Never have the lessons from one of my favourite books – A Libertarian Walks Into A Bear, by Matthew Hongoltz-Hetling – resonated so loudly as today with the Trump administration. The book chronicles the experiences of a small town in New Hampshire populated by a bunch of libertarians whose disdain for collective action – like garbage collection – leaves them with a bear problem.
Markets work because we have created institutions that set and enforce the rules of market behaviour. The US dollar works because the US government has created a deep liquid market for US Treasuries that parties can exchange with confidence that interest and principal will be repaid in US dollars. The US tax system works because the Internal Revenue Service (IRS) staff rigorously enforce the tax rules, even if the IRS staff may not agree with the rules that so favour the wealthy.
The Trump administration is starting to look like the New Hampshire town in their destruction of institutions through firing staff, abandoning long-honoured rules, and decimating US government and multilateral institutions. How much chaos will result from the actions of the Department of Government Efficiency (DOGE), along with the US shift towards a “might is right” stance in its external relationships, will depend on the resilience of these US and multilateral institutions in the face of these assaults.
Spoiler alert – in the New Hampshire town, the bears won.
Institutions are the result of collective action of a government or governments that establish them, set the rules, and resource the enforcement of those rules, along with those to whom the rules apply. All institutions, whether purely regulatory or delivering agreed programs such as grants and contracting out service delivery, follow a set of rules. An institution may have some autonomy in how they interpret the rules they are given to administer, and some autonomy in how they collect revenue to operate. But ultimately, institutions are accountable to the government(s) that established them.
Those governments can, and should, regularly review the performance of the institution to ensure that it is operating effectively and efficiently. Those governments can also agree to change the rules, funding arrangements, and administrative processes of the institution, often at the behest of those to whom the rules apply. When there are many entities – financial institutions, businesses, other organisations – reliant on the enforcement of a set of rules, change should progress with care as these entities will need to adapt. Collaboration is essential to design and manage change.
Blowing up an institution by firing the staff needed for enforcement, flouting the rules, freezing or permanently withdrawing promised funding, and spreading misinformation about the institution’s purpose or performance, can cause chaos. This chaos will be taken advantage of by some to the detriment of the many.
The Trump administration is busy blowing up institutions. Some have hailed this as needed to shake up the system, believing that the institutions are sufficiently resilient to emerge with an updated mandate and/or more efficient and effective than before. The fraud and corruption narrative fuels this belief.
Unfortunately, the promised savings are often illusory. More dangerous are those who believe that the system – whether markets or society – does not need institutions, rules or enforcement to operate. This libertarian outlook, when applied to finance, trade, digital systems, or the use of the environment, poses considerable risks. Rules will always emerge to manage the resulting chaos.
The question is whether these rules will be determined by a coalition of those who have to comply with the rules, or by a “might is right” set of powerful. And if the latter, what kinds of institutions will be built to impose the rules on those that have been excluded from the decision making?
Many workers, people from disadvantaged groups, and developing country governments have long been excluded from the rule making, but for most of the post-Second World War period the United States and developed European countries have considered their interests. This made Western control of multilateral organisations acceptable. Trump is changing all this.
While Americans should be worried about the removal of checks on corporate behaviour, as with the attack on the Financial Consumer Protection Agency, on tax fraud rates with the cuts to the IRS workforce, on the ongoing functioning of government entitlement payments, and their privacy, the rest of the world also has reason to worry.
One well-documented area of concern is the US violation of World Trade Organisation rules and its own bilateral and plurilateral trade and investment agreements. Another, yet to receive sufficient attention, is the risks to the global financial system posed by a US government promotion of cryptocurrencies, and pressure to reduce regulation. Even the proposed “Mar-a-Lago Accord”, which would force holders of US Treasuries to exchange them for 100-year bonds, would be enough to completely destabilise the global financial system.
As unhappy about multilateral institutions as the “Global South” currently is, the prospects of US-driven chaos should be motivating cooperation to stabilise those institutions. They are desperately needed to maintain the trade, investment and financial systems essential to economic prosperity. The United States withdrawing from the global system is creating an unprecedented opportunity for reform. To build greater resilience into the system of multilateral institutions will require much compromise, but the future depends on the willingness of countries to cooperate.
