“It’s the economy, stupid.”
That’s the famous quote attributed to a top Bill Clinton aide in 1992, when he was trying to come up with slogan for the presidential campaign.
It is still true. While the focus may be on immigration or President Trump’s problems, the issue facing the U.S. and underlying the next campaign is the economy.
Trump claims and gains credit for great economic success for two reasons.
The recovery from the deep recession has peaked in the first two years of his term. He gets credit for it, though the low interest rates set by the Federal Reserve and the Obama-era stimulus got the recovery under way well before Trump took office.
Trump also is hailed for the tax cut. Devised by congressional Republicans, he signed it into law. It stimulated corporate profits and the stock market. It gave taxpayers more spending money, boosting sales and cutting unemployment to the bone. It did not pay for itself.
Economic growth will now begin to slow. Given its size, the American economy cannot be fine-tuned. Sometimes it heats up too quickly, causing inflation. Sometimes, it grows slowly or idles, causing unemployment. The natural swings are called the “business cycle.”
It now appears that the business cycle will soon decline from its sustained growth. Through tax policy and the Fed’s money policy, the swing could be limited. Trump, who was a major business borrower, prefers low rates and may be pleased with the Fed as it keeps rates down to fight the slowdown.
Added to the business cycle is uncertainty, which worries businesses and markets. When they cannot enjoy confidence in economic policy, they tend to hold back, reducing activity and investment.
Uncertainty makes planning ahead far more difficult. Because the stock market is supposed to forecast the future, it may slump or grasp at varying signs from day to day.
Where are we now? Trade and immigration policies are sending signals that create uncertainty. Tax cuts have boosted the annual federal deficit, leaving no room to deploy more of them without cutting Social Security and Medicare, which looks politically impossible.
The U.S. has real trade issues with China, so has good reason to be tough. But Trump seems to think that any American negative balance in trade in goods must be ended, and against all countries, not only with China. “I am a tariff man,” he says.
Trump focuses on trade in goods, not services or investment. He sees the value of imported goods as a sign the exporting country is winning an economic war. He ignores any offsetting value of U.S. exports. He likes tariffs, because they bring in federal revenues, helping to offset the deficits from tax cuts.
He overlooks the impact on American exporters who immediately face retaliation from countries whose exports must pay higher tariffs. American farmers see their soybeans rot and manufacturers lose equipment exports when other countries retaliate against Trump’s moves.
When the president threatens even higher tariffs, he breeds uncertainty among as U.S. exporters wait to see what happens. They worry about their losses. When they worry, investors worry, and the stock market flutters and falls. Pensions are dependent on the market and suffer, making retirement more risky.
Add the immigration situation. It is likely that a majority of Americans worries about excessive, illegal immigration. Stemming all immigration is a central element of Trump’s political appeal. To prove his seriousness, he expels long-term productive contributors to the economy as both workers and consumers.
Low unemployment is appealing, but the country is reaching the point where jobs go unfilled for a lack of workers. Blueberries, a major Maine product, went unharvested this year without migrant workers.
Some may worry about China displacing the U.S. as the world’s largest economic power. Not only are there a lot more Chinese, but U.S. anti-immigration policy would result in a gradual decline in the American population, reducing the size of the domestic market and the ability to produce for the world market.
Dealing with this range of economic issues is complicated and difficult. Like it or not, the U.S. is part of a world economy. Easy political promises may have easy popular appeal, bringing cheers from the crowd, but may prove impossible to fulfill. There is no silver bullet.
Isaac Newton, the great British physicist, found that every action has an equal and opposite reaction. The task is to understand effects of actions.
Trump’s policy is “America First,” even if it isolates the country. The reaction to “America First” may be economic chaos and decline.