Talk of recession is once again in the air. It’s neither skeptical economists nor the media responsible for a possible recession. It’s a confluence of real events, including gross incompetence of Trump and his economic team.
Trump inherited a strong economy, the main weakness of which was rising income inequality. Economic strength could have — should have — been enhanced with a sound infrastructure bill that would have drawn bi-partisan support.
After-tax income inequality could have been at least modestly reduced by tax reform that would have favored the middle class and working poor by increasing marginal tax rates of the wealthiest citizens who have benefitted most from our growing economy over the last several decades.
Increasing tax rates on the wealthiest citizens would have been scotched by congressional Republicans. Nevertheless, if Trump would have used the “honeymoon period” that all presidents receive to push for such a bill, he could have legitimized his promise to represent those left economically behind.
Instead, Trump did the opposite. He and his Republicans tried to take away healthcare from those who benefitted from the Obama health bill. They rammed through a tax bill that increased income inequality, increased federal deficits, and inhibits our ability to get out of a future recession.
Trump has consistently demonstrated that his economic competence is limited to pushing the envelope through stiffing his contractors, employing undocumented immigrants that he deplores, maximizing use of bankruptcy laws, and engaging in apparent tax fraud — to what extent we will never know. He is now obviously using the presidency to enrich himself and his children.
His self-professed “negotiating skills” are based on a history of dealing from strength of wealth and power. He has no experience in negotiating with those holding significant power.
Managing the American macro economy along with everything else is a task too great for any individual, especially for one whose economic history is limited to pushing the law to the max solely for his own economic advantage. Other presidents have had limited experience in worldly matters. But that is precisely why choice of high-level appointees, and willingness to listen to them, determines the success or failure of a presidency.
Trump’s string of appointees that have been incompetent and/or outright corrupt is appalling. With his short attention span and unwillingness to read, Trump insists on appointees who adhere to blind obedience. This explains his selection of Larry Kudlow and Peter Navarro.
Kudlow, his chief economic advisor, is a longtime peddler of supply-side economic snake oil, otherwise known as trickle-down economics. He has been a long time hawk on deficit spending, and an advocate of free trade. However, as a Trump appointee, while he embraces the Trump tax bill and its trickle-down economics, he is OK with the Trump tariffs and record federal budget deficits.
Peter Navarro, Trump’s point man on trade, is a protectionist who insists that Trump is winning the Trade War with China. When financial markets plunged some 800 points, Trump postponed plans to impose a new round of tariffs on Chinese goods until mid-December. The conservative Wall Street Journal opined that Trump should go even further and call a worldwide “tariff truce,” lest the U.S. could face a “Navarro recession.”
With Trump’s brief reversal, financial markets recovered, temporarily. With Trump’s recent curious “order” that U.S. companies stop doing business with China, Beijing said it will slap tariffs on $75 billion on autos and other U.S. goods including a new 5% on soybeans. Trump then retaliated, stating that starting Oct. 1, $300 billion worth of other goods will be subject to tariffs of 15% -- up from the 10% previously announced. After Trump threatened to respond to China’s latest tariffs, financial markets again tanked, the DOW losing about 2.4% and the more important S&P about 2.6% last Friday.
Kudlow and Navarro know that it is not China, but American consumers and businesses who pay for American tariffs on Chinese goods. Yes, to the extent that imports from China will fall, China eventually pays a price. But the predictable Chinese response is to retaliate with tariffs on American products, such as soybeans and pork. Kudlow and Navarro surely know that there are no winners in such a trade war, but are standing by their boss, insisting that Trump will eventually convince China to succumb.
Trump labors under the illusion that he is dealing from strength. In reality, he is dealing from weakness. When asked the time, Americans look at their watch. Chinese look at the calendar. Realizing that patience is not an American virtue, China plays for the long haul. To put a point on it, Trump is up for reelection next year. China’s Chairman Xi is not.
In addition to the Trump-instigated Trade War, there are other troubling economic signs. There is definite softening of European economies, specifically Italy, Germany and the UK with uncertainties surrounding Brexit.
The flattening of the yield curve is troubling. While not all yield curve inversions are followed by recession, all recent recessions have been preceded by inversions of the yield curve.
American private business investment has been soft for some time. As economists — not Trump’s — had predicted, the Trump/Republican tax bill did not stimulate increased business investment.
While Trump hails a “strong economy,” he talks about cutting payroll taxes for working people — one day, “yes,” the next day, “no.” Instead of that huge tax cut rewarding Republican donors, the 2017 tax bill should have been oriented toward the middle class.
Trump economic advisor Kudlow insists that he doesn’t see recession on the horizon. Trade guru Navarro “guarantees” that we will not have recession.
Trump has regressed to his standard tactic of blaming someone else, namely his own appointee, Fed Chair Jerome Powell, explicitly labeling him an “enemy,” on par with Chairman Xi.
With record deficits and historically low interest rates, we’re in a trap; our tools for getting out of recession are now limited. We can thank Trump’s failed economic team for that.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
