After the 2016 election, I laid out three possible scenarios for a Trump economy. “Funhouse Reagan” assumed a large, regressive tax cut and an explosion in the deficit; “Reverse Robin Hood” assumed the tax cut would be offset, at least in part, by cuts in social spending; and “Trade Warrior,” which speaks for itself, could be attached to either of the other two. So how has it turned out?
I said that “Funhouse Reagan” was the most likely alternative, and I was right. I assumed, however, that the unnecessary stimulus would result in significant interest rate hikes, and ultimately, a recession. There were indications of that earlier this year, but the rate hikes have stopped, because: (a) Trump engaged in inappropriate jawboning of the Fed; (b) growth in the rest of the world has been tepid; and (c) above all, most of the tax cut just went into the pockets of the wealthy, and did not cause a consumer spending boom, so demand-driven inflation has not been a problem. In a sense, therefore, the ineffectiveness of the tax cut can be credited for the absence of an interest rate backlash; all Trump has done, in essence, is take our inequality problem and make it worse.
“Reverse Robin Hood” is periodically advocated by the CLs within the administration, but cuts in social programs have mostly been averted. The effects of “Trade Warrior,” on the other hand, have yet to be determined. They have been muted thus far, but that could change in the near future, particularly since Trump appears to be concerned that the Democrats could attack him from the protectionist left for being a wimp on Chinese trade issues.
The psychological damage caused by “Trade Warrior” on the markets, if tariffs get larger, could well exceed its actual practical impacts. We’ll see.