Neither tax cuts nor tariffs are working.
Donald Trump has pursued two main economic policies. On taxes, he has been an orthodox Republican, pushing through big tax cuts for corporations and the wealthy, which his administration promised would lead to a huge surge in business investment. On trade, he has broken with his party’s free(ish) trade policies, imposing large tariffs that he promised would lead to a revival of U.S. manufacturing.
On Wednesday, the Federal Reserve cut interest rates, even though the unemployment rate is low and overall economic growth remains decent, though not great. According to Jay Powell, the Fed’s chairman, the goal was to take out some insurance against worrying hints of a future slowdown — in particular, weakness in business investment, which fell in the most recent quarter, and manufacturing, which has been declining since the beginning of the year.
Obviously Powell couldn’t say in so many words that Trumponomics has been a big flop, but that was the subtext of his remarks. And Trump’s frantic efforts to bully the Fed into bigger cuts are an implicit admission of the same thing.
To be fair, the economy remains pretty strong, which isn’t really a surprise given the G.O.P.’s willingness to run huge budget deficits as long as Democrats don’t hold the White House. As I wrote three days after the 2016 election — after the shock had worn off — “It’s at least possible that bigger budget deficits will, if anything, strengthen the economy briefly.” And that’s pretty much what happened: There was a bit of a bump in 2018, but at this point we’ve basically returned to pre-Trump rates of growth.
Republican faith in the magic of tax cuts — and, correspondingly, belief that tax increases will doom the economy — is the ultimate policy zombie, a view that should have been killed by evidence decades ago but keeps shambling along, eating G.O.P. brains.
The record is actually awesomely consistent.
- Bill Clinton’s tax hike didn’t cause a depression,
- George W. Bush’s tax cuts didn’t deliver a boom,
- Jerry Brown’s California tax increase wasn’t “economic suicide,”
- Sam Brownback’s Kansas tax-cut “experiment” (his term) was a failure.
Nevertheless, Republicans persist. This time around, the centerpiece of the tax cut was a huge break for corporations, which was supposed to induce companies to bring back the money they’ve invested overseas and put the money to work here. Instead, they basically used the tax savings to buy back their own stock.
What went wrong? Business investment depends on many factors, with tax rates way down the list. While a casual look at the facts might suggest that corporations invest a lot in countries with low taxes, like Ireland, this is mainly an illusion: Companies use accounting tricks to report huge profits and hence big investments in tax havens, but these don’t correspond to anything real.
What about the trade war? The evidence is overwhelming: Tariffs don’t have much effect on the overall trade balance. At most they just shift the deficit around: We’re importing less from China, but we’re importing more from other places, like Vietnam.
And there’s a good case to be made that Trump’s tariffs have actually hurt U.S. manufacturing. For one thing, many of them have hit “intermediate goods,” that is, stuff American companies use in their production processes, so the tariffs have raised costs.
Beyond that, the uncertainty created by Trump’s policy by whim — nobody knows what he’ll hit next — has surely deterred investment. Why build a manufacturing plant when, for all you know, next week a tweet will destroy your market, your supply chain, or both?
Now, none of this has led to economic catastrophe. As Adam Smith once wrote, “There is a great deal of ruin in a nation.” Except in times of crisis, presidents matter much less for the economy than most people think, and while Trumponomics has utterly failed to deliver on its promises, it’s not bad enough to do enormous damage.
On the other hand, think of the missed opportunities. Imagine how much better shape we’d be in if the hundreds of billions squandered on tax cuts for corporations had been used to rebuild our crumbling infrastructure. Imagine what we could have done with policies promoting jobs of the future in things like renewable energy, instead of trade wars that vainly attempt to recreate the manufacturing economy of the past.
And since everything is political these days, let me say that pundits who think that Trump will be able to win by touting a strong economy are almost surely wrong. He most likely won’t face a recession (although who knows?), but he definitely hasn’t made the economy great again.
So he’s probably going to have to do what he’s already doing, and clearly wants to do: run on racism instead.