What is Trump’s economy? It looks like modern Chinese pseudo-capitalism, economist Joel Naroff says
The president has effectively seized power over how the government spends its money, determining which industries and services should benefit, writes Naroff.
Welcome to the new U.S. economy, where the president determines which sector in the economy will grow, which will wither, and most importantly, who wins and who loses. This is what I call the new U.S. pseudo-capitalism.
What am I talking about?
Tariffs are bad but executive orders are worse
While most people have focused on tariffs, a revolution is occurring. The executive branch has seized control over the U.S. budget and is exerting its power to determine where those funds will, or will not, be spent.
When it comes to economic policy, President Donald Trump’s use of executive orders to control the spending of funds appropriated by Congress may be the most breathtaking grab for power since Franklin Roosevelt tried to pack the Supreme Court.
Think of it this way: Before Jan. 20, 2025, Congressional committees held appropriation hearings, budgets were hashed out in Congress, expenditure categories and levels were agreed to by representatives and senators, and votes were taken to pass the budget. Then the president signed the budget bills and spent the money.
And the appropriations were spent according to the structure set out in the budget bills.
Not anymore. Now, the budget is just an outline of where funds may or may not be disbursed.
The president now determines who wins and who loses
Through executive orders and the use of executive power, spending has been cut, departments closed or made functionally inoperable, contracts have been rescinded, services have been effectively terminated, and workers have been fired.
And that list doesn’t include Trump’s executive orders on deportations, tariffs, and even pharmaceutical prices.
At the same time, the president has determined that selective sectors, such as manufacturing and oil, should be afforded full protections to grow.
The president has become the decider-in-chief for who wins and who loses in the struggle for government support and ultimately economic growth.
He has accomplished that by essentially creating, without legislation, the right to not only line-item veto funding but also line-item green-light spending.
Is this constitutional?
The Supreme Court ruled in 1998, in Clinton v. City of New York, that a president can veto an entire bill but not parts of a bill. But that has not stopped President Donald Trump so far.
The president’s ability to withhold appropriated funds without Congressional approval may have been limited by the Impoundment Control Act of 1974, but it has not curbed the rescission of contracts or the cutting of departments and programs.
In other words, the president has effectively seized power over how the government spends and in doing so is controlling the direction of economic activity.
Unless the president’s actions are ruled unconstitutional, the U.S. economy is now operating under an industrial policy that allows the president, not market forces, to determine where resources should be allocated.
How did Trump take control of spending decisions?
All it took was simply the willingness of Congress to allow the president to commandeer the power of the purse.
The majority party, or a bipartisan coalition, could stop or slow this transfer. But as of now there seems to be little will to assert Congressional authority over spending.
Meanwhile, the Supreme Court seems happy that lawsuits over these actions are slowly wending their way through lower courts. I doubt Chief Justice John G. Roberts Jr. is itching for a fight with Trump over the president’s actions.
The lack of Congressional oversight has economic implications
With Congress now a largely irrelevant body of political sycophants when it comes to spending, it is important to understand what a centralized economic policy means for the economy.
This economic strategy is nothing new. It is an update of the economic philosophy that was pushed heavily in the 1970s called “industrial policy,” but with a few twists and turns.
The 1970s industrial policy concept was fairly simple: Where the private sector fails when it comes to investing in critical industries, the public sector must come in to support and protect those sectors.
Protected industries included those being battered by so-called unfair foreign trade actions, meaning industrial policy was the intellectual foundation for protective tariffs.
Democrats pushed that tactic but didn’t get very far. Ronald Reagan’s free markets approach moved government policy toward investment in technology to improve U.S. firms’ global competitiveness.
We are now in a pseudo-capitalism economy
While the U.S. abandoned picking winners and losers, other countries embraced the approach.
Most importantly, China perfected what I call modern Chinese pseudo-capitalism.
China’s modern economy is not socialism, communism, or capitalism. It is a little of all of them. Thus, while some call the Trump approach “MAGA Maoism,” that is not accurate.
The days of Mao’s classless society are largely history. The Chinese government’s goal is not the equal sharing of resources but the limitation of income distribution distortions.
To accomplish that end, Chinese leaders control the key economic levers, including monetary policy, taxes and spending, tariffs, and exchange rates.
Clearly, this is not capitalism. The markets matter but the government can and does override them when it feels the need to. That is why I call it pseudo-capitalism.
Now consider what Trump is doing.
Trump’s central control of spending and funding of economic and social entities largely mirrors the Chinese approach. He is unabashedly directing government policies toward favored economic sectors and away from those he does not support.
He believes he should control the Federal Reserve and monetary policy. While the president has yet to exert direct control over the Fed, he will have the opportunity to appoint a new Fed chair next May.
He believes Congress should pass his tax policies, regardless of their impacts on exchange rates, the budget deficit, or the distribution of income. The proposals are largely political but play to different segments of the population than China’s.
The use of trade restrictions to protect and foster growth in favored sectors is similar to China’s.
When you add it up, Trump is moving the U.S. economy toward a more centrally controlled, pseudo-capitalism economy.
Is that good or bad? I suppose it depends upon whether you are in the winning or losing group.