Oscar Wilde once wrote that to lose one parent might be regarded as a misfortune. However, to lose two parents looks like sheer carelessness.
One has to wonder whether something similar might not be said about the Trump administration’s approach to economic policy. To engage in a budget stimulus at this late stage in the economic cycle as the Trump administration is now doing would seem to be most unfortunate step. However, to now further compromise the U.S. economic outlook by leading the country into a global trade war looks like the height of irresponsibility. It heightens the prospect that the U.S. economy will succumb to a painful economic recession within the next 12 months.
The timing of unfunded tax cuts amounting to around $1.5 trillion over the next decade and public spending increases of around $300 billion over the next two years is doubly unfortunate. Not only is the U.S. economy presently already growing at a healthy clip, it is at or beyond full employment, as Federal Reserve Chairman Jerome Powell recently testified before Congress. The global economy is now characterized by very high debt levels and by equity, bond and credit market bubbles, which are all too reminiscent of the period immediately preceding the 2008 Lehman crisis.
By engaging in fiscal stimulus at this time, the Trump administration is risking a large increase in interest rates in response to an overheating economy that could cause global asset and credit price bubbles to burst.
This could occur if the Federal Reserve is forced to raise interest rates at a faster pace than it is now planning in order to avert the rekindling of inflation. Alternately, if the Fed is pressured politically not to raise interest rates despite an overheating economy, it could occur as a result of the return of the bond vigilantes. Those vigilantes must be expected to dump their bonds and thereby force interest rates higher on the view that the Fed was likely to lose control over inflation.
A singularly ill-timed budget policy would be reason enough to expect that the U.S. economic recovery will be derailed in relatively short order. However, as if to make sure that the U.S. and global economies are to be plunged into economic recession, President Donald Trump has chosen this particular moment to raise U.S. steel and aluminum import tariffs by 25 percent and 10 percent respectively.
Political Cartoons on the Economy
This is almost certain to invite retaliation by U.S. trade partners. The Europeans are already preparing to impose proportionate import tariffs on U.S. Harley Davidsons, Wisconsin cheese and Kentucky bourbon, while the Chinese are considering restricting U.S. agricultural imports. That in turn could be yet another trigger for the bursting of the global asset price bubble with untoward consequences for both the U.S. and global economies.
Undaunted by the prospect of trade retaliation, Trump is warning the Europeans that he would respond to any such move by imposing tariffs on European automobiles. He also seems to be relishing the prospect of a trade war by arguing that the U.S. would handily win.
Sadly, Trump’s posturing on trade reveals a dangerous lack of knowledge about the disastrous consequences of beggar-my-neighbor policies in the inter-war period in general and about the 1930 Smoot-Hawley Tariff Act in particular. If there is one thing on which there is general consensus among economists from that experience, it is that there are no winners in trade wars and that such trade wars are apt to be ruinous to both U.S. and international economic prosperity.
It is also to be highly regretted that the Trump administration fails to grasp that arithmetically trade deficits are the result of a country saving less than it invests. So long as a country’s savings level falls short of its investment level it will run a trade deficit. This remains true no matter what level of import tariff it sets for itself.
A principal justification that the Trump administration offers for the imposition of import tariffs is that it would like to attain more balanced trade. However, if the administration were serious about this objective, it would not be raising import tariffs but rather it would be seeking to raise the country’s abysmally low savings rate. At a minimum, the administration would not be as supportive as it has been of tax and public spending policies that would increase the country’s budget deficit and thereby increase its trade deficit.
For the sake of both the U.S. and global economies, one has to hope that the president backpedals on his recent import tariff proposals. However, judging by the administration’s recent disregard of the fundamental laws of economics, it would seem more likely that when the current round of import tariffs do not succeed to reduce the country’s trade deficit because of an increasing budget deficit, the president will double down by imposing further trade restrictions. As the president might have tweeted, THIS IS VERY SAD.