Putting aside the coarseness and unpleasantness of President Trump, we are faced with a couple of objective facts about his economic policies. His policy of deregulation has removed the wet blanket from the economy that President Obama’s oppressive regulation and hostility to business caused. The tax cuts, particularly the corporate ones, are good for growth and will make US companies more competitive worldwide. At the margin, the tax changes will encourage more jobs at home and reduce the incentive for offshoring. That plus our cheap energy resources from the fracking boom create big tailwinds for the economy and could even draw back some manufacturing.
Growth is already strong and unemployment is low, so the average worker may be starting to see decent wage growth. And the economic expansion may have been given a new lease on life, though increased deficits and adding stimulus with such a low unemployment rate could lead to higher interest rates and inflation. These factors need to be watched, but tax policy combined with deregulation look to be very positive for the economy on balance.
Trump’s Trouble With Prosperity
But as we’ve seen with the President in the past, he seems to have a hard time handling prosperity. The one real threat to this Goldilocks moment seems to be his looming trade moves. A trade war will reverse all of the economic progress that has been made under his administration.
A trade war equals higher prices for consumers, screwed up supply chains, retaliatory actions by other countries, inflation, and a potential downward spiral like with the Smoot-Hawley Tariff, which deepened and lengthened the Great Depression.
To protect industries that can’t compete, he will raise prices on all consumers, which is a giant tax increase. America has much more to lose than gain from this. Expect farmers to be some of the first to feel the pain of retaliatory tariffs.
Trade Protection Feels Good, But Hurts You More Than The Other Guy
The problem with Protectionism is that it feels really good, but it ends up hurting you more. It is the economic equivalent of Mutually Assured Destruction. It likely ends in a feedback loop of retaliation that hurts everyone severely. Like burning down the house in order to save it.
Is Trump Really Smart Like He Says?
One of the President’s biggest problems is a lack of impulse control and thoughtfulness. I hope he will step back and think hard about the situation and the second and third order effects before he stubbornly undoes all of the good of his deregulation and tax policies. If he fouls up the economy with a trade war, that could likely be enough to push even loyal Republicans off of his bandwagon. I would think it would also make a major defeat for Republicans very likely this fall and increase the chances of his impeachment and potential removal from office in 2019. Don’t do it Mr. President. Discretion is the better part of valor in this case. Impulse control now!
“The whole trick in life is to get so that your own brain doesn’t mislead you.”
— Charlie Munger
“We want to do business in times of pessimism, not because we like pessimism but because we like the prices it produces. It’s optimism that’s the enemy of the rational buyer.”
— Warren Buffett