Oscar Wilde once wrote that losing a parent can be considered bad luck. However, losing two parents seems like sheer carelessness.
One has to wonder if the same cannot be said about the Trump administration’s approach to economic policy. Joining a budget stimulus at this final stage in the economic cycle as the Trump administration is doing now would seem to be the most unfortunate move. However, now compromising further from a US economic standpoint by leading the country into a global trade war seems like the height of irresponsibility. This raises the possibility that the US economy will succumb to a painful economic downturn within the next 12 months.
The timing of the roughly $1.5 trillion unfunded tax cut over the next decade and the nearly $300 billion increase in public spending over the next two years is doubly unfortunate. Federal Reserve Chairman Jerome Powell recently testified before Congress, not only is the US economy currently growing at an already healthy clip, it is at or beyond full employment. The global economy is now characterized by very high debt levels and equity, bond and credit market bubbles, reminiscent of the period immediately before the 2008 Lehman crisis.
By engaging in fiscal stimulus at the moment, the Trump administration is risking a major increase in interest rates in response to an overly warming economy that could burst global asset and credit price bubbles.
This can happen if the Federal Reserve is forced to raise interest rates at a faster rate than it plans to avoid a re-igniting of inflation. Alternatively, if the Fed is politically pressured not to raise interest rates despite an overly warm economy, it could result in a return to bond caution. Those cautious should be expected to dump their bonds and thereby raise interest rates, emphasizing the idea that the Fed is likely to lose control of inflation.
A singularly poorly timed budget policy would be reason enough to expect that the US economic recovery would be derailed in relatively short order. However, as if to ensure that the US and global economies do not fall into an economic downturn, President Donald Trump has chosen this special moment to raise US steel and aluminum import tariffs by 25 percent and 10 percent, respectively.
political cartoon on economy
It is almost certain to invite retaliation by US trading partners. Europeans are already preparing to impose proportional import duties on US Harley Davidson, Wisconsin cheese and Kentucky bourbon, while the Chinese are considering restricting US agricultural imports. This in turn could be another trigger for the bursting of the global asset price bubble, which could have adverse consequences for both the US and the global economy.
Irrespective of the prospect of trade retaliation, Trump is warning Europeans that he will respond to any such move by imposing tariffs on European automobiles. It seems that he is also liking the prospect of a trade war by arguing that the US will easily win.
Sadly, Trump’s posture on trade reveals an alarming lack of knowledge about the disastrous consequences of beggar-my-neighbor policies in the interwar period in general, and the Smoot-Hawley Tariff Act of 1930 in particular. If there is one thing on which there is consensus among economists from that experience, it is that there are no winners in trade wars and that such trade wars are disastrous for both America and international economic prosperity.
It is also a matter of great regret that the Trump administration fails to understand that an arithmetically large trade deficit is the result of a country’s savings less than it invests. As long as a country’s savings level falls below its investment level, it will run a trade deficit. This is true no matter what level of import duty it sets for itself.
A key rationale that the Trump administration offers for imposing import tariffs is that it seeks to achieve a more balanced trade. However, if the administration was serious about this objective, it would not have increased the import duty, rather it would have tried to increase the country’s low savings rate. At least, the administration will not be as supportive as it has been to tax and public spending policies that will widen the country’s budget deficit and thereby increase its trade deficit.
For the sake of both the US and global economies, one has to expect the president to back down on his recent import tariff proposals. However, given the recent defiance of the fundamental laws of economics by the administration, it seems more likely that when the current round of import tariffs does not succeed in narrowing the country’s trade deficit due to a growing budget deficit, the President will be doubled by imposing further trade restrictions. As the President may have tweeted, this is very sad.