The Trump Economy On the Brink

Federal Reserve

It’s hard to keep track of all the things President Trump is melting down over this week. I thought cancelling a trip to Denmark over Greenland was the low point. But the most dangerous stuff came on Friday with two sets of tweets. The first:

….My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?

— Donald J. Trump (@realDonaldTrump) August 23, 2019

Trump is furious that the Fed — and the Chairman he appointed because Janet Yellen was apparently too short — are being opaque about monetary policy (which is their usual standard so they don’t affect markets) and not lowering interest rates. This is the same President who assures us every day that we have the best economy ever … which should result in Fed maintaining moderate to high interest rates to keep inflation in check. He’s also mad that the Fed has labelled his trade wars as an area of concern, which I’ll get to in a moment.

Powell is acting entirely appropriately, trying to keep the economic expansion going without creating inflation. That’s a tricky balance at the best of times and one made much more complicated by trade wars and political unrest. Trump, as far as I can tell, is demanding that the Fed do everything it can to keep the economy from going into recession while he’s President. And while, at first blush, that sounds good, it’s actually kind of bad.

We have some experience with a Federal Reserve that would burn everything down if it meant preventing a recession in the short term. Starting in the mid-60’s the Federal Reserve engaged in a monetary policy designed to keep unemployment low, even if it meant high inflation, based on what turned to be a broken theory called the Phillips Curve. By the end of the 1970s, we had high inflation and high unemployment and a bunch of Keynesians insisting that it was reality that was at fault, not their models. Everyone knew what had to be done: the Fed had to get control of the money supply. But no one wanted to do it because they knew it would cause a short but severe recession. And so they kicked the can down the road, making the inevitable recession worse with each passing day. Finally, Paul Volcker (with support from Reagan) did what had to be done. We had a terrible recession and then got onto a recovery that went, with only short downturns, for the next 25 years.

What Trump wants is to recreate that situation in spirit if not in detail — kick the can down the road, making the inevitable recession much worse as long as it doesn’t happen on his watch. This is perfectly consistent with his entire political philosophy — short term gains that benefit him even if they screws the country in the long term. See, for example, his tax cuts and massive deficits.

Going to war with his own Federal Reserve would be a bad day for any President. While the Federal Reserve is nominally independent to protect it from precisely this sort of political pressure, our economy has done best when the President and the Federal Reserve work together (Reagan and Volcker; Clinton and Greenspan; Obama and Yellen). Having them at cross purposes would be bad enough. But Trump also decided to ramp up his trade war with China:

For many years China (and many other countries) has been taking advantage of the United States on Trade, Intellectual Property Theft, and much more. Our Country has been losing HUNDREDS OF BILLIONS OF DOLLARS a year to China, with no end in sight….

— Donald J. Trump (@realDonaldTrump) August 23, 2019

Let’s just stop right here. We have not been “losing” money to China. Trump is pushing the myth that a trade deficit drains money from a country and that, eventually, all the money will be gone. In fact, a trade deficit is usually the sign of a healthy economy. It means that our economy is generating so much wealth it is, in effect, “spilling over” into other countries like a fountain overflowing a basin. We get products and investments; China gets cash. Everyone benefits. Trade is not zero sum. China’s wealth does not make us poor. This is the lesson we have learned very painfully over the last century.

…unfair Trading Relationship. China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%…

— Donald J. Trump (@realDonaldTrump) August 23, 2019

…Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!

— Donald J. Trump (@realDonaldTrump) August 23, 2019

Kids, read up on the Hawley-Smoot Tariff Act. This was the protectionist act that Congress passed in 1930 to try to prop up our economy. It not only failed, it made the Great Depression much worse by killing global trade. And this was in 1930, when economies were far less interconnected than they are now. We now have a President looking at that and saying, “Hold my Diet Coke”.

China doesn’t just sell us cheap toys. They sell products involved in every stage of manufacturing and production in this country. The result is that everything we buy is about to get more expensive (see, e.g., what happened with his washing machine tariffs). And it is unlikely to create tons of American jobs (see, e.g., the lack of new jobs in steel). Moreover, as China retaliates, we’re going to find we can’t export things. Which I guess will mean another round of farm subsidies.

Look, I’m no economist. This post stretches my knowledge of the field and I suspect a few economists would faint reading what I’ve written. But you don’t need to be an economist to know that none of this is good. We have a President at war with everyone: his own Federal Reserve, China, Europe, Mexico and Congress. He’s pushing an economic agenda that is pure crackpottery — tax cuts, defense spending, soaring deficits, loose monetary policy, low interest rates and trade wars.

The interesting thing is that everyone in Trump’s Administration is apparently trying to warn him about the course he’s on. But Trump isn’t listening to them; instead he’s listening to one the most chitinous cretinous crackpots in an Administration full of them: Peter Navarro. Trump is rumored to have found him via Google search and loves him because he tells Trump exactly what he wants to hear: trade is bad, China is screwing us, everyone else is wrong. If you haven’t had the Full Navarro Experience, you can watch here as Jake Tapper grills Peter Navarro on the Trump economy. Navarro keeps saying that Tapper should “check the data” but the data shows the complete opposite of what he’s saying.

On @CNNSotu, Navarro kept telling @jaketapper to "look at the data" for evidence that tariffs were not affecting U.S. prices. Has Navarro himself looked at the data? https://t.co/ZiUePMOcKG pic.twitter.com/N6FUZ8b1bB

— Catherine Rampell (@crampell) August 18, 2019

So in addition to all the other problems, we have our economic policy being set by a man who insists that black is white, up is down and Gigli was a cinema classic.

The potential for a big economic meltdown feels very real (It feels even realer when you remember that many Democrats are pushing trade policies that are just as bad if not worse). I know that a lot of people who dislike Trump are hoping for a recession so he’ll be driven out of office. These people should be ashamed of themselves. Recessions mean suffering. Recessions mean permanent damage to people’s lives. Recessions means suicides. I despise Trump but a recession that drives him out of office is the last thing I want.

The only real hope for us to glide between the Scylla of Trump’s economic buffoonery and the Charybdis of electoral politics is for Congress to wake up and do their job. Trade policy is supposed to be their bailiwick and they could easily wrest control back. But even typing that sentence makes me blush with shame at my own naïveté. There is no way they will actually do their damned jobs. Republicans won’t do it because they are completely cowed by Trump. Democrats won’t do it because they would rather win the election than work the problem.

And so, here we are, careening toward an utterly predictable economic catastrophe (similar, in its way, to the other preventable economic catastrophe being Thelma-and-Louise’d toward in Great Britain). Trump is at the wheel, clutching hands with Peter Navarro and insisting he’s the best driver ever. The Democrats are in the passenger seat, arguing about what color the upholstery should be. And the rest of us are in the back seat, feeling the thing careening out of control and unable to do anything to stop it.

One of the only realistic things about Ayn Rand’s interminable magnum opus Atlas Shrugged is that, as the economy fails, the political leaders blame everyone else and double, triple, quadruple down on failed policies. We’re now seeing that playing out in real time with Trump. It makes you wonder how many of those Republicans clutching their copies of Atlas Shrugged as totems of their supposed capitalist credentials actually bothered to read the damn thing.