Trump and the Congress are willing to continue juicing the economy with deficit spending, today’s sugar becomes tomorrow’s vinegar. That is, the current fiscal impulse is scheduled to leave the system by 2020, and growth rates are expected to slow sharply, from around 3 percent this year to around 1.5 percent.
That’s not a recessionary scenario, to be sure, but there is a downturn out there somewhere, and all this fiscal stimulus means our public debt levels may well be twice what they’ve been in the past going into a recession. History has shown that in such cases, politicians have done too little to offset the downturn.
The business press is understandably focused on the threat of contagion from Turkey to advanced economies, through, for example, the financial channel of banks holding Turkish debt that require a haircut. Neither European nor especially U.S. banks appear too exposed to Turkey, and the crisis may be at least temporarily diminished, as one of Turkey’s allies (Qatar) has stepped in to help.
But even if the financial contagion is limited, the damage done to even strong, advanced economies by reckless leadership is not something we can afford to ignore.