U.S. President Donald Trump holds a Foreign Trade Barriers document as he delivers remarks on tariffs in the Rose Garden at the White House in Washington, on April 2.Carlos Barria/Reuters
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
When I think about the macroeconomic leadership in the United States, a joke that Jonah Hill said on the Roast of James Franco comes to mind. Among Hollywood actors, Mr. Hill says, the philosophy on making movies is generally “one for them and one for me” – one movie to appeal to commercial interests, and one to fulfill personal artistic ambitions. But not James Franco. Mr. Franco’s philosophy is “one for them, five for nobody.” It’s hard to imagine a better description of Donald Trump’s policy-making.
On April 2, Mr. Trump announced tariffs of 10 per cent or greater on the vast majority of the country’s trading partners, using a bizarre formula concocted by what might have been ChatGPT. He temporarily paused some tariffs on Wednesday, but the global trade war continues. Mr. Trump is also currently trying to push forward a corporate tax cut through the House that non-partisan budget analysts say will increase the federal debt by about US$5.7-trillion if not offset by spending cuts or other taxes. Much has been said about how destructive the tariffs will be, and how unnecessary the tax cuts are in the present climate. But what is most extraordinary about the U.S. President’s economic agenda is that truly nobody will benefit from this.
Usually, economic policies are about moving resources around in some way, shape or form. After the dust settles, normally at least someone ends up better off. Higher taxes or lower spending, for example, would help pay down the federal debt for future generations, while lower taxes alone would help businesses grow and perhaps hire more people. Higher government spending could pay for better Medicare and Medicaid or military/foreign policy objectives. Even tariffs alone would at least generate some net government revenue, albeit at a great cost.
But Mr. Trump’s combination of massive corporate tax cuts and across-the-board tariffs will, on net, do none of the above, because together they cost far too much and stimulate far too little. These policies are certainly not for the working class since workers will both pay more in tariffs and owe more in public debt as a result. Nor is this even governing for the wealthy, since businesses will lose more from tariffs than they will gain from cuts, as evidenced by tumbling stock markets. If Americans had elected a monkey throwing darts at a list of policies, they would still be better off.
A monkey, at least, would have been hard-pressed to find the exact combination of policies that both cripples the real economy while expanding government debt so rapidly. Fiscal expansion, either in terms of tax cuts or government spending, would at least grow the economy in the short term by raising demand. Austerity measures – dramatic spending cuts or huge tax increases – would undermine demand, but these would at least be done to pay down debt, benefiting future generations. Yet Mr. Trump has threaded this needle, choosing simultaneously the most painful revenue source (tariffs) in tandem with an unproductive, poorly timed and expensive stimulus agenda (tax cuts), such that no American will be able to point to tangible gains.
Tax cuts are not necessarily wrong prima facie. If U.S. companies were not investing enough due to financial constraints, then cuts could be a legitimate remedy. But the 2017 tax cuts Mr. Trump is trying to extend had only modest growth benefits, most likely because companies already had enough cash during the bull market. And even though a tax cut could be more welcome in the self-induced recession that’s expected, the fact that U.S. equities have plummeted in the past week suggests the markets believe the present discounted value of cash flows in the American economy have fallen drastically – meaning they expect the tariffs to dominate the effect of tax cuts on corporate revenues. In other words, the tariff-tax-cut combo will have cost American taxpayers trillions while still being the most destructive shock to U.S. businesses since the COVID-19 pandemic. A truly remarkable feat of policy-making.
The tax cuts would not even help much in the absence of tariffs, which themselves do almost nothing for anyone’s economic objectives aside from being a questionable source of revenue. For the umpteenth time, tariffs will not reduce trade deficits, which are largely about the large fiscal debt and the inflow of foreign savings, nor are they likely to bring back manufacturing jobs with U.S. wages so high, the advent of automation and a global decline in the manufacturing share. Supposing even generously that manufacturing could return to pre-China-shock levels, the cost-benefit is ludicrous. Are American workers and businesses in other sectors supposed to rejoice in the enormous subsidy they are paying, through both future taxes and loss of GDP, to a single sector of declining economic importance?
It is of great irony that this agenda-for-nobody was voted for by a cross-section of everybody – from blue collar workers to financiers and tech entrepreneurs. That they are now expressing some regret is at least an iota of sanity in an economy that no longer makes sense.