What happens over the long term can turn out to be very different to the short-term impact, especially when it comes to economics. Even more especially when it comes to the favourite economic policies of President Donald Trump.
There are grotesque contrasts between what people in the US and around the world might experience in the early weeks and months after he implements a policy and what the consequences are likely to be when the full effect of that policy runs its course.
The most obvious example of this is the new president’s decision to pull the USA out of the Paris climate change accords and ‘drill baby drill’. What needs to be done to try to prevent events like the recent Los Angeles fires from becoming even more alarming and frequent is well known to all who take scientific evidence seriously. We need to switch as rapidly as possible away from outdated fossilised technology.
Stepping on the gas
Unfortunately, what will make the most profit in the least time is very different. Drilling for every last drop of oil in the US and in Greenland is likely to prove popular with US citizens if it lowers the price of their gasoline by even a few cents for a while.
It may seem less appealing when they have to pay more for their car and home insurance to cover the billions lost in destroyed homes and vehicles as a result of climate chaos.
Nor are such measures likely to go down well with voters whose homes are lost in the increasingly serious floods, wildfires or hurricanes. The 78-year-old president is unlikely to be around to see the worst of the fires and fierce winds roar up the fairways of his favourite golf course but the consequences of his determination to focus solely on short-term profit will become a reality all too soon in many parts of America.
Tit-for-tat tariffs
Turning to Trump’s enthusiasm for tariffs, it’s clear there is a huge gap between the promised outcome and real world consequences. Put a hefty tax on Chinese products and it is likely that more cars made in the US will get sold, which might generate some welcome jobs. But the tariffs will mean higher prices on many other desirable imports and that won’t go down so well.
Tariffs almost always cut both ways. The Economist points out that 90 years ago Franklin D Roosevelt described them as “the road to ruin”, inviting retaliation and suffocating investment. Put taxes on imports from the EU and the EU will put taxes on imports from America. That will cost American jobs.
Shutting out products made in places like China looks a lot easier. It isn’t. Refuse to import some things and they can disrupt the supply of others in a complex web of production. Silicone chips made in Taiwan are, for example, essential for US producers. Their supply could easily be disrupted by China.
A trade war trap
So erecting tariff borders rarely helps an economy in the long run. It may prove possible to protect from competition an inefficient overpriced domestic car manufacturer like, I don’t know, let’s choose an example at random, say Tesla. Tariffs won’t help that company to sell its cars around the world. Nor will they prevent Chinese manufacturers from getting more efficient and cheaper as they secure an increasing dominance in a rapidly growing global market.
Already China is selling popular electric cars for just $4,000 on their domestic market. More than half of all Chinese domestic sales are now electric.
If the US sets up a trade war on car import tariffs it will virtually guarantee a rapid decline in the competitiveness of its own manufacturers in global markets. Clinging to outdated technology is rarely a recipe for success.
No immigrants, no workers
When it comes to kicking out immigrants it isn’t hard to win popular support if you’re blaming them for a country’s economic woes. But the true impact is almost never what is hoped for by those who think it is the way to help their country. Get rid of the immigrants in California and there is instantly a serious shortage of labour to pick fruit, nuts and vegetables. That increases prices and drives up inflation.
A lot of people voted for Trump because they were horrified by the price of eggs. They are not going to be happy when they see the impact on that price of expelling immigrant labour – and it isn’t just food prices that will go up.
Shortage of labour drives up the price of care services and affects many other services such as the cost of washing a car. It also has a huge impact on high-tech industries where it is important to attract talent and creativity from around the world.
The way to bring new jobs into run-down inner city areas is not to stop immigration. It is to get your business at the forefront of the next wave of technology instead of hanging on to the old ways of doing things.
The cost of tax cuts
What about President Trump’s desire to cut regulation and reduce taxes? These are policies which go down very well with financial markets whenever they are announced and tend to result in quite dramatic short-term gains in profits and popularity. Then the true risks and consequences emerge and things begin to look very different.
Tax cuts have to be paid for. The US has hefty balance of payment problems and debts that amount to around 120% of its entire national income. That is not a level that can sustain dramatic tax reductions.
Considerable amounts of the debt is owned abroad. That leaves the country exposed to changes on global financial markets. Any drop in the value of the dollar or increase in interest rates will hit the US economy hard and be directly felt in the pockets of voters. After the initial sugar rush on financial markets is over there is a high chance that things will start to go badly wrong.
When boom leads to bust
We learned in 2007/8 how easily a boom in financial asset prices can turn into a bust. All it takes is for a few international investors to get jittery and move their money to safer places and an economy can become very vulnerable very quickly.
Once the initial rise in stock market prices slows and a few savvy investors decide to sell at the top, panic is never far away. The UK under Liz Truss was an excellent example of what can happen when far-right politicians implement irresponsible economic policies.
Predicting how quickly the US economy may turn from short-term boom to bust is almost impossible. The danger is nevertheless there in plain sight and the next crash is likely to be a lot worse than the last one.
Most owners of bizarre versions of bitcoin are probably feeling pretty smug as the value of what they own rises. But in a serious downturn questions will soon be asked about whether it’s time to get rid of an asset that in reality is worth less than the value of a tulip bulb.
Belief in the economic miracle
A lot of fine promises have been made by Trump about what would happen from day one and how quickly things would get a lot better. It is entirely possible that for a short time voters can be kept satisfied with a few instances of economic success and will display a degree of patience as they wait for the miracle to materialise that Musk’s algorithms tell them is on the way.
They won’t stay tolerant for very long. If their own lived experience doesn’t start to get better soon they are going to be very angry indeed. Anyone who sells themselves so hard as a hero runs a high risk of sooner or later being seen to possess two very heavy feet of clay.
The US economy might very well enjoy an initial boost and Trump’s allies are very likely to get a lot richer. But what will happen when policies that only suit the short-term interests of a few very wealthy people run into the cold light of economic reality? Hold on to your hats. The US is in for a very bumpy ride and may well take the rest of us with it. Unless of course we politely refuse to climb aboard.
