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LIST

Out of my depth: Facebook and Co., November 24, 2019

A useful global recession?, November 16, 2019

Reform of the Stability Pact: political leaders simply give up, September 30, 2019

Brexit: Three overlooked facts, September 11, 2019

Bad governments matter, August 28,2009

The problem with Trump, August 21, 2019

Out of my depth: Facebook and Co.

 November 24, 2019

 

Let me try to wander far away from whatever competence I may have. Every day, you can read reports of debates about the risks posed to society by the social media, which are used to disseminate fake news, conspiration theories and hate. They are reported to meddle in elections in democratic countries. They allow fringe groups with noxious agendas to grow and act. Law-abiding countries seem powerless. And, yet, a couple of simple tricks would do.

 

The amazing aspect is that there is nothing new with the social media. Except for the underlying technology, the debates mirror earlier ones on the freedom of opinion and on monopolies. These two issues have been studied and disputed in great depth earlier, solutions have been found and refined. These solutions only need to be adjusted to the new technology.

 

For a few centuries following Gutenberg’s magic invention of the printing press, exactly the same happened. Newspapers sprang up and, as with all inventions, ill-intentioned people used them for bad purposes, disseminating the same insanities and profanities as the social media. It was less efficient than the web but probably as dangerous. The initial reactions were as poorly thought as what is taking shape now. Governments used the bad press example to silence good press when it was irreverent. The press argued for self-regulation, which failed, as self-regulation often does – just think of the financial industry before 2008. In the end, the democratic countries adopted laws to regulate the press.

 

These laws vary from country to country but there is a common core. The regulated media are free to publish what they see fit as long as it does not infringe on fundamental social values such as decency and honesty, with a view to avoid spreading falsehoods or hate against particular groups. These social values change over time so they need to be updated, but the key idea is that some things are not fit to publish. The democratic process determines social values. Of course, it is much more complicated than my simple, possibly naïve, description but the principle is clear and simple.

 

The challenge is well understood. Freedom of opinion and speech is a fundamental requirement in democratic societies and it includes the freedom of the press. At the same time, like most other freedoms, it cannot be boundless because it can be exploited for anti-democratic forces to undermine society. The equilibrium is difficult to find but, after decades of experimentation, most democratic countries have found acceptable and effective compromises. These laws, initially created to deal with the written press, have been extended over time to radio and television. It was easy because the new media were clearly determined to be the press with other technologies.

 

This is a good place to start. The next step is to recognize that, nowadays, many people get their information from the social media. The millennials, it seems, don’t read newspapers, don’t listen to the radio and don’t watch television. Instead, they surf the web. They do not send the antiquated letter to the Editor, they chat among themselves. They tend to develop links with like-minded people, pretty much as people used to be defined by the newspaper that they read. The social media are replacing the traditional media. They ought to be defined as press organizations and governed by the same laws and regulations as the traditional media. These laws and regulations have been thoroughly tested and improved, they are largely accepted and ready to use. I fail to understand why this is not done.

 

There may be difficulties in defining what is a social media and what are private discussions. Indeed, clusters of discussions emerge on the web, but they merely replace the meetings of old time, including those held informally at the pub. This is all for the better, with limits. It is generally the case that public meetings are regulated while pub discussions are free. The dividing lines on the web are especially delicate to draw, but so are the traditional lines between public and private meetings. Somehow, through trial and error, we have learnt how to deal with the old dividing lines, there is no reason not to adapt them on the web, and improve them over time. We just need to start, which does not seem on the agenda of current debates. Doubtlessly errors will be made but that is not a good enough reason to let the indignities of the web continue to prosper and shake the foundations of democracy.

 

Beyond freedom of the press, another classic battle is being fought. The social media are dominated by a few giants. They are subject to massive economies of scale, which means that the bigger you are, the more difficult it becomes for competitors to emerge and, when some do, you just buy them. The reason is a well-known process called network externalities: the more people are connected to each other, the more appealing is the network. The result is called a natural monopoly. We saw that, for example, with the telephone, which is more useful the more people can talk to each other. The telephone industry was monopolized and highly profitable, until the monopolies were broken down into competing firms. Of course, each network externality case is different, which allows the dominating firms to argue that they should be allowed to continue dominating the market. What it really means is that the measures to be taken are not strictly from the shelf, but taken they must be. Like their traditional predecessors, the social media use their power to influence public opinion to defend themselves and scare policymakers. This is lobbying at its worst.

 

Freedom of the press and monopoly power are two distinct issues. Too often, the public debate mixes them up. These issues need to be considered separately because they are very different and the solutions belong to different logics and therefore regulations. Progress on one issue will not solve the problem of the other issue.

 

After denying their responsibilities for as long as they could, the social media skillfully exploit these delicate questions to promote self-regulation and quash the natural policy issue. This is what Mark Zuckerberg says when he asks policymakers for guidance on how to self-regulate Facebook – a.k.a. to exercise content censorship – while he warns that he will fiercely resist any anti-monopoly action. He also claims that he cannot instantly catch devious actions. That really is his problem. The wonderful technology that the social media have developed and keep developing can be directed to monitor content in real time, but it probably would be quite costly. Why invest in it if the main result would be to lose customers who would migrate to less rigorous websites? This is one limit of self-regulation and a key reason for legal intervention.

 

The easy trick is to declare that the social media are media organizations and then apply the existing laws to fine them heavily for unacceptable content, maybe as proportion to the time it remains posted. It is safe to bet that they will invest in the technology to eradicate illicit content in real time and that they will turn down dubious political advertisement. The state has ready-made tools to make the social media a vibrant and healthy source of information and debate. It can also apply anti-monopoly legislation, including special provisions that apply to the press, to make it a competitive industry. Am I wrong and it’s not that simple?

 

A useful global recession? 

November 16, 2019

Forecasters have become less gloomy over world growth recently. I was expecting such a turnaround in forecasts, largely a bout of wishful thinking. When it came, though, I started to feel sorry. Wouldn’t a recession be good, after all? Obviously, a recession is generally painful. Large numbers of people lose their jobs, firms go bust, incomes vanish, useful investments are postponed and much wealth is erased as stock markets plunge. Is there a silver lining?

 

There is a whole literature about the cleansing effects of recessions. This is when bad business decisions meet their fate and zombie firms are finally eliminated. People who were in wrong jobs are forced to look elsewhere and eventually are happy they did. Overvalued assets are adjusted to their true values, clearing the air for a less worrisome future. Loans that could not be reimbursed are given up one way or another. Unrealistic expectations of the past are brought back down to earth. In the end, the economy emerges ready for a new phase of sustained growth. As we go through one of the longest expansion phase ever recorded, a cleansing recession has much to recommend to it. Yet, other aspects, specific to these times, come to mind.

 

The first obvious one is that a serious recession in the US could remove the spectrum of another four years of Trump in the White House. Rising unemployment and widespread business failures stand to break Trump’s magic in the eyes of the beholders. Inasmuch as this would be the consequence of the trade wars that he singlehandedly launched, a sufficient number of his aficionados might see him as a failure. In spite of the misery that a recession would bring upon, it is a price that is worth paying, I believe. In addition, it would make those policymakers around the world who do not fear trade wars much realize how wrong they have been. After all, the postwar architecture is a consequence of the trade wars of the 1930s. Those who thought that this time is different would learn a useful lesson, one that is likely to be remembered by a generation or two.

 

In Europe, governments have become fixated on a curious orthodoxy, that less public debt is always and everywhere better than more. Here again, this orthodoxy is not new, it made a bad situation much worse in the 1930s. Since then, we have learned that judgments about the size and evolution of the public debt must be carefully nuanced. This knowledge has often been ignored by policymakers, not all of them for sure, so a lesson is well overdue. It is sad that it takes misery to get the message heard, but it may have become necessary.

 

Then look at stock valuation. Many financial analysts think that stock prices are generally high. Even firms have not rushed of late to issue shares, which suggest that they agree. True, rock-bottom interest rates expected to prevail over a long period imply that asset valuation is based on realistically low discounting. Maybe, then, assets are not overvalued. Yet, these valuations do not seem to factor in a recession, so they stand to be reassessed if a recession does occur. Financial markets have been on a glorious roll, which suggests that investors have become excessively optimistic, as they usually rare at the end of an expansion phase. Part of their optimism is driven by the post-2008 experience, whereby central banks have innovated in many ways as they prevented a remake of the Great Depression and maintained financial stability during troubled times. The financial markets still seem to expect that central banks will be able and willing to continue doing so even though they are running out of ammunitions. Risk, it seems, is underestimated, which may lead to excessive risk-taking.

 

Finally, a new view has emerged and seems to be widely shared: we are living through a long-lasting period of secular stagnation, characterized by low growth and low interest rates. One reason is that technological progress has declined. This view is controversial. It does not square with widespread reports about the presumably amazing changes brought about by the information and artificial intelligence revolutions, which are shaking all aspects of production and everyday life. They also are boosting research advances, not only in fast-moving fields of research. Can both views be simultaneously true? It does not seem so. At the same time, globalization has also led to fast technology transfers that are raising productivity and growth in many parts of the world, including in populous China and India. How can this historical transformation not raise global productivity and speed up growth?

 

The second reason behind the secular stagnation hypothesis is that the world is saving more than it needs to borrow to finance productive investment. Even though population aging encourages saving, global saving does not indicate a rising trend and it remains unclear whether we face a lack of investment opportunities or whether we are still stuck in the lingering impact of the global financial crisis which deters lending. We just don’t know for sure. The cleansing effects of a recession could turn the page on the residues from the crisis and allow the world economy to return to faster growth, more investment and higher interest rates.

 

We are probably going to escape a recession in the near future, which is undoubtedly good news, if confirmed. Yet, somehow, there is a case for wishing one, a wish that I may come to regret, of course.

 

Reform of the Stability Pact: political leaders simply give up

September 30, 2019

 

Meeting ‘informally’ in mid-September, the Finance Ministers of the Eurozone considered reforms of the Stability Pact. They concluded that the task was too complicated, too controversial, sure to fail. Refusing to face up to the challenge is a sure way of laying ground for a future major turmoil.

 

In 1997, shortly before the launch of the euro, Germany proposed what eventually became the Stability Pact. The proposal was directly inspired by the German federal experience but it had no chance to work in the European Union (and, anyway, it does not work well in Germany either). Yet, it was accepted without serious discussion. The view in Paris was that it was not worth a confrontation with Germany since the pact would not be respected anyway. This is indeed what happened. Beyond continuous frictions on the importance of abiding by accepted rules, the fraught pact is directly responsible for the sovereign debt crisis that erupted in 2010-12, coming close to scuttling the single currency.

 

The consequences of bad economic policy choices rarely surface right away, but they eventually do. Even before the crisis, it had become increasingly difficult to ignore the pact’s weaknesses, a first reform was agreed in 2005. After the crisis, more reforms were agreed. Each time, the pact’s deep misconceptions were studiously set aside. Rather, the focus was to refine its strictures, mostly by adding bells and whistles. Today’s pact is extraordinarily complex et deeply bureaucratic, the result of multiple changes that aim at the symptoms, not the root causes of its failure.

 

Am I exaggerating? For a long time, officialdom and many analysts thought so. The European Commission, in particular, staunchly defended the pact, which it was responsible for and from which it seemingly derived much authority. Not anymore. The Commission has finally accepted that the current pact is unlikely to adequately function. The recently created independent European Fiscal Board just published an official report that does not mince its words and largely validates the above criticism.

 

The September meeting of Finance Ministers was presented with proposals by the Commission and by the European Fiscal Board. Mind you, these proposals do not challenge the fundamental architecture of the pact but, for the first time, some of its key aspects. They probably are the best that officialdom can suggest. The main suggestions aim at moving away from nitpicking about annual budgets towards a longer-term strategic appraisal, trying to combine short-term flexibility with long-term rigor.

 

However, these proposals in effect challenge the pact’s logic, including the infamous limits of 3% for the deficits and 60% for the public debts. Were these objectives misleading? Yes. Do the new proposals stand to work better than the existing arrangements? You bet they do. Can we be sure that they will deliver fiscal discipline in each and every member country? We don’t. But for politicians, it is nigh impossible to recognize past mistakes. Risk taking (will it work 100%?) is terrifying, even if improvement is guaranteed. Anyway, they simply cannot fathom the opening of negotiations that are bound to be politically divisive and technically challenging. On the other side, they have no trouble kicking the can down the road and keeping in place an arrangement that stands to lead to yet another major crisis. This is not new, of course. This is what they did with earlier pact reforms. It delivered the sovereign debt crisis, which came about shortly after the Global Financial Crisis, itself the consequence of similar thinking. These crises delivered rising Euro-skepticism, they debased the credibility of the governing elites, which led to the current wave of populism and to the rise of extremism. Today’s politicians apparently fail to grasp the risk that they will lose power and that the survival of liberal democracies is at stake.

 
 

Brexit: Three overlooked facts

September 11, 2019

 

The Brexit process is truly fascinating. Some new drama unfolds nearly every day. As a result, maybe, some very basic facts tend to be overlooked, probably because they would undermine the dramatically entertaining value of these events. It all seems crazy and, in a way it is, but the process is more reasonable than it looks.

 

The first fact is that nothing much will happen on B-day, with or without a deal. As is often said, the focus of past negotiations has been on the divorce, not on future relations. This is why the deal foresees a two-year transition, to allow for negotiating future arrangements with the EU. There are zillions of decisions to be taken within the broad framework of the deal. They range from what exactly happens at the borders to the status of EU citizens working or living in the UK and of British citizens working or living in the EU and to mutual recognitions of standards for each and every good or service that will be traded. Without a deal, all of these things will also have to be negotiated, even if they is no explicitly agreed framework. Because geography implies that there will be a lot of trade and movement of people between the EU and the UK, a no-deal Brexit will require a transition period as well. During this period, little will actually change, simply because no one wants to see total disruption, even the hardest of the hard-Brexiters who still have to grasp the day-to-day implications of what they wish for. One way or another, a standstill will have to come.

 

The second fact is that the British economy has become totally integrated into the EU economy over more than forty years. As a consequence, European laws govern everything that concerns trade within the UK and with the EU, commerce with third parties, consumer protection, anti-trust and more. The UK will have to build from scratch a new legal apparatus. British firms will have to disentangle a myriad of links with their European partners. Non-national residents will have to reorganize their lives. Even if the EU is not a perfect arrangement, it works reasonably well. This implies that it will be best for the UK to retain many of existing EU laws and for firms in the EU and in the UK to maintain much of existing links. Brexit is a huge disturbance with limited long-run practical effects. Meanwhile, firms face a massive uncertainty and postpone productive while some have relocated or downscaled their activities in the UK. Eventually post-Brexit UK will not differ much from what it now is.

 

The third fact, which may be lost in the spectacular debates that we have seen over the last few weeks, follows from the previous observation: Brexit is impossible, or nearly so. Much has been said about the stability and pragmatism of the British democratic institutions but, all of a sudden, it seems to have become highly dysfunctional and irrational. Of course, the referendum should not have been called, or the question asked should have been better designed. So, yes, a huge mistake was made. It is worth asking how can a stable and pragmatic democracy manage an impossible task. A poorly functioning democracy would just have made Brexit happen, without second thoughts. The convulsions that we observe reveal the more or less conscious efforts of the British system to deal with the situation. Theresa May famously said that “Brexit is Brexit” but then she discovered that things are not so simple. Part of her predicament was to negotiate a reasonable deal, much more complex than what she had envisioned, but she also faced a Parliament that rejected every single proposal that she made. The inability of Parliament to come up with alternatives is often described as the ultimate proof that it is totally dysfunctional. Alternatively, it may be that it simply recognized that there is no good way of leaving the EU. Millions of citizens marched to ask for a second referendum, one where the alternatives would be well specified. The former fringe Tories who are now in power reject this natural step, but they seem overwhelmed by the resistance that they face. All of that makes a lot of sense. We do not know yet how it will all end up.

 

Bad governments matter

August 2, 2019

We don’t know whether a marked economic slowdown, or even a recession, is going to hit broad swaths of developed countries. If it does, we are in serious trouble. Since the infamous subprime crisis started in 2017, central banks have been deploying an impressive of arrays of tools. They brought their interest rates to close to zero, in some cases into negative territory. They have printed massive amounts of cash as part of their quantitative easing policies. They have made pledges about what they would do far into the future. These were all bold, untested innovations. There was a serious recession in 2009, but that was it (except in the Eurozone where a public debt crisis erupted in 2010, a by-product of policy mistakes). A much-feared repeat of the Great Depression, which hit in the 1930s in the wake of a similar financial crisis, was averted, a feat that will feature in history books.

 

The dog that did not bark is inaction by governments. Beyond a short-lived effort in 2008, most governments were more than happy to let central banks do the heavy lifting. They were concerned by the size of their public debts. Yet, with the exception of Germany, measured as a proportion of GDP, the debts shot up during the crisis and thereafter, as the figure below shows. Not that governments were trying to help out the central banks, simply that they failed to close their deficits because that would have been unpopular. Germany succeeded because the Germans have been allergic to deficits ever since the dramatic events in the 1920s that led to the rise of Nazism. And also because the huge Chinese appetite for big luxury cars made in Germany has provided a huge boost to the economy. By the way, in these times of anti-corruption drives in China, German car sales have plummeted and Germany is about to face a recession.

 

 

 

 

 

 

 

 

 

 

 

                                                                 

                                                          Source: AMECO on line, European Commission

 

 

All this is not just of historical interest, unfortunately. The central banks intended to normalize their crisis-era policies. They planned to raise interest rates and to reabsorb the cash that they had injected. That way, they would be ready to act again in case of need. Tough luck, they did not have the time to do so. If a recession hits now, they just have no ammunitions left, or too little. This time around, the only game in town will be fiscal policies, raising public spending or cutting taxes. Don’t hold your breath, though. The current governments are unlikely to help out their hapless central banks. A small recession could turn into a big and long-lasting one.

Of course, the governments will explain their inaction by pointing out to even bigger public debts now than in 2007. It does not matter that it is their fault, or that of their predecessors. They have become accustomed to letting their central banks do the job. The central banks, which now see themselves as true heroes that saved the world, are making the crucial mistake of pretending that they still have enough tools, which they don’t. Their hubris provides the cover that governments need to do nothing.

 

It all seems crazy, and it is. The truth is that most developed countries’ governments seem to have gone nuts. To start with, the slowdown, if it happens, is largely due to policy mistakes. The world does not need a trade war. Brexit is a gratuitous shock created for political expediency. Austerity policies in the EU over 2010-14, now replaced with fiscal policy neutrality, are driven by ideological beliefs, not by existing knowledge. Successive Italian governments have not cleaned the banking system and hardly fixed a malfunctioning economy, which has led to stagnation over two decades. Argentina seems addicted to recurrent crises. The mounting fears of a catastrophic climate change are the result of decades-old government inaction and fear-mongering by legions of well-meaning but blinded NGOs. Facing these challenges, it is nothing short of a miracle that consumers are not yet panicking, which would prompt a recession. 

Populism explains some of these massive failures. At the same time, most populists do not care much about budget deficits and public debts, mostly for wrong reasons. Once in power, directly or indirectly, they do much harm, who knows, it might be helpful to have them in power in the event of a recession. This is how badly things stand nowadays.

 

August 21, 2019

The problem with Trump

We all love to hate him. For who he is, for what is stands for, for what it does and especially for what he fails to achieve. And yet, there is that nagging impression that he sometimes has a point, and an important one at that.

 

Take China. It is said to execute more people than the rest of the world. Freedom of opinion and speech does not exist in this dictatorship. It viciously persecutes its minorities. Trump does not seem to give a damn about that. He cares about trade. And, it’s true, China has brazenly flouted OMC rules since it joined. Trump cares a lot about that. Most other countries also care about China’s disrespect for trading rules, but they mostly stay mum about it, and about human right violations as well. The reason is that China is the world’s fastest growing market and no self-righteous political leader would take the risk of seeing its firms shut off the bonanza. So, at least, Trump is taking on the Chinese autocrats, you have to give him credit for that. The US is leading the fight against the biggest trade offender on earth.

 

Of course, Trump attacks China’s trade practices mainly because he cannot stand the trade deficit between the two countries, which is meaningless (and has shrunk a lot). If you’re not an oil producer, you’ll run deficits with some oil producing countries, to everyone’s benefit, and make it up with surpluses with other countries. China, which has few natural resources, runs deficits with many countries that provide these resources, and surpluses with others, including the US. This is the very reason why international trade is so useful. Trump fails to understand this elementary fact, because the overall external balance of the US is in deficit, which is not China’s fault. The US deficit exists because the US spends more than it earns, which is its right provided it pays for the difference. Which it does, by exporting dollars (cost to the US: zero) to the rest of the world, including China, which is keen to accumulate them. There is nothing wrong with that either: Saudi Arabia exports oil, which it has in vast quantities, the US exports dollars, which can produce at will, every country has, or should have, something to sell to others. The Saudis are lucky to have oil, the US has been extraordinarily skilled at building the financial infrastructure that the world needs.

 

Anyway, back to Trump. He bitches about Germany not paying its share of defense while enjoying the protection of the US. That seems a fair complaint. His predecessors largely chose to ignore the issue, maybe because no one really wants to see a resurgent military power in a country with a poor historical record of the use of might. Inconsistently, perhaps, he regularly expresses his disdain for European integration and enthusiastically encourages a hard Brexit. He sees the European Unions as an amorphous arrangement, which is precisely what the most ardent pro-Europe activists also lament, an echo of Kissinger’s famously humiliating remark that he did not know which phone number to call to talk to Europe. He is siding unreservedly with Israel’s hawks in belittling the Palestinians’ aspiration of a state, which has become a mythical goal of the Arab public opinion. The fact that seventy years after Israel’s creation, may Palestinians still live as refugees in various Arab countries, on the other hand, indicate that solidarity is highly limited while the sharp divisions among Palestinians betray the limits of the “sacred” goal. Trump is not fully misled when he beieves that the peace agreement of Oslo is unlikely to bring this old conflict to its end. His brotherly friendship with the North Korean despot is meant to try something different than the approach that has failed for more than half a century, including precluding the acquisition of nuclear weapons. While the Europeans bemoan Trump’s denunciation of the agreement with Iran, they freely admit the agreement’s deep shortcomings.

 

I can go on and on. The fact is that Trump is not fundamentally wrong. He is the ultimate enemy of political correctness, an apparent paradox for the President of the world’s superpower that has shaped the world order and become the champion of the politically correct. Political correctness, however, is a way if sweeping under the rug difficult questions, by blunting valid criticism under often arbitrary moral pronouncements. In many ways, it is fortunate that the White House is shaking decades of faulty arrangements.

 

The problem with Trump is that faulty arrangements are better than misleading ones or than no arrangements at all. Most of the time. Trump has nothing better to propose. His approach, which combines insulting off-the-cuff statements and aggressive actions, betrays his lack of a deeper understanding of the issues at stake, their historical origins and complexity. If things were as simple as he seems to believe, they would have been dealt with long ago. He has systematically fired his early advisers, who knew better, to assemble a coterie of yes-sayers, who do not know better or who stand ready to jettison what they know to keep their jobs.

 

There is nothing that can be done from the outside to improve the inner workings of the Trump presidency. The traditional allies of the US may hope that it will end soon, but this hope may turn out to be an illusion. Two approaches are conceivable. A first one would be to recognize that Trump is often right and to come up with well worked-up proposals, in effect taking the risk to jettison political correctness and imperfect arrangements, without any guarantee that the outcome will be better than the current situation. A second approach would be to ignore Trump and try and salvage as much as possible of the status quo. In fact, both approaches have been tried. An example of the first approach is to defend economic multilateralism and encourage China to abandon its most egregious trade violations. An example of the second approach is the Europeans’ attempts to keep the Iranian agreement alive. So far at least, none of these efforts have borne any fruit. One reason is that the US remains the world superpower so that no arrangement can work without its support, another reason is that Trump does not abide by his commitments so that any agreement stands to be undone for unpredictable reasons.

 

What is left is to bid for time. At some point, either in 2021 or in 2025, someone else will move into the White House. In the meantime, the world will have changed, quite possibly for the worse, it already has. There is no way we will be able to simply go back to the pre-Trump world. The first of priority is to avoid disasters. The second priority is to work with all those in the US who share our views, and there are a great many of them, to prepare the aftermath, pretty much as the Allies did during World War II. It means negotiations among coalitions of the willing to forge well-crafted agreements without the US but drawing on technical knowledge and political involvement by US citizens, think tanks, possibly even political groupings.

 

A good example is climate change. The best solution is a well-designed carbon tax (not the faulty versions occasionally promoted), as a group of 27 Nobel prize winners, all from the US, have reminded us. It would be highly desirable that as many countries as possible agree on establishing such a tax, and apply border duties on import from non-complying countries. This would open the way for the US to join in once Trump is gone, while encouraging individual US states to make preparations to rip rapid benefits once it happens.