The triple contradiction of Trumponomics could crash the world economy

Globe and Mail

3 days ago

Donald Trump wants three things from the U.S. economy.
First, the U.S. President wants lower interest rates. It infuriates him that his country's baseline rate lingers at 4.5 per cent, which makes it very expensive to service the trillions in national debt his tax cuts have rung up. Washington will need to pay an estimated US$665-billion, more than all its defence spending, on interest payments this year.
Mr. Trump recently posted a list of countries that have lower interest rates, including Canada, with a handwritten note telling Federal Reserve Chair Jerome Powell that rates should be more like those of recession-threatened countries such as Japan or Thailand. This week he went as far as writing (but not sending) a letter firing Mr. Powell, who he called 'a knucklehead' and a 'stupid guy.'
Second, he wants manufacturing to move back to the United States. This is the most plausible of the many, largely fictitious, reasons he's given for his punitive tariffs. U.S. companies, he says, should escape his tariff threat by shutting down branch plants and 'reshoring' manufacturing, especially of labour-intensive products such as smartphones and cars.
Third, Mr. Trump wants fewer working-age people in the United States. Not only has he reduced most forms of immigration to near zero, he is attempting a mass deportation campaign that would throw hundreds of thousands of people, most currently employed, out of the U.S. If he succeeds – and Congress has recently given him the funds to do it – then projections show the U.S. working-age population could decline by 3.3 million workers by the end of this year, and by 8 million by 2030.
Opinion: Trump has already crossed Fed independence Rubicon
Mr. Trump seems unaware that these three policy goals all contradict one another. If he fully achieves any one of them, the other two will become impossible. If he genuinely attempts any two, we will all be hurt by the resulting worldwide economic catastrophe.
The reason why some countries have lower interest rates than the United States is no mystery: Those countries aren't experiencing much economic growth, and need looser money to stimulate it. In most cases, including Canada's, they have higher levels of unemployment, so an upturn in growth would result in increased employment rather than a wage-driven inflation shock.
The United States is in a different position. This week – a day before Mr. Trump threatened the central bank chief – Americans learned their inflation rate had risen to a disquieting 2.7 per cent, largely due to Mr. Trump's tariffs driving up prices of goods. Given that his more dramatic tariffs, such as his threatened 35-per-cent rate against Canada, have yet to take effect, any rate cut at this point would likely trigger a reprise of the pandemic-recovery inflation spike of 2022-2023 – an event whose lingering mood of anxiety contributed significantly to Mr. Trump's election victory.
The problem Mr. Trump faces is not just that the economy is dangerously close to overheating and spiraling into serious inflation, it's that this is in large part due to the extremely tight U.S. labour market. Unemployment in the United States is currently 4.1 per cent – far below the approximately 5-per-cent rate that economists consider 'full employment.' In other words, his country appears to be short several million workers, at the exact moment its President is planning to expel or exclude millions more workers.
Opinion: Trump's trade war madness won't last
That makes inflation much more likely, and higher interest rates more necessary. But it also makes it near-impossible to 'reshore' major industries to the United States. Unlike the successful reshoring initiatives under the Obama and Biden administrations – which were driven by policies and incentives – Mr. Trump hopes manufacturers will simply come back to escape the tariffs. But moving, say, a major car factory from Ontario to Wisconsin would also require hundreds of parts companies to be located close to the plant, thus shifting tens or hundreds of thousands of jobs into a state that's already short of workers.
Even outspoken advocates of reshoring say Mr. Trump's immigration crackdown, amidst already more-than-full employment, makes such moves impossible.
'If he achieves his objective, which is our objective, to let's say increase manufacturing by 40 per cent – that's 5 million workers,' Harry Moser, head of the Florida-based Reshoring Initiative, recently told Wisconsin Public Radio. 'If you don't have the work force, it's not going to happen. There's going to be nobody to man the factories.'
Mr. Trump's deportations and tariffs are driving up inflation and making reshoring more difficult. They're also forcing interest rates to stay high. Cutting rates or reshoring major employers without immigration would provoke unprecedented levels of inflation and likely supply failures. It's the triple contradiction of Trumponomics: Pull hard on any one of his threads, and the whole tent crashes down.