Trump-economics: The Law of Unintended Consequences

This current economic boom began under the fiscal and monetary policies of the Obama administration, although Mr. Trump takes credit for it all. His shoveling of trillions of dollars of unnecessary tax cuts to corporate America tanked the deficit by trillions of interest-bearing dollars, resulted mostly in stock buybacks and dividends benefitting the richest in the land but produced almost no new investment capital. Put more money into a corporation, even if it is not generated by running a profitable business, and of course the stock price will soar, especially when you keep interest rates low. It has little to do with productivity.

Jobs? Unemployment numbers? If you do not peel back the surface numbers, the numbers are indeed impressive. But for 70% of working Americans, the rising costs fomented by truly ill-thought out economic policies, the net result is no result. Buying power is stagnant, and we have never had so many working-years-adults simply give up looking for work. Lots of work in the gig and part-time economy, with no benefits or job security, and lots of folks having to hold down two (or more) jobs just to make ends meet.

But what really brings home the failure of Trump’s economic policies, where multinational trade agreements are replaced by one-on-one trade negotiations and simply ignoring the most basic laws of supply and demand, are the industries that Trump has pledged to turn around to Make America Great Again. Not only has the global aversion to coal-fired power generation continued to escalate – resulting in the closure of even more U.S. coal mines and the reduction of that work force – but where Trump has imposed high tariffs to “create more jobs in the U.S.,” the blowback has produced very much the opposite result.

Some companies have been forced to shift their global manufacturing outside the United States to avoid being caught up in the retaliation from other nations against U.S. tariffs against their goods. Look at General Motors’ closing traditional plants in Ohio and opening up new manufacturing centers in Mexico. Where manufacturing “reshoring” has returned to the United States, it has not resulted in massive numbers of high-pay manufacturing jobs being recreated; robots do that work now, and the companies that own that automation now earn the money that once was paid to workers.

As climate change flooding – against the “climate change, what climate change?” policies of the Trump administration – has slammed Midwest farmers, his “national security” driven tariff wars have changed international buying patterns, allowed new agricultural competitors to replace what used to be American agricultural exports and taken a big bite out of U.S. farming income (even with his federal handouts). And as Trump proselytizes gasoline-powered vehicles with lower emissions standards, the global marketplace simply is turning it back on that business plan. 

We truly understand why Trump was a subpar student at Wharton. Understanding the complexities of economics wasn’t really his thing. Tariffs, which have historically failed to deliver as most economists will tell you, just don’t work. Simple and make for great slogans. They just don’t work. When Trump announced massive tariffs on steel and aluminum imports, he presented American metal workers with a vision of endless high-paying jobs. They would no longer have to compete with cheap foreign steel and aluminum, and America would bring those jobs back.

Construction took the first hit, but that was quickly followed by a realization that any sector of the U.S. economy that relied on these materials, from construction and car-making to manufacturing appliances, was going to have to raise prices (or reduce profits) for their end products. Another motivation for American manufacturers to move overseas. There was a moment, however brief, when a few aluminum and steelworkers got a boost, but that did not last long. Without massive new investment, the overall U.S. steel industry just is not competitive at any level.

Matt Townsend and Joe Deaux, writing for the July 9^th Los Angeles Times, drill down on the blowback in the steel industry as a good example: “President Trump’s tariffs on foreign steel have sped the decline of some of the U.S. mills he vowed to help.

“Exuberance over the levies dramatically boosted U.S. output just as the global economy was cooling, undercutting demand. That dropped prices, creating a stark divide between companies such as Nucor Corp., which uses cheaper-to-run electric-arc furnaces [pictured above] to recycle scrap into steel products, and those including U.S. Steel Corp., with more costly legacy blast furnaces.

“Since Trump announced the tariffs 16 months ago, U.S. Steel has lost almost 70% of its market value, or $5.5 billion, and idled two furnaces in mid-June that couldn’t be run profitably at the lowest prices since 2016. Meanwhile, Nucor, down about 20%, has touted $2.5 billion in expansion projects.

“The president’s actions probably ‘sped up’ an unavoidable ‘evolution,’ Nucor Chief Executive John Ferriola said in an interview last month. ‘Are some companies going to suffer? Absolutely. We’ll see some capacity go away, I’m sure of it.’

“Last July, Trump stood on a makeshift stage at a U.S. Steel mill in Granite City, Ill., and beamed as workers cheered the tariffs. At that point, the company had already restarted one of two blast furnaces at Granite City, and vowed the second would soon be brought online… ‘Workers are back on the job, and we’re once again pouring new American steel into the spine of our country,’ Trump said during the hourlong program. ‘U.S. Steel is back.’

“Since then, though, there’s been a somewhat different outcome… With the stronger steelmakers aggressively boosting capacity to grab market share, a dip in demand has left older, more costly blast furnaces at U.S. Steel and AK Steel Holding Corp. struggling to compete, even with foreign steel nudged out of the equation.

“‘Be careful what you wish for,’ said Timna Tanners, an analyst at Bank of America who has dubbed the industry’s push to add capacity without enough demand ‘Steelmageddon.’ She called it ‘ironic’ that the tariffs are ‘punishing some steel companies.’…

“A spokeswoman at U.S. Steel declined to comment. AK Steel said its products have little overlap with electric-arc furnaces, or EAFs, and that the additional capacity will further pressure imports… As expected, the tariffs reduced steel imports, creating more demand in 2018 and boosting profits. With that cash in hand, added money from Trump’s corporate tax cut and confidence that protectionism is here to stay, domestic producers began adding more capacity than they would have otherwise.

“The problem: This year, with the global economy cooling, demand — and prices — has fallen. That’s given an added incentive to EAF companies with superior profit margins and balance sheets to aggressively grab a bigger share of the market.” Trying to force massive changes in the marketplace with market-distorting and ill-conceived polices generally does not work… and Trump’s economic policies have been particularly ineffective. Consumers pay more, foreign competitors step in to replace what the United States used to export, and we make enemies with companies and nations the world over. Think they will forget anytime soon?

              I’m Peter Dekom, and if The Art of the Deal is constantly getting slammed by the law of unintended consequences, then Donald Trump is indeed the unrivaled master of that universe.