Unlock the White House Watch newsletter for free
Your guide to what Trump’s second term means for Washington, business and the world
In the late 1960s, after the discovery of natural gas deposits in the North Sea, the Dutch economy changed dramatically over a relatively short period. In 1964, the country had exported almost no gas; a decade later it exported the equivalent of 74mn tons of oil.
The gas exports raised the value of the guilder, and taxes on the windfall allowed the Dutch to increase social spending, as research by Michael Ellman of the University of Amsterdam in the late 1970s showed. This squeezed manufacturers outside the oil sector at both ends. Costs went up at home, and exchange rates made it harder to export.
In the Netherlands, an obvious advantage — a sudden boom in natural gas exports — turned into a disadvantage: a hit to domestic manufacturing. By 1975, the output of the clothing industry in the Netherlands had dropped by 15 per cent. For footwear, it dropped more than 50 per cent.
We now call this phenomenon “Dutch disease”. It’s become a useful way to analyse countries that export commodities, since it provides an explanation for why they have a hard time turning export wealth into diversified, productive economies at home.
Many now think of Dutch disease as a developing-world phenomenon, since developed economies tend to be diverse and productive, with strong value-added manufacturing sectors. If we take the US over the past 25 years, however, it’s possible to think of its current account deficit as its strongest and most enduring export.
Until this year, people around the world have consistently wanted dollar-denominated assets, which Americans create when they borrow. And Americans have been more than happy to give people around the world what they wanted.
Americans do argue with each other, opportunistically, over debt levels. Democrats tend to be better at finding ways to pay for their programmes. But broadly, if we pay attention not to what Americans say, but to what they do, then the US is a country that discovered debt as a natural resource around 2000, and has been exporting it ever since.
The US has Dutch disease. Its export is the dollar. All that’s necessary to see that is to stop treating America as if it’s magic, and not subject to the same forces as any other country.
The dollar lost roughly 8 per cent of its value over the past six months, which has renewed the old discussion of whether holding the world’s reserve currency is an exorbitant privilege or an exorbitant burden. The most straightforward answer is: of course it’s been a privilege for the US to issue $36tn in debt. Some of the literature on Dutch disease, however, can help us understand how a privilege becomes a burden.
In the 1990s, development economists began to document that countries with strong commodity exports had lower growth. In 1999, Aaron Tornell, now at UCLA, and Philip Lane, now European Central Bank chief economist, offered a theoretical framework to explain what had happened. The commodity export changed the budgeting process, they argued. After a windfall, powerful groups will fight to get their hands on any new spending.
If the country has strong institutions and social solidarity, this grab for spending will fail. With weak institutions, it will succeed: instead of going to things that increase productivity, such as roads and schools, new spending goes to powerful groups, as unproductive gifts.
Tornell and Lane called this the “voracity effect”. They applied it to data from Nigeria, Venezuela and Mexico, but if we accept that the US is not magic, we can easily ask these questions of it, too. How voracious are its powerful groups? How strong are its institutions? The answers in order are: quite, and not as strong as we’d thought.
The voracity effect does help explain the gobsmacking audacity of Donald Trump’s so-called “Big Beautiful” Bill, with a cost of $3.4tn over 10 years and the benefits going overwhelmingly to the wealthy. In the past, Republicans have attempted to present tax cuts for the rich as a policy to release productive investment. They’ve even attempted to model this idea as a process called “dynamic scoring”.
But even the dynamic cost of the BBB looked embarrassing. The party shrugged its shoulders; the wealthy were voracious. The overriding logic of the bill, down to its name, adds up to: we are doing this because we can. That is at least honest. The US can borrow, and the most powerful groups will take what they can of it.
American institutions were never up to this challenge, and they won’t be until the US suddenly confronts a theoretical framework it hasn’t had to think about since at least 2000. Let’s call it the “paucity effect”.
