Have you ever heard of the 80-20 principle?
It’s a memorable phrase that boils down the lessons of something called the Pareto Principle.
Simply put: 80% of the outcome is caused by 20% of the work, and vice versa.
And just to be clear, it’s not always 80-20, sometimes it’s 90-10, or 99-01: it all depends on the circumstances.
This nonlinear relationship is often found in economics. For example, the distribution of wealth in America follows this pattern: the top 20% of households own 77% of the wealth.
Why am I telling you this?
Because America’s economy is declining, and it needs to be fixed. And although most people agree on this point, they can’t ever agree on a specific policy—after all, there are thousands of things we could do.
The 80-20 principle simplifies our choice—we don’t need a thousand solutions, we just need to implement the top few, since they’ll do most of the work.
In this article, I’ll tell you the top three things that Donald Trump needs to do to fix the economy.
1. Trump Must Get Tough On Trade
I’ve written before that the Cold War left America with the intellectual hangover to end all hangovers, and it’s poisoned our economic and political thought accordingly—whatever the Soviets did, we did the opposite.
The reasons why economic globalization hasn’t worked are many, and it’s not worth going into detail here.
But I will give you a brief outline of what a nationalistic trade policy would look like.
First, we need to recognize that long run economic growth is caused by better technology—in the end, better technology is really all that separates us (economically) from our ancestors.
The key to growing the economy is to invent stuff, to improve our productivity—ideally within our own borders.
How do we do this?
By maximizing the size of our advanced industries.
And how can we do that?
The best way is to expand their markets: bigger markets means bigger, and more diverse, and likely creative industries. To do this, we should ensure that our advanced industries aren’t offshored to foreign countries, and remain profitable.
Once that’s taken care of, we should look to expand into foreign markets: America shouldn’t just supply its own software, it should supply the world’s software.
This means tariffs on advanced products, investments in the necessary infrastructure, and pursuing trade deals that asymmetrically benefit America’s advanced industries.
If we do only this, it should be enough to get our economy back on track—it worked for us historically, it will work again.
2. Stop Illegal Immigration
Illegal immigration hurts America’s economy in a few different ways.
First, illegal immigrants cost America a net $150 billion every year—that’s a lot of money that should be going to rebuilding America’s infrastructure, or educating our kids etc.
Second, illegal immigrants increase competition in the labor market, particularly for the working class.
This means lower wages (it’s basic supply and demand folks), and a lower quality of life for millions of Americans—all so that the rich can hire slightly cheaper maids.
And it’s also led to social problems, like Americans feeling like strangers in their own country.
3. End The Fed & Stop Quantitative Easing
The Fed is doing enormous damage to the US economy, and has been for decades.
By destroying our purchasing power—especially through the recent practice of quantitative easing (QE).
Here’s how QE it works:
The Federal Reserve buys US securities, like government bonds, from private banks, using newly created electronic money.
This new currency bolsters bank reserves and increases buying pressure.
This has two effects: (1) it capitalizes banks so they make more loans, and (2) inflates the markets.
Since 2007 (just before the 2008 Great Recession), the Fed has bought up $3 trillion in US assets.
Anyways, this is really just a Ponzi Scheme that hurts America in the long run because:
1. Quantitative easing causes inflation, which temporarily hides government ineptitude by creating the illusion of economic growth.
2. It erodes the dollar’s purchasing power by creating trillions of new dollars, without actually creating any new products.
3. It allows the government to borrow beyond its limits, which leads to more debt.
4. And finally, quantitative easing is basically just a sophisticated way for the rich to get richer: it artificially inflates the stock market by pouring new money into the economy through Wall Street, without actually stimulating economic growth.
It’s all just smoke and mirrors that makes us feel richer, without us actually being richer.
It would be a lot easier to fix America’s economy, if we weren’t busy ripping it down at the same time.
Although there are many more things we could do to fix the US economy, we could only do these 3 and be just fine.
We don’t have to do everything, we just have to do enough.
That’s the beauty of the Pareto Principle: most of the benefits will come from a fraction of the work.
Let’s take the lazy way out, and fix America’s economy. Fast.