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Filet Mignon and a Howitzer

Good morning.

At the end of week one of the Trump administration, Mohamed El-Erian, the chief economic adviser at Allianz, has taken a stab at describing the new President’s approach to economic policy, and I think he gets it about right. Trump has put higher growth and greater job creation at the top of his agenda, but rather than pursuing a free-market approach like all his Republican predecessors, he’s adopted an “import-substitution-plus” approach that has “elements of an industrial policy.”

The strategy, in El-Erian’s words, combines both “macro” and “micro” efforts. At the macro level, it’s a push for deregulation, tax reform, infrastructure spending, and changing incentives to favor domestic production. At the micro level, it’s using his bully pulpit to persuade individual companies and to advance specific projects.

Will this work? As El-Erian notes, conventional economists tend to dismiss the effects of such “micro” measures as too small to matter. But he believes the “signaling effect could be consequential – through their impact in altering narratives, expectations and behaviors at the more general level. This effect is turbocharged by the president’s repeated emphasis on jobs and the active use of a range of communication tools, including more informal ones such as Twitter.”


As I’ve written before here, Trump is taking an extreme “carrot and stick” approach to negotiating – more like filet mignon and a howitzer – by both threatening 35% tariffs for offenders, and promising “massive” tax and regulatory benefits to those who fall in line. CEOs have little choice but to respond.

Overall, El-Erian says, the approach bears some resemblance to growth models that have been pursued at times in the past by countries like Argentina and Brazil. The unknown is how such a dramatic shift in policy by the country “at the core of the international monetary system” will affect other countries, and the overall global trading system.

For the moment, markets seem content. After the Dow broke 20,000 yesterday, Asian markets rose to their highest level in 3 ½ months.

You can read El-Erian’s full commentary here.