Satyajit Das: The ‘Own Goals’ of Trump-onomics

Yves here. Satyajit Das gives a high-level overview of Trump’s confused, often inconsistent, ideologically-driven economic impulses. Like his “deals,” they often come too short of the finish line to call them “policies”. But they do seem all too likely to bring us back to his beloved 1890s.

Apologists for the US administration claim that it is seeking to ‘disrupt’ existing geopolitical and economic norms for the good. Yet the last 17 months have made a convincing case for the nostalgic advantages of status quo. Inverting Shakespeare’s Polonius, if the Trump administration’s measures be method, there is madness in it.

The administration wants lower inflation, but wars, tariffs, trade restrictions and sanctions are pushing up costs and increasing price pressures. It wants lower energy prices, but initiating hostilities in the Gulf, which reduced oil and gas supplies, was unhelpful for that aim. While war is good for US energy exporters, it overlooks that the US imports certain oil products. American prices have actually gone up at a higher rate than in other countries because they have greater flexibility to manage rises—for example, by reducing fuel taxes.

The Trump administration is talking up the prospects increasing US production by as much as 3 million barrels a day.. But shale oil producers, the main source of new supply, have proved reluctant, wanting greater certainty about future prices needing a price between $60 and $80 a barrel to drill profitably. Despite Trump’s desire to get prices down to reverse sliding approval ratings and assist the Republicans in the upcoming mid-term elections, producers have chosen not to invest and use the windfall profits to reduce their debt or reward shareholders.

Simultaneously, the US is pursuing a trade war with Mexico and Canada, its largest sources of crude imports, ignoring that US refineries are set up to process these grades and would need alternative suppliers or costly retooling its operations. The administration is also seeking to tighten sanctions on Russia pressuring prices.

Trump expects the Gulf Cooperation Council members to invest in the US and finance his Peace Board. But the war and lower oil prices, if they hold, are damaging to their economies and reduce available surpluses. He demands that Saudi Arabia invest up to $1 trillion in the US. But Riyadh needs an oil price of $80 to $90 just to balance its budget and finance mega projects designed to rebalance its economy away from fossil fuels.

The ‘build-in-America’ campaign seeks to replace cheaper foreign supply with more expensive domestic production across a range of items. Given the evolution of supply chains over decades, this cannot be done quickly. The de-industrialisation of the US means shortages of workers with the required skills. The attempt to onshore chip productionin Arizona has seen lengthy delays, cost overruns, exposed cultural and regulatory differences and ultimately required the use of Taiwanese workers. The plant will not produce state-of-the-art-chips or use the latest technology. Higher tariffs mean more resources directed to producing lower-end essential goods, which could be imported at cheaper prices, reducing available capacity for more advanced manufacturing activity resulting in higher prices and disruptions of supply chains.

The administration’s actions on fiscal and monetary policy are revelatory. The proposed tax cuts are illusory being a continuation of the expiring existing regime and will be offset by the tariff costs. Channelling Alice in Wonderland’s Humpty Dumpty’s “when I use a word …  it means just what I choose it to mean”, the White House spokespersonstated that tariffs are “a tax cut for the American people” – something hitherto unknown to economic theory.

The tariffs, even if they can be legally implemented, will not help correct America’s chronic and growing budget deficit. The revenue from tariffs cannot replace individual and corporate tax receipts of $2 trillion. Given the base amount of imports of $3.4 trillion, it would require a punitive tariff rate which if levied would reduce imports by making them prohibitively expensive limiting the revenue raised. During the first Trump administration 92 percent of revenues from agricultural tariffs ended up funding subsidies to unhappy affected farmers.

Instead, the planned extensions of tax cuts, eliminating taxes on social security, tips and overtime as well as reinstating state and local tax deductions will reduce revenues by around $900 billion per annum. Over the next decade, the deficit is projected to rise from $2 trillion to $3.6 trillion mainly due to rising payouts for social security, aged and health care from demographic shifts. This will feed into higher public debt and interest costs which at 4.7 % of GDP (the highest in the G20) is already the second largest budget expense after Social Security and greater than defence spending.

The administration wants to, at the same time, devalue the dollar, keep it strong and maintain its reserve currency status which it says leads to overvaluation. It does not acknowledge that tariffs are driving a strong currency because it encourages onshoring of production and lower trade deficits. A weaker dollar will also increase price pressures. In the first Trump term, a higher dollar helped offset the price effects of tariffs.

A lower dollar will discourage inwards foreign investment into the US which it needs. One measure under consideration to devalue the dollar and address the US’s unsustainable public debts is to forcible convert US treasuries into zero coupon one-hundred-year (century) bonds or perpetual (no maturity date) securities. This would effectively constitute default if done unilaterally. If seriously contemplated, to protect saving, investors will sell their large holdings of US Treasuries resulting in large interest rate increases.

The objective of lower interest rates is incompatible with the inflationary pressures of tariffs, loose fiscal, devaluation of the dollar, and policies towards foreign investors.

Immigration roll-backs, including deporting green card holders on flimsy excuses, are reducing the inflow of skilled talent and cheap labour. It reduces tax revenues and demand while aggravating workforce shortages and wage pressures. Immigration helps address an aging population. Where once five workers financially supported every retiree, it is now three and will shortly be two.

Cutbacks in education and research damage workforce skills and productivity. Treatment of foreigners at borders is discouraging tourism. Given that the sector accounts for about 11 percent of jobs and contributes $2.36 trillion to the economy in 2024, it is unclear how this will boost US economic activity – the short-term bump from the World Cup notwithstanding.

The administration’s expansive exercise of executive power, aggressive interpretation of statutes, disdain for the law while claiming to uphold it and wilful disregard of judicial authority may lead to a constitution crisis. Erosion of legal rights and reneging on or re-trading agreements will make foreigners cautious about investing in or partnering with America.

MAGA risks MEEGA (Make Everyone Else Great Again). US actions perversely encourage foreign self-sufficiency isolating America. European efforts to re-build defence capabilities and exclusion of US suppliers will damage American armament export revenues. Over time, foreign competitors will improve capabilities and market share. Modest savings from cancelling foreign aid and cultural programs will be exceeded by large losses of leverage and provide opportunities for others to increase their influence.

To use a footballing analogy, the US administration’s policies are own goals. Mark Twain wondered “whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.” That question is one that could be asked about the Trump administration.

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