Regular visitors to this space know that I’m not an unequivocal admirer of Donald Trump. However, credit where it’s due, I have to praise some of his policies.
For example, his contempt for net-zero madness strikes a tingling chord of sanity in many a wounded heart. Even if Trump doesn’t manage to whip some sense into other countries, committing America to a bright hydrocarbon future is bound to have an invigorating knock-on effect on all of us.
As the US drills and fracks her way back to energy autonomy, oil prices will collapse globally, making things cheaper all over. By way of side benefit, Russia’s aggressive potential will be degraded, and assorted Middle Eastern tyrants will find it harder to blackmail the West.
Also, Trump’s intention to streamline central government comes straight out of the conservative – which is to say sensible – playbook. His success in that area would ease inflationary pressures on the economy, for it’s excessive public spending that’s chiefly responsible for inflation. It would also curb the meddling instincts of federal bureaucrats, which would have all sorts of positive effects, and not just economic ones.
The numbers Trump cites when talking about the scale and effect of such cutting strike me as a bit fanciful, but there is no denying that on that subject his heart is in the right place. Whether or not he and Elon Musk will be able to do what they intend is something else again.
They may find, as many before them have found, that the so-called deep state is quite resilient. Its core is surrounded by abattises and moats keeping interlopers at bay. Such defences have so far proved impregnable. For example, a similar offensive by the Reagan administration got stuck in the quagmire of federal bureaucracy.
The problems come not only from the necessary scope of changes – and it’s massive – but also from the time available for making them. Barring a constitutional upheaval, Trump only has four years at his disposal to cut the federal bureaucracy down to size, which makes him a man in a hurry.
Yet even with the best will in the world, haste seldom makes anything other than waste. An attempt to blow up an edifice that has taken at least a century to construct has to produce a toxic fallout that ideally should be spread over a lofty timeline. Cutting in one fell swoop whole departments employing hundreds of thousands of paper pushers may create shockwaves of chaos, and it’s not a foregone conclusion that these could be attenuated quickly.
Still, if Trump is serious about this, and I think he is, we should all wish him as much luck as he is going to need. Who knows, if America prospers by a decisive shift from centralism to localism, her example may even inspire Europe to mitigate its own affection for socialism, although that hope is slight.
Going hand in hand with reducing the inordinate size and wilful incompetence of federal agencies is Trump’s sincere commitment to cutting taxes. As a practical man of action, and one who has felt the lifetime noose of taxation on his own neck, Trump doesn’t need Arthur Laffer to instruct him on the destructive effects of extortionate levies.
He knows that higher tax rates don’t necessarily produce higher tax revenue, but they inevitably produce lower productivity, slower business activity and eventually stagnation. In modern, variously socialist, economies, taxation is anyway more punitive than economic. It is a weapon of class war, its battering ram. And say what you will about Trump, but a socialist he isn’t.
However, his plan of firing the first salvo in trade war will undo all the good things he hopes to achieve. Trump’s hands-on experience in economic activity didn’t prepare him for tackling the issue of tariffs, and he has little education to plug the gaping holes in his knowledge.
His plan of introducing 20 per cent tariffs on all imports (60 per cent on Chinese ones) is a three-foot blanket covering a six-foot body. If you pull it over your cold feet, the rest of you will freeze.
By protecting malfunctioning industries the state diverts to them the resources that could be more profitably spent to bolster others. By resources I don’t mean state subsidies – those are usually counterproductive – but the natural flow of capital from end user (other industries or consumer) to manufacturer.
Saved from more successful competitors, the protected industry loses incentives to lower the price of its products and improve their quality. Prices go up, inflation follows in their wake, the net effect on jobs and overall prosperity is negative.
The theory of this was established by Adam Smith in The Wealth of Nations: “To give the monopoly of the home-market to the produce of domestic industry… must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.”
Now, Trump doesn’t strike me as an avid reader of economic theory or anything else. But he should heed the voice of practical experience, including his own in his first term.
This will tell him that the mantra of saving American jobs by protectionism simply doesn’t wash this side of demagoguery. Dominic Lawson helpfully provides the numbers in today’s Times:
“Take the example of Trump’s 2018 steel tariffs, designed to preserve jobs in US steel manufacturing. Unfortunately there were more than 12 million jobs in US industries that used steel in their production process – and whose costs soared. A 2020 report by the US Federal Reserve board of governors suggested the steel and aluminium tariffs were linked to a loss of 75,000 US manufacturing jobs; there had been an increase of only about 1,000 in ‘protected’ US steelmaking jobs.”
Edmund Burke, whom Trump probably hasn’t read either, also wrote about the deadly effect of state interference in the economy: “The moment that government appears at market, all the principles of market will be subverted.”
And a government kicking off trade war doesn’t just “appear at market”. It barges in with destructive force. Hence catchphrases like “Buy American” or “Buy a foreign car, put 10 Americans out of work” may work as bumper stickers or campaign slogans, but they are economically illiterate.
I wonder if Trump actually realises that his lifelong affection for protectionist tariffs is at odds with his professed commitment to free markets. If he doesn’t, I hope his advisers explain the facts of life to him before it’s too late.
If he sets off a global trade war, the casualty rate will be appalling everywhere, including the US. After all, some 60 per cent of global GDP is generated by world trade. Throw a monkey wrench into those works, and there will be no winners. We’ll all be part of collateral damage.