Former car czar Steven Rattner explains that after two months of contraction in the manufacturing sector, “You have clearly a manufacturing recessions going on. It may now be spilling over a bit into the service sector.” As the risk of an actual recession in the next 12 months rises to about 35 percent according to the New York Fed, most economic prognosticators see an annual GDP growth in 2020 of between 1 and 2 percent.
In this case, the fall in manufacturing coincides almost exactly with the onset of President Trump’s trade war, a fact that will not be lost on Democrats in the 2020 elections. The policy was flawed from the start, and now the results are coming to light just in time for Trump’s reelection campaign.
James Pethokoukis of the American Enterprise Institute writes, “America’s late 19th century protectionism did little to nothing to promote capital accumulation, technological progress, and the shift of resources from agriculture to industry and services. Protectionism was a bad idea then, and it remains a bad idea now.” We are seeing the short-term effects, but the longer-term effects are frankly worse. He notes from recent studies that “protective measures reduce the incentives for domestic firms to invest in defensive innovation" — that is, the need to keep competitive with foreign producers.
It used to be a fundamental tenet of conservative economic policy that "more-competitive markets induce more innovation, both defensive and expansionary. In other words, with globalization, markets take care of the innovation incentives and eliminate the need for policy intervention.” Not in the Trump era.
Democrats running in 2020 would be smart not to try to imitate Trump’s failed protectionist policies. Instead, they should make clear the connection between Trump’s trade war and a drop in U.S. manufacturing. (He is hurting the very people he promised to help because he is an economic ignoramus.) The risk is that this now sucks the rest of the economy into a recession. Moreover, our humongous debt and already low interest rates will deprive us of the sort of fiscal and monetary tools we normally employ to cushion the blow of a recession.
Democrats would be wise to promise a mutual disarmament in the trade war, a period of consultation with allies to devise a uniform negotiating strategy and reconsideration of the Trans-Pacific Partnership, which was an ideal way to increase pressure on China and strengthen our Far East alliances. The latter may be politically dicey for Democrats, but at least one party should stop talking trade gibberish, take reasonable measures to account for trade dislocation and get back in the business of recapturing and expanding markets.
In any event, if Democrats take over the White House in 2021, they won’t in all likelihood have the luxury, as Trump did, of inheriting a booming economy. They are likely to encounter declining GDP and job growth, gigantic debt, international uncertainty bordering on chaos and a hollowing-out of expertise in critical government departments. They might consider nominating someone who will be able to sort all this out. The hardest task may not be beating Trump but cleaning up his mess.