The last few blogs have focused on some of the upside that might come to our personal finances as a result of Trump’s economic plan to spend and cut taxes. Much less time in this blog has been spent on the unintended consequences of his trade policies (if pursued). You all probably have seen one of his controversial tweets, shooting off the hip in response to the day’s developments (whether it his tweet regarding the China capture of a US drone, or the most recent horrific terrorist act in Germany). Trump’s discussion of his proposed tariff’s and his trade approach with China might even be scarier.
A recent article by Tim Worstall in Forbes sum’s it up well.
“The Chinese government is a despicable, parasitic, brutal, brass-knuckled, crass, callous, amoral, ruthless and totally totalitarian imperialist power that reigns over the world’s leading cancer factory, its most prolific propaganda mill and the biggest police state and prison on the face of the earth”
That is the view of Peter Navarro, the man chosen by Donald Trump to lead a new presidential office for US trade and industrial policy. This same guy has put forward policy proposals which run counter to all modern views of economics. That trade is a zero sum game, and that VAT (Value added Tax) favors export economies. Both of these notions are incorrect. Trade is a voluntary exchange in which both parties partake in; if it was a zero sum game – would anyone participate? A VAT system is entirely neutral upon the source of goods and services–it is a tax upon the place of consumption and thus has no effect upon place of supply at all.
The reason these ideas are scary, is this could be the basis for which Trump and other support tariffs and taxes to protect US made goods (the rationale for pursuing a protectionist agenda). This in the end could hurt overall growth and GDP – as consumer prices will be driven up as a result of US consumers being forced to buy US goods (which are not competitive on a global basis)
I have been looking closely at previous presidencies who have echoed much of the same rhetoric as Trump.
Let’s unpack the Make America Great theme – cut taxes? spend? and protect American made goods? Let’s take a look at Reagan and Hoover. Two presidents that campaigned on aspects of this same message.
Are we on the cusp of Hoover like outcome? or could it be more positive…. such as the Reagan years?
Following Calvin Coolidge’s 1922 Fordney-McCumber Tariff act. Tariffs were increased on foreign imports. Hoover in the first 90 days in offices, passed the Smoot-Hawley Tariff which protected American agricultural goods. Hoover believed it was essential to balance the budget despite falling tax revenue, so he raised the tax rates.
At first, the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent. U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1
And yet the economy kept falling and unemployment rates rose to about 25%. We know that Hoover was likely dealt a tough hand with the Stock Market Crashed in October 1929, and the Great Depression that followed. Yet, the Smoot-Hawley Tariff clearly did not help. This downward spiral, plus his support for prohibition policies that had lost favor, set the stage for Hoover’s overwhelming defeat in 1932 by Democrat Franklin D. Roosevelt who promised a New Deal.
Figure 1 – Timeline and Key Economic Indicators from Hoover’s Years
Entering the presidency in 1981, Reagan implemented sweeping new political and economic initiatives. His policies, dubbed “Reaganomics” advocated tax rate reduction to spur economic growth, control of the money supply to curb inflation, economic deregulation, and reduction in government spending.
Over his two terms, the economy saw a reduction of inflation from 12.5% to 4.4%,
While Reagan did enact cuts in domestic discretionary spending, increased military spending contributed to increased federal outlays overall, even after adjustment for inflation
Figure 2 – Timeline and Key Economic Indicators from Hoover’s Years
This sums it up well, over the first two years, while Hoover was successful in reducing the trade balance (closed it by 68 %), GDP tanked (with the economy shrinking by more than 20%). While in Reagan’s case it took a bit longer for the S&P to grow yet, GDP maintained a steady upward track.
Figure 3 – Comparison of Performance (Hoover and Reagan first two years)
|Change over first 2 years in office||Change in S&P||Change in P/E Ratio||Change in GDP||Change in Trade Balance|
Figure 4 – so what is going to be?
Trump is off to a better start than Reagan and Hoover, but anything can happen!