Editor's note: This transcript was written by Jeremiah B Leonard, to whom the SFRB is very grateful.
The economy is in great shape, which is one of the few things Donald Trump has going for him in this midterm season. Should Americans credit him for these good times, though? Should one expect that today's fortunes will hold steady down the road? Peter Schiff is one of our time's most outspoken libertarian economists. A veteran investment banker, he foretold the 2008 economic meltdown. Schiff shares his views about Trump and the economy on this week's episode of 'Cotto/Gottfried.' SEE more episodes HERE: http://www.sanfranciscoreviewofbooks....
COTTO: The economy is perhaps one of the few things to brighten Donald Trump’s public image amid a midterm season like this. The economy’s obviously doing pretty well, and a lot of people give him credit for that — specifically his economic policies, or at least does coming out of his administration. However, is this credit due? Is it correct? Is it a good idea to think that because the times are good now they’ll also be good down the road? Peter Schiff is one of our time’s most outspoken economists — a very strong libertarian. He shares his views on what I just mentioned and more on this week’s episode of Cotto/Gottfried. I’m your cohost, Joseph Ford Cotto editor-in-chief of the San Francisco Review of Books. My cohost is Paul Gottfried, head of our editorial board.
COTTO: People I think now would generally say that the economy is doing well because of President Trump’s policies — it certainly seems that investor and consumer confidence is up as a result of what he’s done since becoming president. Peter, do you think that this is a fair assessment?
SCHIFF: Well, I believe that there is an increase in confidence, particularly among Republicans. I’m not sure how confident the Democrats are, but there are a lot of Republicans who believe that the economy is going to get a lot better because of things that Trump is doing. But unfortunately, I don’t think what’s actually being done justifies that confidence. I don’t think the economy is really any better that it was under Obama. I think it’s still a bubble. I think the Federal Reserve inflated this bubble. After the last bubble it inflated popped, it caused a financial crisis in ‘08, and I think the economy is still headed for a much greater economic collapse than the one that we had in ‘08, which I think is going to be far more destructive and far more painful for the average Americans.
And to the extent that the day of reckoning happens before the end of Trump’s term — he’s not going to have a second term— and I’m afraid that the next Democratic administration is going to be far to the left of Obama, and that’s probably going to be a complete disaster given how bad the economy is going to be when they take over. And their prescription of even more government is going to make a bad situation much, much worse.
COTTO: What makes you think that Trump won’t get a second term? Is it something economic? Or is it something different?
SCHIFF: Well, I said “if the bubble bursts before the end.” So, the last bubble, Bush was able to get reelected, because the bubble didn’t burst until his second term. But this one is so big, and it’s been inflating for so long, I don’t know if Trump is going to be able to survive long enough to get reelected. So it’s possible, but if Trump can get reelected that just means the bubble was able to get that much bigger. And if it pops in his second term then obviously it’s going to be more catastrophic than had it popped in his first.
COTTO: Paul, do you have anything to add?
GOTTFRIED: I’m not quite sure why it’s going to burst. And Peter will have to — I know he’s written on this — but he’ll have to explain for our benefit exactly why it is going to burst. But it seems to me that if the Democrats win, and if Trump fails to win a second term — which is a possibility given his verbal ineptitude, and the fury with which the unified media are coming after him — that under the Democrats things could get a lot worse because there would be all kinds of burdensome regulation, the economy would slow down, the government would get larger and more parasitic — all of these things that I think are not as serious under Trump as they would be under a democratic alternative.
SCHIFF: Well, I agree that government could grow faster under Democrats than Republicans, but it’s grown a lot since Trump has become president. Donald Trump has signed on to a budget that dramatically increased welfare and warfare spending. So, Donald Trump — despite cutting taxes — he has simultaneously made government bigger and more expensive. He has just decided to pay for the added cost of government with debt rather than with taxes. And that may feel good in the short run, but I personally believe the worst way to pay for government is by debt. I think it’s more efficient to raise taxes.
GOTTFRIED: I agree with you that to try to increase the debt in order to pay for runaway budgets is a bad idea. But what options does he have given the opposition that he faces? And given the fact that most Americans, from what I can see, want the government very much involved in their lives — they want the government providing them with social programs. And the Democratic Party is the larger and more powerful of the two parties. It enjoys the support of most of the media, the academy, the popular culture, and so forth. Does he have any alternative?
SCHIFF: The alternative is to actually drain the swamp. And that means letting a lot of water out of the swamp, and that means cutting government spending dramatically. There are all sorts of agencies and departments that should be completely abolished, and we should be cutting military spending, not increasing it. But we should also be going after entitlements. We need to take a meat clever to [these things.]
GOTTFRIED: Do you think that’s politically feasible? I mean, I agree with you — in theory I agree with you. Do you think it can be done in a politically feasible manner? Given the obstacles, and the formidable opposition that Trump is facing?
SCHIFF: Well, anybody that tried to do that would have opposition, but at least Trump had the opportunity. I think he’s squandering it. I think the problem for Trump is that he’s claiming that since he’s been elected, he’s fixed all the problems and that he’s already made America great again. And when the whole thing implodes on his watch — and now it’s his bubble, it’s his recession he owns it — there’s going to be a huge backlash. And I think that the country is going to turn to socialism as its savior. It said, “well, we tried capitalism with Trump, we tried less government and cutting taxes, even though we didn’t get less government.” But the perception is that Trump cut taxes for the rich and the corporations, and if we have a big recession before he finishes his term, that’s going to be to blame. It’s going to be blamed on those tax cuts, and the solution is going to be more government. I think we’re going to end up potentially with complete socialized medicine — we may socialize higher education completely. I mean, who knows? There’s all kinds of crazy ideas. Look at this ridiculous bill that Elizabeth Warren introduced — the Capitalist Responsibility Act [it’s actually the Accountable Capitalism Act]. I mean, that’s an example of the kind of stuff that we could get under a Democrat president with a Democratic Congress.
GOTTFRIED: And she may be electable. I agree with you entirely in terms of your criticism, I just do not understand how — given the present electorate, given the problems that anybody who wishes to slash budgets faces in the present government and with the electorate — I’m not quite sure that it’s possible to do anything to avoid the dire consequences that you’re depicting.
SCHIFF: But then the consequences are worse. If we don’t address these problems on our own, we’re going to address them in a crisis. It’s going to be a currency crisis — it’s going to be a sovereign debt crisis. If you want to look at something that’s going on in a country like Turkey right now — we are in far worse shape than Turkey. Turkey is a paradigm of fiscal responsibility compared to the United States. We have so much more debt than they do. Our economy is so much more screwed up. It’s just that we’re able to continue to borrow money. The world is willing to continue to lend us more money, even though it’s impossible for us to ever repay what we’ve already borrowed and the only reason that we can pretend that we can afford the debt is because the interest rates are still so low. But all of this is going to change, and I would rather have a controlled burn than a raging inferno, but that’s what’s coming.
COTTO: Do you suppose though that the United States, like AIG back in 2008, is too big to fail — that regardless of whatever happens to the US federal government — regardless of how far in debt it might go, that somehow it will be bailed out simply because it’s of too great importance to the world’s economy to be allowed to essentially default? Do you think that’s a reasonable perspective?
SCHIFF: No, in fact I think it’s too big to bail. The resources that we suck up from the rest of the world — it’s too much. The world can’t afford not to let America collapse. It’s the cost of supporting Americans — of loaning us all the money that we need to borrow and producing all the goods that we need to consume, and not get paid. Remember, the world has to supply America with all sorts of consumer goods and accept no real payment. We don’t export to pay for the imports. So, the world has to loan us all the money that we need to pay for all the products that we don’t produce, and they have to loan us all the money to run our government. We are draining — we are sucking up savings and capital, and consumer goods from the rest of the world. So, the world has to suffer to bear the burden of maintaining this gigantic bubble in the US economy. And the sooner the world lets the bubble deflate, the better for the rest of the world. But we are enjoying the fruits of their labor, and we benefit at their expense. But this parasitic relationship is not going to go on forever because ultimately, we’re going to kill the host. Because we’re too expensive to support.
GOTTFRIED: So your view of our relationship to the world — or our fiscal relationship — is the opposite of that of Donald Trump who complains that other countries are taking gross advantage of us, that they impose tariffs on our goods, whereas we allow their goods to come in. And he’s promised to get rid of this trade imbalance so that people will deal with us more fair.
SCHIFF: Yeah, I think Trump has it backwards. I think we are taking advantage of the rest of the world, but unfortunately in the long run this is a disaster for our economy — to take these shortcuts. And ultimately, I do think that the world is going to suffer when we end up defaulting, because the world thinks they’re accumulating assets by buying our treasuries — or buying all of our debt. But when we end up defaulting either because we outright just don’t pay, or we create massive inflation and so they get nothing of real value, then the world is going to have to eat those losses. But because the US economy has evolved in this way, when we have to fend for ourselves, we can’t do it.
Let’s say we were a nation fishermen and everybody knew how to fish but over time we started importing fish, and generation after generation everybody forgot how to fish and then all of a sudden the fish stops coming — now what do we do? We just starve to death. Eventually if we have to produce the goods that we need, we just don’t have the infrastructure. We don’t have the supply chains. We don’t have the skilled workers. All that stuff that was built up over generations has been dismantled. We have a service-sector economy, but without any manufactured goods the service-sector economy can’t exist.
GOTTFRIED: But hasn’t trump tried to return to that by creating jobs in the steel industry, by trying to bring heavy industry back to United States, and having us not be dependent on other countries for steel products and for other things which are necessary for our industrial base. He does seem to have made an effort to move in that direction. But there’s another question that I — oh, go ahead, I’m sorry.
SCHIFF: Tariffs are not going to do it. The trade deficit in and of itself is not the problem, it is the consequence of the problem. The problem is that our economy is not productive. Now, why is that? Well, because interest rates have been kept artificially low for too long, so Americans don’t save enough. We borrow too much for consumption. We don’t make the capital investments that we need to make. So, in order to address the underlying problems, what Trump needs to do is dramatically reduce the size of government to free up the resources for the private sector. The Federal Reserve has to allow interest rates to rise to a level where Americans save again and stop borrowing. That means a much lower stock market, that means much lower real estate prices. We have to allow all the imbalances that have built up over the years to go away, and we have to become a nation of under-consumers, and frugal-savers, so that we can invest our savings productively in plant equipmen — and we need massive government deregulation. We need to reinvent our economy — we need to go back to what we used to be.
When Trump says “well, let’s make America great again” fine. Well, why was America great? Because we had lots of economic freedom and very minimal government. So, we need to go back to that. Trump likes to talk about how we used to run on tariffs — yeah, because we had no income taxes, we had no Social Security taxes, and we had a tiny government. So, it could run on tariffs, because the tariffs weren’t that high, and the government was small. But we have to go back to that. We have a lot of work to do. Just putting tariffs around and trying to blame foreigners for our trade deficits — that’s not going to work.
GOTTFRIED: My question is do you think anyone would be electable to the presidency running on that kind of platform? Again, I agree with you in theory, I just don’t think anybody who took those positions would be electable.
SCHIFF: No, but Trump was already elected. The key is to get elected and then do the right thing.
GOTTFRIED: He would last for four years, and then he would be replaced by Elizabeth Warren.
SCHIFF: No no, look, if you do the right thing — obviously you could wait for real disaster. Look at Roger Douglas New Zealand in the 80s. I mean, Roger Douglas was elected from the labor party, and he instituted massive free market reforms from the left — and that’s a way to do it. But Trump was elected in a way that — he was already breaking all the rules. He’s not a career politician. That was my hope for Trump — was that once he got elected he would actually do the right thing and not give a damn about the political consequences. Because he wasn’t beholden to anybody, he could just do the right thing for the country and be more concerned about his spot in history than how he’s viewed right now. But unfortunately, he just became a total politician, and all he’s doing is cheerleading another bubble, he is doing everything he criticized Obama for doing.
Now we’re going to have this massive collapse, and I’m afraid it’s going to get blamed on free-market principles and capitalism — I mean capitalism always gets blamed for the damage government does, and then government gets rewarded by getting bigger. It’s always the solution — “we need to have more government,” and then the problems get bigger. But we are about to go all in on it.
The concern that I might have is — ok, we go full-on socialist in 2021, and it’s a complete — runaway-inflation, poverty, riots, looting, shortages, civil unrest. Then where do we go from there? Are we going to come back to freedom, or just complete the journey to totalitarianism? We don’t know.
COTTO: It seems to me that nowadays a lot of people view the word freedom not in the context of limited government or classical liberalism moreover. They look at it more or less as a license to have what they want and to them that’s liberation — liberation from the lack of something to having it. I don’t think that’s a good strategy at all in the long term, but I think if you talk to people today especially younger, college-educated ones on the whole — not everyone, obviously, but most of them — that’s how they would view freedom. I don’t know how that’s going to change in the near future. It’s probably only going to get worse.
SCHIFF: It’s more about group rights, and entitlements, and not understanding what individual liberty actually means. I don’t think a lot of these people even can connect the dots between what they want and where it’s coming from — because really what you’re doing when you claim that you’re entitled to something — you’re enslaving other people. You are basically forcing other people to provide you with things, to work for your benefit rather than their own. But a lot of times people just don’t even understand. They just say “well, the government should provide all this stuff,” and they have no idea that the government has nothing. All the government can do is take money from other people and give it to you. So, if you think that healthcare is your right, well the Government has to enslave doctors, or they have to enslave other people to pay doctors to provide you with healthcare.
But that’s not freedom. Freedom is freedom from force — from other people taking things away from you, that you earn — that you produce. It’s not being able to steal from other people and claim that that’s being free. That’s just enslaving other people and thinking that you’re entitled to some kind of special privilege. But in a democracy — which unfortunately, we have degenerated into over the years, rather than the republic that the framers created for us — but that’s how people get elected. They promise to steal stuff from the people who don’t vote for them and give it to the people who do. If you’re promising to give people money to the middle class and the poor, well they’re going to outnumber the rich. So you know, that’s what happens.
GOTTFRIED: Do you think immigration policies add to the problems that you describe? You have large numbers of people coming in who do not fit in culturally — who create social problems — and these have to be addressed by creating government agencies, which mediate their relations with other groups — help us overcome prejudice. It seems that a very large, almost sort of secondary bureaucracy is created to deal with the effects of trying to create a multicultural, diverse society in which the pieces don’t quite fit together, and in which continuing government intervention is necessary to maintain civil peace.
SCHIFF: It’s a shame that immigration is a problem and a benefit. All four of my grandparents were immigrants. Of course, when they came here there was no welfare state. So, when my grandparents came they immediately added their productivity and their skills to the American economy. And everybody benefited from my grandparents coming to the United States along with millions of other immigrants that came with nothing. My grandparents came without even — they didn’t speak any English. They had no money. There was no government welfare office to go to. They had no minimum wage law — no nothing. It was just sink or swim, and they swam. And they invited their friends over, and their relatives, and people came and thrived. And unfortunately, today the problem isn’t immigration, the problem is the welfare state that a lot of immigrants end up getting ensnared in. The problem is the war on drugs where a lot of the immigrants end up in crime because of this ridiculous prohibition that has been going on in the United States. So, those are the bigger problems. And then the immigration issue ends up being a scapegoat. People end up blaming immigrants for the problems, and it’s very convenient that history is littered with countries that have blamed immigrants because it’s easy and you can fan this nationalist spirit — “oh it’s their fault” — “their taking our jobs,” and “they’re doing all this bad stuff.” But none of that is true. The jobs that are getting destroyed are not because the immigrants are coming here and working, it’s because of government regulation and taxation, and other things. There’s an unlimited number of jobs that would exist but for government, and it’s not like if an immigrant comes in and goes to work he’s somehow depriving an American citizen of a job that no longer exists. That’s complete nonsense. And to the extent that immigrants come in and work, everybody benefits from their productivity and from the fruits of their labor. In fact, there a lot of things …
GOTTFRIED: But the other thing is that they also get to vote, and they bring a certain political culture which I don’t think is compatible with the classical liberalism that you’re expounding. They’re used to government help, they’re used to gov …
SCHIFF: To the extent that they’re American citizens, to the extent that they become citizens they can vote, that’s true. Although, some of them might vote illegally. But yeah, if they come in — but you would think though, if it wasn’t for the welfare state the only immigrants that would come here would be people that would come because they’re ambitious and hard-working and they just want to make a better life for themselves. We would just get the best and the brightest that the world has to offer. But if we attract people based on a welfare state, saying “come here and we’ll give you this and give you that,” then sure. They’re going to vote for more free stuff. But if we get rid of all the free stuff and if we say, “look, you can come to America, but don’t expect the government to take care of you; take care of yourself,” then we’re going to get the right kind of immigrants, and they’ll vote for the right type of leaders.
COTTO: For the last question, Peter do you think that Trump in the long run, his policies — if there isn’t a crash, which you mentioned hypothetically — do you think that his policies will be regarded in a positive sense then? Do you think that perhaps he might be regarded as a middling president? Or maybe, in the really long run, could he be seen as not much different than Barack Obama or George W. Bush?
SCHIFF: He’s going to be like a Bush. Bush was very unpopular at the end of his second term because of the financial crisis, and there’s a bigger financial crisis [on the horizon]. And it’s either going to happen in Trump’s first term, or his second term — if it doesn’t happen in his first term. But he doesn’t have any real policies. His policies were — he cut taxes — but he didn’t shrink government.
And look at what he did with Obamacare, right? Obamacare is still here. All of the worst parts of Obamacare live on while the president takes credit for repealing it. But the only thing he repealed was the individual mandate — the penalty that was supposed to counteract the damage that Obamacare did by making it illegal for insurance companies to discriminate against pre-existing conditions. That was the worst part of Obamacare. That’s what Trump left in place. And so, this is just a ticking timebomb.
GOTTFRIED: What could he have done, however? But what could he have done? I agree, it’s an abomination. But given his political options was it possible to simply scuttle the whole thing?
SCHIFF: If you couldn’t repeal the whole thing, he should have left it alone, because now when it all blows up it’s not going to be because of Obamacare, it’s going to be because Trump ruined it by getting rid of the penalties for not buying insurance. And so, it’s going to be Trump and the Republicans that get the blame. And now it’s going to be, “look, we just need total single payer, we need socialized medicine.” That’s going to be the solution. Trump should’ve tried to bring us to the solution of “get government out of healthcare completely.” Let’s have a free market-based healthcare system, so healthcare will be like consumer-electronics. It gets better every year and it gets cheaper every year. Everything that gets better and less expensive is what’s provided by the free market. Stuff that gets more expensive and worse, that’s what you get from government. So, we just need to get the government out of things that are important like healthcare, so we can have high-quality healthcare and maximize the accessibility. The way it was before the government got involved.
COTTO: Paul, do you have anything to add?
GOTTFRIED: I’m simply looking at the problem of feasibility. It seems to me that however rotten Obamacare was that something like well over half the American people now want something like that. They do not want a free market medical system, although Peter and I would vote for that. I’m simply thinking of the political obstacles that are faced by any politician who says — even if he had the means to do it, which this president doesn’t — any attempt to scuttle this plan is going is going to be opposed by Congress, and I doubt it’s going something better outcome in the next election.
SCHIFF: I get the political realities. We’re so far gone our country is populated by such basic illiterates — economic illiterates, and everybody’s got the vote that it may be impossible to persuade the American public that they would have better health care if the free market provided it. If they put their trust in the free enterprise system, and the invisible hand. But yeah, we may be too far gone. But the system we have now doesn’t work at all. So, we may have to move to something like the Swiss have, or something like that where we guarantee some kind of basic medical care for all and then allow people to buy better care on their own — yes, it’s not as good as the pure free market , but it’s probably better than what we’ve got now. What the government has created with this hybrid-type system with insurance companies, and the way the tax laws are written, we’ve actually created something that in many cases is actually worse than what we would get if we had some kind of national healthcare.
But, there are still some parts of our health system that are very good, but it’s just unfortunate that they’re so damn expensive — and they wouldn’t be. And if you look at the parts of our healthcare system where government is not involved, and insurance companies are not involved. Look at cosmetic surgery — gets better, get cheaper. Look at eye Lasik surgery — gets better, gets cheaper. A lot of cosmetic dentistry. A lot of stuff that doesn’t get paid for by insurance companies, that people shop around, and there’s free market and there’s a competitive market, and you get improved quality and you get lower price.
Before the government got involved, doctors made house calls. I mean hell! I talked to my grandparents. My grandparents, when they came here they were poor, but they never had a problem affording medical care. If my dad got sick they would call the doctor and he’d show up at the house right away, [and say] “what’s wrong?” It wasn’t expensive. Healthcare was not something that people were worried — how are they going to pay their medical bills.
COTTO: Excellent discussion. Thank you for joining us Peter and thank you for tuning in everyone. See you next week.