Recipe for a Depression
While the state of the economy and the concern many voters – especially those whose wages have not kept up – express over the current level of prices has been a matter of some discussion during this campaign season, the public debate regarding the economic consequences of the candidates’ policy proposals hasn’t gone much beyond estimates of the effects they might have on future budget deficits and the growth of the public debt. These are important concerns, but they are not the only ones. Should Vice President Harris become the next President, she will face appropriately tough legislative battles to enact some of what she has indicated that she will propose. That, to me, sounds like proper and constructive political discourse.
Mr. Trump, on the other hand, has pointed to three proposals that could lead us down a dangerous economic road.
GDP = C + I + G + (X - M) Gross Domestic Product = Consumption + Investment + Government Spending + Net Exports
In the 1928 Presidential campaign, Herbert Hoover cited “the enactment of adequate protective tariff and immigration laws which have safeguarded our workers and farmers from floods of goods and labor from foreign countries” as Republican policy triumphs that had brought Americans a high-degree of postwar prosperity. Seven months after Hoover’s inauguration, the US stock market crashed.
X - M (Exports - Imports = Net Exports)
One of Mr. Trump’s promises is to enact a very high tariff on a wide range, or perhaps all, imported goods. Not long after the 1929 market crash, Congress enacted, and Hoover signed, the disastrous Tariff Act of 1930, the Smoot-Hawley Tariff, a measure widely regarded as having intensified the Great Depression of the 1930s. So what might be the effect of a Trump-Hawley (perhaps) Tariff?
Vice President Harris often describes a tariff as a sales tax on imported goods. That isn’t precisely correct, but it isn’t a bad simplification. Mr. Trump asserts that it’s the foreign producers that pay the tariff, and that may be true in the sense that the foreign producers write the checks, but the Vice President is correct that the end consumers (you and I) bear the economic burden. Foreign producers of goods with no domestic-source equivalents will simply raise the prices we pay to cover the tariffs. Basic supply-demand analysis also suggests that the quantities they sell will fall. Domestic producers of goods that compete with imports would have every incentive to raise their prices to just below the tariff-adjusted prices their foreign competitors would have to charge. In that instance, too, quantities would fall. Either way, our standard of living would take a direct hit, as we pay more and consume less. Other nations may also retaliate with tariffs on American goods, attenuating any improvement in our trade balances that the reduction in imports might produce. (I’m not even going to get into the effects on employment at our ports, or on our capital account).
C + I (Consumption and Investment)
Mr. Trump also likes to promote draconian immigration policies, including his “mass deportations.” Setting aside the practical difficulties of implementing such a policy, one effect of restricting immigration is to restrict the labor force, which might seem to offer the possibility of higher wages, but it would also reduce the size of the consumer sector, which would tend to reduce consumption, and possibly disourage investment – especially if it also impaired the availability of labor.
G (Government Spending)
Mr. Trump caused something of a stir by suggesting he might name Elon Musk to head something he called a “Department of Efficiency.” Mr. Musk, in turn, suggested in a rather offhand manner that he could cut government spending by $2 trillion (per year? per decade? per year a decade from now? he didn’t quite say) without breaking a sweat. The Bureau of Economic Analysis currently places US GDP at just under $30 trillion per year. On its face, a $2 trillion cut in government spending would represent an immediate reduction in GDP of about 6%. The accounting isn’t quite that simple, and a full analysis of the effects of such drastic cuts quickly takes on the character of a theological dispute, depending on the analyst’s beliefs regarding the effect of government spending on the overall economy. But since any $2 trillion cut would almost certainly include large cuts to Social Security and Medicare, its effect on the standard of living of at least American seniors would be sharp and severe. Mr. Musk himself replied to a suggestion that large cuts in spending, along with Mr. Trump’s other proposals, would results in chaos by saying, “Sounds about right.”
Mr. Trump’s economic proposals, if enacted, all seem calculated to undermine our prosperity. A cynic might think it was deliberate, but I couldn’t possibly comment.