Financials are down for the year overall. The wealth of the very rich has taken a huge hit. The market value of tech companies has fallen $800 billion. Earnings are up, as are retail sales, but investors are unimpressed, moving money away from stocks as interest rates rise and make safer bond markets look more attractive.
Housing is softening but still strong enough. Wages are up, and everyone who wants a job can get one, which is a rather amazing thing. Sure, economic fundamentals all seem fine, and it is always easy to claim that Wall Street is not Main Street. That’s true, and yet, forecasts of an overall downturn and even recession are in the air.
The question is why.
These are times when you wish that we could perform controlled experiments in the social sciences. Wouldn’t it be great to put the history of our times on repeat and change just one variable and see what happens? Then we could know. Then we could decide.
Here’s what I would like to know. Suppose that the tax and regulatory cuts of 2017 had continued apace, more and deeper. And suppose there had been no punitive interventions in international trade. Globally, tariffs were at historic lows, the achievement of many decades. What if that system had been left in place? Where would the financial markets be right now?
It’s not possible to know such a counterfactual. So our sense of the precise causal sources for the downward economic pressure is left to discern from correlations and intuitions. We know for sure that central bank increases in the federal funds rate put upward pressure on interest rates across the yield curve. We know that higher rates tempt financial capital away from risky stocks toward more reliable returns.
What we do not, and cannot, know is the extent to which a certain policy brings about results. The system about which we are speaking is too complex to know for sure. So let’s reflect on what we do absolutely know for sure. We know that widened circles of trade are good for economic growth. We also know that trade barriers are detrimental to wealth creation.
And we know this: the year 2018 has been absolutely terrible for international trade. The U.S. president imposed tariffs on steel and aluminum. Then the president threatened automotive tariffs on the EU. He tore up Nafta and replaced it with something even worse. The United States dropped out of the Trans-Pacific Partnership. (Then the Partnership happened anyway, minus the United States.)
American trade belligerence became notorious. The world retaliated and shut down markets to US goods. It’s hurt American exporters. Farmers have been granted $12 billion in subsidies as compensation for the loss of overseas markets. But it hasn’t really helped. They are still in deep trouble. Ten major American production companies most visibly hurt by tariffs and retaliations include a list of heartland American companies: Tyson Foods, Harley-Davidson, General Motors, Molson Coors Brewing, Coca-Cola, Whirlpool, Alcoa, Union Pacific, SunPower, Qualcomm. And there are countless others.
The United States has so far imposed $250 billion in tariffs against China. Last weekend, Vice President Michael Pence let slip that the administration is open to doubling those until China shapes up. But what does that mean? The U.S. complaints are so voluminous that there is no possibility of complying with them. They include China’s subsidies for industry, violations of intellectual property rights, currency manipulation, too high tariffs, uncompetitive wage differentials, and on and on.
The message the United States is sending is pretty clear: this is a new cold war, and there will be no compromise. To what end? The slogan says that this is about putting American First. Based on what we’ve seen so far, the slogan should be Harm Americans First.
How can the United States “win” this trade war? Let us never forget that tariffs are another word for taxes. They are never imposed on other countries. They fall hard on the citizens of the protectionist nation. Consumers pay. Producers pay. That means everyone in the protectionist country pays, all because one government has an idea that it would be good for the nation, which it never is. There is no way to “win” a trade war, just like there is no way to improve your health by shooting yourself in the foot.
Here’s the thing about international trade. When it is interrupted, even if only in a limited way, it affects everything — not immediately, but over time. Costs of production rise. Consumer prices rise. Trade routes are lost. Supply chains are disrupted. Retaliation is inevitable because governments are in control, and this causes more negative effects.
The damage cascades in ways that no one can precisely pinpoint. The usual consequences are declining productivity, loss of markets, higher prices, and an interruption in the progress of people in all nations. But once it happens, it is often the case that no one can draw any solid line of cause and effect, because the effects are all strangely diffuse.
When the Trump administration embarked on this path, it was under the presumption that a nation should be managed like a single firm. Its success should be judged as if the trade deficit reveals what other nations owe us.
None of it is true. You can render metrics of any human activity. You could push out a spreadsheet of the difference between what you buy from Kroger and what Kroger buys from you. The results will be grim. Or you could just trade like a normal person, finding gains wherever they emerge in the course of human choice.
The trade deficit is a classic case of a metric that no one needs to collect and codify, exactly as Peter Earle said: “Numerical measures are by their very nature retrospective. Epistemologically, information derived exclusively from data analysis will by be both backward-looking and prone to the shortcomings associated with the snapshot fallacy. Which is to say: they are essentially without context…. Unquestioned and/or without updated context, metrics become at best unhelpful, and at worst, pernicious; grist for fools.”
The problem is that a very powerful person is enraptured by these metrics and wants to fix them to achieve some kind of equality, in our own interest. So you must be taxed. Every business must be taxed. We must have belligerent relationships with foreign nations until the metrics are made right, no matter the cost.
It’s very possible that the cost, in this case, is American prosperity. It's happened before. It could happen again. Prosperity has been so fragile since 2008 that no responsible government should take the chance, but the very idea of responsible government these days has become an oxymoron.
How bad do things have to get before we reverse course on trade protectionism? Speaking now in the remaining weeks of 2018, a grim year for so many financials, with storm clouds on the horizon, I would make the worst possible prediction. Nothing can crack the strange nut of a convinced economic nationalist.