The president is setting the theme for the November congressional elections: We—he prefers “I” but might deign to share credit with Republican incumbents—have upped the pace of economic growth from below 2 percent to above 3 percent, created millions of new jobs, and cut taxes to put more money in your pocket. Return control of the House and Senate to us. Let the good times roll.
It’s a message that sells itself.
And the good times probably will roll, barring a negative effect on the so-called real economy of three developments: the end of what seemed an inexorable rise in share prices, a wave of protectionism, and political turmoil caused by the possible impeachment of the president.
The stock market “correction,” or “tantrum,” or “volatility”—take your pick—might feed into the real economy via a negative wealth effect. People feel poorer, they zip their wallets and purses, retail sales decline (as they did last month), businesses invest less, and dreams of rapid growth are replaced by a gloom-driven, downward spiral.
Possible, but not probable. Studies by the Federal Reserve Bank of St. Louis conclude that about half of all Americans do not have a single penny committed to the stock market, either directly or in the form of the 401(k) savings accounts. A 10 percent drop in share prices, what professionals call “a correction,” would at most have a 1 percent or 2 percent impact on the wealth of 9 out of 10 Americans reckons Edward Wolff, a professor of economics at New York University. He calculates that 84 percent of all shares are owned by the wealthiest 10 percent of Americans. “For the vast majority of Americans,” Wolff told the New York Times, “fluctuations in the stock market have relatively little effect on their wealth, or well-being, for that matter.”
He’s right about the wealth effect, but might be understating the effect of a share price plunge on “well-being.” Even those with no direct involvement in securities markets can sense whether joy or gloom is in in the air. Most Americans might not obsess over whether the interest rate on 10-year Treasuries will pierce the 3 percent mark—a concern of people with large share portfolios—but they feel its effects when rates they pay on their $13.15 trillion in credit card, mortgage, and other debt—even at this time when that debt burden is considered sustainable. Still, it does not seem likely that what has been going on in the markets in recent weeks will have enough of an impact on consumer confidence to offset the stimulative effect of the tax cuts, at least in the short run.
But the president’s protectionist policies just might have such a negative effect on the real economy, say the critics of Trump’s trade policy. He already has introduced “yooge” tariffs to protect the washing machine and solar panel industries, and is about to impose duties and quotas to protect the remnants of our steel and aluminum industries. He is considering withdrawing from our trade agreement with Mexico and Canada and levying a “reciprocal tax . . . on countries that take advantage of the United States.”
Most important, the president has abandoned hope that China will put pressure on North Korea to rein in its program to develop a nuclear armed missile that can reach the United States, and so feels free to take aim at the massive $375 billion trade deficit in goods that America ran with China last year. That’s half the total gap between our imports and exports.
His advisers are working out precisely what steps—including declaring a national emergency to bypass world trading rules and congressional objections—he can take to offset the subsidies Xi Jinping’s Peoples Republic lavishes on industries of the future, such as artificial intelligence and quantum computing; its theft of U.S. intellectual property which has given the Chinese the information they need to build exports of the advanced technology products that account for about one-third of our goods deficit; and its barriers to made-in-America goods and services.
These protectionist measures would drive up prices, reduce consumer purchasing power, and fuel the inflation that already has investors spooked, say those for whom “the notion of the gains from free trade has developed a ring of universal truth in polite discourse,” to borrow from former Fed governor Larry Lindsey (now head of his eponymous consultancy). He notes the average tariff in America is 1.6 percent (compared with the worldwide rate of 2.7 percent), imports constitute only 15 percent of GDP, and calculates that tariffs represent a fraction of 0.24 percent of GDP—$60 per person.
“Free trade is a good thing . . . But even in a worst-case scenario,” concludes Lindsey, Trump’s ideas “are simply not apocalyptic.” My guess is that there is nothing Trump can feasibly do that will have a major impact on the real economy, at least in the near-term.
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Which leaves political turmoil as a possible growth-killer. The Democrats are more, rather than less, likely to regain control of the House, which is the body charged by the Constitution with responsibility for considering whether to impeach a president.
Many Democratic candidates are members of the “Resistance” (not quite as daring as the French patriots whose name they have filched) and are determined to impeach the man they regard as an illegitimate usurper of the throne Hillary Clinton was destined to inherit. If history is any guide, which it at times is, no need to worry about the effect of political uncertainty on the real economy. Between the uncertainty surrounding Bill Clinton’s impeachment by the House and the Senate’s refusal to convict, share prices rose 43 percent and the real economy grew at annual rate of around 4 percent.
Share price volatility, protectionism and looming political uncertainty we will have. But they are unlikely to derail economic growth, at least in the near term, especially with the effect of the tax-cut booster rocket coming into play. Never mind that its fuel was purchased on the national credit card.