One of the mysteries puzzling observers of the U.S. economy was how, exactly, President Trump was getting away with it. The economy looked pretty good, with decent job growth, low inflation and healthy economic growth. Trump could take some credit for this — even critics acknowledged that the 2017 tax cut would temporarily goose the economy. But what is astonishing is the fact that Trump could enact escalating trade wars, repeatedly threaten the independence of the Federal Reserve and adopt the most anti-immigration set of policies in modern history without any serious economic repercussions.
To put it another way: If it turns out that presidents can do and say things that even students of Economics 101 acknowledge to be stupid without paying a price, then what is the point of taking Economics 101? Are we in a world of postmodern economics?
Fortunately for economics textbooks everywhere, but unfortunately for the United States, the most recent economic growth figures illuminate an answer to this conundrum. Second-quarter GDP growth was only 2.1 percent. The New York Times’s Ben Casselman reports:
That is significantly lower than the 3.1 percent growth rate in the first quarter. And it falls far short of the 3 percent target that President Trump has repeatedly promised. Data revisions released Friday wiped away what had been a prized talking point for the White House: G.D.P. grew 2.5 percent for all of 2018, down from the 3 percent previously reported.
It also turns out that inflation accelerated in the second quarter, with consumer prices rising at a 2.3 percent rate. So, in other words, economic growth in 2018 and 2019 has not been as robust as it was previously thought to be. These numbers are a far cry from Larry Kudlow’s 2018 claim that GDP growth would top 4 percent for a few quarters.
A peek under the numbers suggests two contradictory trends, as Vox’s Matthew Yglesias explains:
We saw increases in household consumption spending, federal government spending, and state and local government spending. That was offset by reductions in exports, in business investment, and in residential investment.
In other words, the basic supply-side dynamics of the American economy where businesses invest in improving the long-term productive capacity of the economy got worse. It’s not entirely clear why.
To me, it’s pretty clear: Trump has unwittingly sanctioned the U.S. economy.
According to my research on economic sanctions, the key pathway through which they affect a target’s economy is by scaring away both domestic and foreign investment. Intuitively, this should make sense. Investment is a bet on the future of an economy. Sanctions inject major uncertainty into any economic forecast. Private businesses will understandably take a risk-averse approach to investing in a sanctioned economy. Better to stand fast for a while. If the sanctions episode lasts only a few weeks or months, then the investment can occur on a slight delay. If the sanctions endure, then the investment gets delayed further.
Trump, in starting trade war after trade war, has made himself the uncertainty engine for those interested in investing in the United States. And the effects are starting to be felt. In the second quarter, business investment was -0.6 percent. As in, negative. That is, how you say, not good. And as Matthew Slaughter notes in the Wall Street Journal, part of the problem is the drying up of foreign direct investment:
In 2015 and 2016, America’s FDI inflows totaled $482 billion and $486 billion, respectively. Soon after taking office in January 2017, President Trump launched several new trade disputes; that year FDI into the U.S. tumbled nearly 40% to $292 billion. As many of these trade disputes persisted and deepened throughout 2018, FDI inflows slumped further, down 8.2% to $268 billion. Earlier this month, the Commerce Department reported that first-quarter FDI inflows for 2019 were down another 5% from the previous quarter. According to the United Nations Conference on Trade and Development, in 2018 America’s share of global FDI flows fell for the first time since 2008, from 25% to 23%.
Not surprisingly, FDI into the U.S. from China—the country with which America is on the verge of full-blown trade war—plummeted 87.9% from 2016 to 2018, to $5.4 billion.
How will Trump react to the growth news? It is possible that he will respond in a mature fashion. Politico reports that Trump is “increasingly listening to internal and external advisers telling him the best way to postpone an economic slowdown is to turn down the burners on his trade wars, avoid any fiscal meltdowns and lay off criticizing the Federal Reserve chairman.”
This makes sense, except for two teeny weeny little problems. First, for Trump, the damage has already been done. Even if the administration does not make the trade wars worse, there is little chance that any deals will be struck. The status quo is economic limbo for most investors, and that status quo looks likely to persist until November 2020.
Second, for this strategy to work, Trump has to display some degree of impulse control — and he can’t, he just can’t. The president could not even stay silent on the strength of the dollar. There is no way he manages not to berate China, Europe, Democrats in Congress and the Federal Reserve repeatedly over the next 16 months. It is the only predictable thing about this president’s economic policy.
Trump might be the victim of some bad economic timing. The perpetrator of this political crime? That would be one Donald J. Trump.