The vital signs aren’t good. The S&P 500 has fallen more than 10 percent since its September peak, which technically puts us in “correction” territory. In the past few weeks, markets whipsawed over whether we do or do not have a trade deal with China (we don’t) and whether President Trump will further jack up tariffs on Chinese-made goods (still unclear).
Stock wobbles alone don’t necessarily imply an immediate downturn, of course. (They “forecast nine of the last five recessions,” Nobel laureate Paul Samuelson once quipped.) But consumers also report rising pessimism to pollsters. The Treasury yield curve — which shows interest rates for bonds at different maturity dates — has partially inverted, which can signal that traders think the Federal Reserve will have to slash rates to goose the economy. Virtually every independent forecaster foresees a slowdown once the sugar rush of Trump’s tax cuts wears off in the next year or so. And in a recent survey of economists by the Wall Street Journal, more than half predicted that we’d have a full-blown recession by 2020.
Statistically speaking, given how long the economy has been growing, a recession is overdue — and the eventual collapse may bear Trump’s fingerprints. After all, his new trade barriers have lifted manufacturing costs, closed off markets and clouded the future for American firms with global supply chains. Economists say Trump’s trade war is the biggest threat to the U.S. economy in 2019. In loonier moments, the president has also threatened to default on our debt, ramp up the money-printing press, reinstate the gold standard or deport all 11 million undocumented immigrants. Some of those policies would ignite not just a recession but an immediate, global financial crisis.
Or perhaps the contraction will follow some non-Trump-related catastrophe, like an oil shock or a wave of defaults in the growing leveraged loan market. It’s often impossible to ascribe blame accurately.
Yet there’s one thing we can expect with reasonable conviction: Even if Trump isn’t the direct cause of the next recession, he’s likely to make it so, so much worse.
There are, alas, many ways the administration is likely to bungle a recession response — it may have even done so already. The first issue is that Trump has already shot most of our fiscal bullets, leaving us with less ammunition when we actually need it.
At times, it’s justified to run up deficits: specifically, during a recession. When the private sector is shrinking, the public sector helps plug the shortfall (through higher spending and/or tax cuts). Republicans and Democrats — including Presidents George W. Bush and Barack Obama — have followed that standard Keynesian response over the years. When the economy is good, however, economists advise shrinking the deficit as much as possible or even running a surplus. Repair the roof when the sun is shining.
Instead, Trump has done the opposite. When he entered office, budget deficits were expected to rise steadily over the next decade thanks to (among other factors) more baby boomers claiming Medicare and Social Security. Trump decided to widen deficits even further, adding $2 trillion over the next decade through tax cuts and spending increases. Now, with gaping budget holes, it will become much harder to provide fiscal stimulus when the time comes.
Plus, whatever the actual cost, the Trump-led GOP seems poised to block greater spending during the next recession. National Economic Council Director Larry Kudlow opposed Barack Obama’s major stimulus package in the last downturn. Outside adviser Stephen Moore recently counseled the president to “veto every spending bill headed his way between now and the 2020 election.” Even if Trump ignores such guidance, the tea-party-influenced GOP, which has held onto control of the Senate, will probably have even less appetite for fiscal stimulus than it did in 2009 — when just three Republican senators and zero Republican representatives voted for the Recovery Act.
Trump might also pursue policies that would inflict even more damage. As he tweeted recently, he’s a “Tariff Man”; he thinks import duties make America richer by shielding struggling industries from foreign competition. (Economic research overwhelmingly says this is wrong.) It’s not hard to imagine him trying to fix a contraction by throwing up even more barriers to trade.
This beggar-thy-neighbor, protectionist approach has been tried at the start of a downturn before — during the Great Depression. The problems began with the 1930 Tariff Act, sometimes called Smoot-Hawley after the lawmakers who devised it. As with Trump’s recent tariffs, the new rules made the cost of doing business much more expensive for U.S. firms that purchased foreign goods as components of their own products. They also triggered a cascade of retaliatory counter-tariffs around the world. Global trade crashed. Economists agree that Smoot-Hawley deepened and extended the Great Depression, not just here but worldwide.
What if, in a crisis, Trump somehow received — and then listened to — sound economic advice? Even then, he would face a nearly impossible task, especially if the advice required enacting expensive and unpopular measures such as bailouts, which rank-and-file voters on the left and the right have told pollsters that they revile. During the 2008 collapse, Obama and Bush both stuck their necks out to corral votes for politically risky bills, measures that were necessary to stop the panic but that were not obviously beneficial to the short-term interests of politicians. Both also genuinely tried to reach across the aisle to get bipartisan buy-in where possible. Trump has rarely evinced much political courage himself, much less inspired it in others. We’re all in it together is not really his vibe.
Speaking of leadership, there’s also the problem of our deteriorating international standing. In the last financial crisis, having good relationships with foreign central banks, finance ministers and other leaders abroad proved crucial for coordinating fiscal and monetary responses. We set up currency swaps with other countries, for example, to stanch the bleeding, and we agreed to synchronized stimulus plans at the Group of 20 meetings in London. Given this experience, the Organization for Economic Cooperation and Development warned its members recently that they should start planning and coordinating their responses to “a sharp downturn” far in advance.
But Trump has picked trade wars with adversaries and allies alike. He’s insulted foreign leaders, such as Canadian Prime Minister Justin Trudeau (whom he called “dishonest & weak”), when they even politely object. And he’s otherwise proved himself an erratic, unreliable partner, with a dubious grasp of basic economics. He obsesses over bilateral trade deficits, which are driven by macroeconomic factors like savings and investment rates rather than by anyone “taking advantage”; he reportedly thinks countries can pay down their debts by simply printing more money; he says Mexico is paying for his border wall through the NAFTA replacement (it’s not). Foreign leaders would understandably be skeptical of U.S. entreaties for multilateral problem-solving.
If, in fact, we even bother with such overtures. Trump views the world as zero-sum. Anytime another country is improving, it must be at our expense: If Germany runs a trade surplus, for instance, or if German economic growth picks up, that must be because it’s stealing business from somewhere else. Given this outlook, he may be suspicious of any multilateral response to a global downturn, as University of California at Berkeley economics professor Barry Eichengreen observed in a recent talk.
Finally, there’s this administration’s unusually shallow bench of economic talent. Consider the team that led us out of the 2007-2008 financial panic. Whatever their shortcomings — and not foreseeing the crisis was surely one of them — they collectively offered tremendous expertise, experience and relationships. Federal Reserve Chair Ben Bernanke had spent his academic career studying the Great Depression. Bush’s treasury secretary, Henry Paulson, had been chief executive of Goldman Sachs; he knew the players on Wall Street, and they respected him. Timothy Geithner, president of the Federal Reserve Bank of New York and later Obama’s treasury secretary, understood the plumbing of both the financial system and the federal government. (In an earlier stint at Treasury in the 1990s, he was involved in responses to financial crises in Brazil, Mexico, Indonesia, South Korea and Thailand.)
By contrast, Trump chose as his treasury secretary Steven Mnuchin, a guy who had zero policymaking experience and whose top private-sector achievements include investments in “Avatar” and “The Lego Batman Movie.” Mnuchin worked on Wall Street — including at Goldman Sachs — but he has largely frittered away whatever trust he built up there. Like other Trump economic officials, he has been frequently, and brazenly, deceptive about administration policies and their consequences: whether tax cuts will reduce deficits, whether we have a deal with China on trade, how quickly the U.S. economy can reasonably be expected to grow over the coming years and so on. On that last point, Mnuchin, Kudlow, Council of Economic Advisers Chairman Kevin Hassett and other administration officials have repeatedly claimed that 3 or 4 percent growth is “sustainable,” despite the fact that every independent economic prognosticator says otherwise.
Such obvious fibs may seem minor, but they have consequences. If we can’t trust officials to tell the truth about little things now, why would anyone trust them when they’re trying to calm financial markets? Lack of credibility is a minor inconvenience when times are good; it’s a disaster in a crisis.
To deal with a financial calamity, you need people in charge who not only actually know stuff but also inspire confidence that they know stuff. Trump seems to have selected very senior personnel — when he’s selected them, anyway; about half of key Treasury posts remain vacant — based not on expertise or credibility, but how much they praise him, especially in public. His televised Cabinet meetings are flattery sessions. Mnuchin has averred that Trump possesses “perfect genes.”
Trump’s appointments at the Fed, mercifully, have been qualified. If all else fails, these politically independent technocrats, led by Chair Jerome Powell, will follow whatever theory and data suggest that economic policymakers should do, regardless of the news cycle or the proximity of the next election.
Unfortunately, Trump has been busy trying to discredit this one remaining competent economic institution, too. Rather than following decades of precedent — that administrations never comment on monetary policy — he rants about interest rate hikes and says he regrets appointing Powell. Trump seems more invested in setting up the Fed as a scapegoat in case the economy turns than in preserving the credibility it will so desperately need to do something about it.
And that is what we should be most worried about. Because if Trump destroys the central bank’s hard-won political independence — and convinces markets that the Fed’s choices are based on political arm-twisting, rather than dispassionate analysis — he could hobble the Fed’s ability to effectively intercede not only in the next recession but in every single one thereafter.