The “very stable genius” in the Oval Office is, in fact, extremely unstable, in word and deed. That’s not a psychological diagnosis, although you can make that case, too. It’s just a straightforward description of his behavior. And his instability is starting to have serious economic consequences.
To see what I mean about Trump’s behavior, just consider his moves on China trade over the past month, which have been so erratic that even those of us who follow this stuff professionally have been having a hard time keeping track.
First, Trump unexpectedly announced plans to greatly expand the range of Chinese goods subject to tariffs. Then he had his officials declare China a currency manipulator — which happens to be one of the few economic sins of which the Chinese are innocent. Then, perhaps fearing the political fallout from the higher prices of many consumer goods from China during the holiday season, which would result from the tariff hikes, he postponed — but didn’t cancel — them.
Wait, there’s more. China, predictably, responded to the new United States tariffs with new tariffs on U.S. imports. Trump, apparently enraged, declared that he would raise his tariffs even higher, and declared that he was ordering U.S. companies to wind down their business in China (which is not something he has the legal authority to do). But at the Group of 7 summit in Biarritz he suggested that he was having “second thoughts,” only to have the White House declare that he actually wished he had raised tariffs even more.
And we’re not quite done. On Monday, Trump said that the Chinese had called to indicate a desire to resume trade talks. But there was no confirmation from the Chinese, and Trump has been a notably unreliable narrator of what’s going on in international meetings. For example, he made the highly improbable claim that “World Leaders” (his capitalization) were asking him, “Why does the American media hate your Country so much?”
To repeat, all of this has happened just this month. Now imagine yourself as a business leader trying to make decisions amid this Trumpian chaos.
The truth is that protectionism gets something of an excessively bad rap. Tariffs are taxes on consumers, and they tend to make the economy poorer and less efficient. But even high tariffs don’t necessarily hurt employment, as long they’re stable and predictable: the jobs lost in industries that either rely on imported inputs or depend on access to foreign markets can be offset by job gains in industries that compete with imports.
History is, in fact, full of examples of economies that combined high tariffs with more or less full employment: America in the 1920s, Britain in the 1950s and more.
But unstable, unpredictable trade policy is very different. If your business depends on a smoothly functioning global economy, Trump’s tantrums suggest that you should postpone your investment plans; after all, you may be about to lose access to your export markets, your supply chain or both. It’s also, though, not a good time to invest in import-competing businesses; for all you know, Trump will eventually back down on his threats. So everything gets put on hold — and the economy suffers.
One question you might ask is why Trumpian trade uncertainty is looming so much larger now than it did during the administration’s first two years. Part of the answer, I think, is that until fairly recently most analysts expected the U.S.-China trade conflict to be resolved with minimal disruption. You may recall that after denouncing NAFTA as the worst trade deal ever made, Trump essentially surrendered and declared victory, settling for a new deal almost indistinguishable from the old one. Most economic newsletters I get predicted a similar outcome for the U.S. and China.
At the same time, the U.S. economy is slowing as the brief sugar high from the 2017 tax cut wears off. Another leader might engage in some self-reflection. Trump being Trump, he’s blaming others and lashing out. He has declared both Jerome Powell, chairman of the Federal Reserve Board, and Xi Jinping, China’s leader, enemies. As it turns out, however, there’s nothing much he can do to bully the Fed, but the quirks of U.S. trade law do allow him to slap new tariffs on China.
Of course, Trump’s trade belligerence is itself contributing to the economic slowdown. So there’s an obvious possibility for a vicious circle. The economy weakens; a flailing Trump lashes out at China, and possibly others (Europe may be next); this further weakens the economy; and so on.
At that point you might expect an intervention from the grown-ups in the room — but there aren’t any. In any other administration, Treasury Secretary Steven Mnuchin, aka the Lego Batman guy, would be considered a ridiculous figure; these days, however, he’s as close as we get to a voice of economic rationality. But whenever he tries to talk sense, as he apparently did over the issue of Chinese currency manipulation, he gets overruled.
Protectionism is bad; erratic protectionism, imposed by an unstable leader with an insecure ego, is worse. But that’s what we’ll have as long as Trump remains in office.
Paul Krugman, winner of the Nobel Prize for Economic Science, is an Op-Ed columnist for The New York Times.