4 Mistakes Trump is Making on the Economy
Okay. We all support our camps. We say, "Don't criticize my guy or you are an idiot."
When we feel under attack, we tend to close ranks and reserve or withhold any criticism no matter how much it is needed. I get this and am guilty of this as well. We have congressional elections every two years and presidential elections every four. The other side is bad mouthing our guy constantly and if we pile on, no one will be supporting. Then we lose elections and the other guy takes control.
But the major draw back to this mindset is that it removes any chance for improvement of our side. Whatever they say is good with us. Even if it is not good with us.
And what if the corrections that need to be made are big and important? What if we are driving toward a fiscal cliff that could be catastrophic? What if nationally we are playing a game of hot potato where a meltdown is coming and whoever is in office will be blamed for decades? Then failing to make the changes needed are both bad for the nation and bad for "our side."
No, we have to make corrections and avoid catastrophe.
Okay. Let me explain my side. I am a social conservative and a fiscal libertarian. In that order. And for that reason, I am generally pretty happy with Trump. I didn't vote for him the first time but I will this time unless something changes. I view abortion and religious liberty to be the premier issues of our day and the issues by which our nation will be judged (by history and by God). I think that Trump's actions on these issues could not be much better. From the judges he has nominated to the policies he has put in place, he has been maybe the best president in recent history for social conservatives.
So, please understand that what follows is not me trying to hurt Trump. To the contrary, I think that if these changes are not made, the damage done to him and the rest of the conservative movement might be hard to recover from. So, take these as loving criticisms from someone that wants the best for "our side" and our nation. And wouldn't right now be a good time to do it? We are a solid year from elections. Let's make some corrections now and then we will be even stronger in November.
So what needs to change?
I would like to note four areas that I think Trump needs to get better on. For some of these, Trump would need the help of congress. But for others, he should be able to do himself. Here they are:
1- Dollar Strength
Imagine you had a big pile of gold in your basement. Even better, imagine you had a gold mine in your basement and you could go get almost endless amounts of gold. None of your neighbors have this. Now, imagine wanting the value of gold to plummet. Your argument for this is that if the value of gold would just drop, your wife would start working in that garden again because right now she is just buying her vegetables from the store with gold.
Well, that is the argument for a weak dollar. We have this thing that the rest of the world considers valuable. We can print it. But the drawback is that when the dollar is strong, no one wants to start factories in the USA. If they did, they would have to pay in dollars for the work we do and the products we make. Better to make it in China or some other place where the people work for peanuts.
But our goal as a nation should not be to make it so our workers are working for peanuts too. Reducing the value of the dollar so that factories move back to the US is the equivalent to making the gold in your basement worthless so that your wife will just get to work. No, keep that gold valuable. If your wife wants to garden for fun, great, but she should not have to for the family to survive. If she prefers to do things that might actually bring value to the family (maybe teach the kids or cook delicious meals) she could do that instead. Why force her to do something (garden) when, with that valuable gold, she could do anything she wanted?
Few parents I know want their kids to be factory workers. With a healthy economy and a valuable dollar, we do not need to have our people growing up to work on factory floors. We can pay the Chinese, the Mexicans, or the Vietnamese to do that for us. We can do other stuff with all our money. We can start restaurants, create art, become engineers, teach, go into the sciences, etc etc. Now, of course, we don't have to. There are still plenty of factories in the US and if you want to work in one, chances are you can still find a job (but like your wife working in the garden, it might not be the most valuable thing you can do with your time). But if we weaken the dollar enough, we will have to. Buying Chinese or Mexican products will become too expensive.
Trump has recently been signaling that he wants a weak dollar. This is a bad move. To the contrary, we should all want a strong dollar and do everything we can do to avoid weakening it.
2- Federal Reserve
Interest rates have been really low for a really long time. This is the result of the federal reserve lending at very low rates.
So, what is the federal reserve and how does their lending rate affect the economy? The answer is that the federal reserve was created to smooth out economic highs and lows by lending money at rates that the people running it think are needed. For example, if the economy is weakening, they will lower lending rates so that people borrow money more and presumably spend it more. This will create more economic activity and help avoid recessions. On the other side, at least in theory, if the economy is booming, the federal reserve increases its rates that will make loans more expensive. The goal here is not to reduce spending necessarily but instead avoid inflation that comes from giving too much cheap money away via loans from the federal reserve. In other words, the federal reserve by giving a low interest rate is essentially printing money and giving it away to whoever wants to borrow it. This necessarily weakens the dollar (if you give something away, its value has to drop) but they try to avoid weakening it by raising rates after the economic scare has passed.
I think to understand why this is bad policy is to step back and to ask what money is. Money is a placeholder for bartering. Ultimately, in a free market, each of us does things for other people. I write crappy books for example. If you want my book, I will barter with you for it. Say you are a farmer and grow corn. But I don't need corn. I need whiskey. I will trade my crappy book for whiskey but not corn. But you really want my crappy book. So, you take your corn to a whiskey distiller. And ask him for some whiskey. Thankfully, he does make some corn whiskey and is willing to make the trade. You give him some corn, get some whiskey, then you mail me some whiskey and I mail you the crappy book. You then leave a bad review and are bummed you went through all that work to get my crappy book.
The role of money is to help you avoid all that work. Money is a placeholder for me (a crappy book author), you (a corn farmer), and the for the whiskey manufacturer. You give me a few bucks, I give you the book. I go to the store and buy whiskey. The store gives the whiskey manufacturer that money. He then goes and buys corn from you. Everyone does the same work but money just makes everything go so much more smoothly.
Now, what happens if the federal reserve dumps a bunch of extra money into the market via cheap loans? Well, it sends a wrong signal to whoever gets that money. If you, a farmer, get it, you assume wrongly that your value as a farmer has increased, you can now buy two of my crappy books where you once could only buy one. I get more money for my books and go buy two bottles of whiskey. The whiskey manufacturer gets two orders. So he calls you and asks for more corn. But you are satisfied already. You have your crappy books and would rather not start producing more corn. The whiskey manufacturer thinking that there is a new demand for whiskey really wants that corn, so he decides to pay you extra. You reluctantly, based on this extra pay, go back into the field and harvest more corn. The whiskey manufacturer raises his prices. But, you finish my crappy book and (after leaving a bad review) decide to try another one. You have money to do it after all thanks to that whiskey manufacturer paying you so much. I am delighted and write three more crappy books to meet the growing demand. I get the order and am so happy that I can buy so much whiskey. I go to the store and am horrified to learn that the price of whiskey has gone up. I wasted all my time writing those crappy books and I can only get one bottle of whiskey? Well, okay. I buy the one bottle of whiskey and go home. The whiskey manufacturer has just bought a bunch of equipment to prepare for the spiking demand on whiskey. You bought a bunch more harvesting equipment for the corn boom. I bought a new laptop to crank out more books. But we all slowly realize that there was no spike in demand. The extra money in the system was a fake signal to all three of us. Only one book is produced. Only one shipment of corn is used. And only one bottle (albeit at a higher price) comes. The extra equipment is wasted. Everyone has more dollars but no one can afford to do anything more than what they did before. I write one crappy book. You produce the same amount of corn as before. The whiskey manufacturer makes the same amount of whiskey.
And unfortunately, we all wasted money on equipment we did not need. Plus, now our tax rates are higher because we are making more (but cannot afford more). In short, the actions of the fed did not increase any of our wealth but actually just brought confusion and waste. This is exactly what happens on the macro scale.
The Federal Reserve is a false signal machine. Any time it lends money below market rates, it confuses the market into thinking (for a short period of time) that there is more collective bartering power available than there is. And the results are waste, confusion, inflation, and higher tax rates.
Trump has recently been pushing for lower rates. I understand why but it is a mistake.
Warren Harding often claimed to have been a terrible president but but I like him. He cut the federal budget by over 50%. Coolidge cut the budget from 3.7% of the GDP to 3%. They did this while also cutting taxes. Making major cuts to the budget are possible. They are almost always painful but the pain is short lived and the benefits last years. These are the guys that gave us the 'roaring twenties.' But today, the spending as a percentage of GDP is now 21%! Our debt continues to skyrocket. We are now $22 trillion in debt to foreign countries but this does not include all that we owe to entitlements (to ourselves). Social Security and Medicare alone are projected to bring a mind blowing $82 trillion in deficit over the next 30 years.
Now, the republicans often run as the fiscally responsible party. But as you can see below it appears that it almost does not matter which party is in power. Spending never goes down.
Debt never goes down. Trump came in and things did not change. We are still spending more. We are still going further in debt. The debt limit keeps getting raised. This needs to stop.
It will be painful. There will be howls and pearl clutching. Entitlement cuts will be used to scream about lack of concern for the poor. Military cuts will bring accusations of hurting our nation's defenses. This all must be expected and predicted. If cutting spending was painless, we would have done it already. But the pain is short lived. The cuts Harding made were followed by a decade of growth. Small time sacrifices will lead to long term well-being.
But without the cuts, the opposite is true. Short term peace with long term pain. As debt creeps up, the cost of debt becomes more and more expensive. Interest payments become a larger and larger percentage of our GDP. The magic of compounding interest will work against us. This is how bankruptcies happen. But we will not go bankrupt. We can print money remember? We will instead just inflate our dollar. Which means that we will be able to afford less and less collectively. The gold in our basement will turn into stone. Ruin will come by turning our dollars into monopoly money.
Unless we act now. Sadly, the president has not accomplished this. Spending continues unhampered.
4- Trade and Tariffs
Free trade, from an economic perspective, is always a good thing. The best illustration of this that I have heard is the following. Imagine a classroom full of twenty boys and girls. Then imagine a generous donor goes to a toy store and buys 20 toys at random. Barbie dolls, hot wheels tracks, GI Joes, board games, etc. Then, imagine the donor then distributes them also at random to each of the twenty kids. Some get things they want (Jane got the American Girl doll she wanted) but some do not (Joe got a Barbie dream mansion). When the toys have been distributed, the teacher asks each student to rate (1-10) how happy they are with the gift that they received. Jane says, '10.' Joe says, '1.' The teacher then adds of the classroom score and gets somewhere a total (maybe somewhere around 100).
'Now,' the teacher says, 'get into groups of 5.' The class obeys. The teacher then says, 'you may trade but only within your group of 5.' The class trades. Some keep their toys (Jane) others trade (Joe). When the trading is done, the teacher again asks for a score. What will happen to this score? The worst that could happen is that it would stay the same (no one traded) but assuming that even one pair traded, the score would increase. If Joe was sitting next to a girl with a GI Joe who wanted the dream mansion, his score might go from 1 up to 8. The girl with the GI Joe might increase her score from 2 to a 7. But no one would ever drop their score. If the trade did not increase your score, you would not do it.
Finally, the teacher opens things up again. 'Now,' she says, 'you may trade with anyone in the whole class.' When the trading is done this final time, the scores once again can only go up. The more potential trading partners, the higher the score's upside potential.
This is what happens when you have global trade. Each country (and each individual in that country) has certain skills (gifts) that they may or may not want to trade with those outside their borders. The more free the trade, the happier they will be with the lot that they have.
And this is true even if the other country limits its trade. So, imagine if one of the groups of 5 in the class room makes a rule that when the teacher opens things up, they will only allow trades if people from other groups include a $5 bill with the trade. Should the other groups trade with that group? Of course. It may be that Joe wants a toy that some kid in that group has so much that he is willing to include $5 along with his dream mansion. It is worth it to him. When the teacher takes the score at the end, he might give a 6 instead of an 8 but it will still be an improvement. What about the group that requires the $5? Good move for them? No. If you are Joe and you are in that group and you are trying to unload the Barbie dream mansion but that $5 charge makes it so no one will trade with you, you are bummed. It would be better for those in that group to figure out the best deal for them personally. Maybe that includes asking for money, but maybe not.
If China is dumb enough to have tariffs and restrictions on trade, it is bad for us.... but it is worse for China. If you could measure trade satisfaction like we did in the class, China would have the worst increase. They are preventing trades that might otherwise improve the lot of their population. The dumbest thing for us to do would be to copy them. The smartest thing that we could do is to maintain low tariffs on foreign goods regardless of their actions. This is the surest way to improve our lot in life. If other countries stupidly fail to do likewise, let them. Don't copy them.
Two possible exceptions on trade and tariffs
There are two times that I think that tariffs and trade restrictions might make sense: for military/humanitarian purposes and/or to attempt to create long term free trade. In the first case, it might be that Iran, China or other nations are doing things from a military or humanitarian perspective that we believe is putting us at risk or otherwise doing damage in the world. To the extent that we think that economic pressure might help, tariffs might be a way to apply that pressure. Tariffs do cause economic damage (especially with the US being as big as we are economically). I am not sure I have seen pressure like this actually work but it is conceivable that it would. Similarly, if we want China (or whoever) to offer free trade, it might make sense to attempt to use our own tariffs as a way of forcing them to negotiate. But this should only be done with full awareness that the ultimate goal should be free trade and that it will hurt us as well as China.
I fear that Trump thinks tariffs help us. They do not.
So, just to recap. We need to find a way to self correct. Circling the wagons is tempting but it is dangerous long term. The GOP needs to fix the fiscal situation or the fiscal situation will fix the GOP. We are driving to a cliff and going slightly slower than the democrats will not help us. We need to turn things around. And we need to do it soon.