UNDOING THE DAMAGE
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FORTUNE.COM // DECEMBER 2019
That’s trouble because uncertainty hurts economies. We all
know from life experience that uncertainty paralyzes, but if you
aren’t convinced, a large body of economic research supports the
point. Many studies show that companies invest less and hire less
when uncertainty is high. As companies stop reallocating capital
and labor, productivity and output slow down. It gets worse. Even
as greater uncertainty freezes business activity, it also subverts
efforts to fix the problem because it makes consumers and com-
panies less responsive to cuts in interest rates and taxes. So it’s
possible that Trump-induced uncertainty is taking the oomph out
of his own tax cut and the Fed’s rate cuts.
The result is significantly slower economic growth. Economists
at the Fed recently calculated that trade policy uncertainty had
reduced GDP 0.8% by mid-2019 and would reduce it 1% by mid-- Those are big numbers in a slow-growing economy. For
Trump the slowdown is a self-inflicted wound, but U.S. businesses
(and consumers) are feeling the pain.
debt and deficitsTHE U.S. HAS ENTERED UNEXPLORED financial territory in the past three
years as Congress and President Trump put the federal government
much deeper into debt while the economy is growing. Plus-sized
federal deficits are standard practice in recessions, but not during
expansions. Yet soon after the Tax Cuts and Jobs Act became law,
Congress passed extra-large spending bills, which, together with
the tax cuts, caused the deficit to mushroom; Maya MacGuineas,
president of the nonpartisan Committee for a Responsible Federal
Budget, called it “fiscal malpractice.” This past July, Congress
passed another lavish spending bill that MacGuineas said “may
end up being the worst budget agreement in our nation’s history.”
The result, the Congressional Budget Office forecasts, is trillion-
dollar annual deficits for at least the next decade.And that assumes no recession, which prob-
ably is not realistic. Recessions automatically
increase deficits as tax revenues shrink and
spending grows, because more people apply
for unemployment benefits, food stamps, and
other benefits. So the CBO forecasts almost
certainly understate the weight of the debt bur-
den that Washington has loaded onto future
generations.
Trump obviously didn’t do this by himself.
Just the opposite: Both parties abandoned fiscal
responsibility with gusto. But a President is
the natural leader of fiscal policy, and of course
none of it can happen without his signature.
Federal debt and deficits are a long-term
problem that most likely won’t hurt business
this year or next or the year after. But it can’t
be avoided forever. “There’s uncertainty about
how you resolve it,” says Holtz-Eakin. “If you
do it with a sovereign debt crisis, that’s not a
growth strategy. High taxes are not a growth
strategy. The solution won’t be good, and it’s
only a matter of time before we have to face it.”
It wouldn’t be complicated for Trump to
transform himself back into a President who’s
good for business. “When you’re in a hole, stop
digging,” advises the Tuck School’s Matthew
Slaughter. Businesspeople would love an
immigration policy that prioritizes the value
immigrants can bring to the economy rather
than keeping people out. They want China to
stop forcibly extracting U.S. technology and
intellectual property, but they don’t want the
U.S. economy held hostage in the process. And
they’d like it all done in a stable, rational, pre-
dictable way, which is the way they try to run
their businesses.
Doing all this wouldn’t be complicated
in theory. But in practice it appears almost
impossible. Trump’s stances on immigration
and trade were the central themes of his 2016
campaign, and all evidence suggests they’ll be
at least as important in 2020. Unpredictability
is part of his essence. Asking him to change any
of these things would be asking him to repudi-
ate what got him to the White House when ev-
ery expert on the planet said he couldn’t do it.
He isn’t going to change course. For busi-
nesspeople, today’s Trump is no longer the
friend he briefly was.FEEDBACK [email protected]
“Unwinding the tariff situation
with China will take a longtime. It shouldn’t, but it will.He’s Tariff Man. Lord knowswhat he’s going to do with therest of the world. ”