Last Thursday, Donald Trump ignored the advice of some of his senior advisers—including the Treasury Secretary, Steven Mnuchin, and the U.S. Trade Representative, Robert Lighthizer—and threatened to impose tariffs of up to twenty-five per cent on imports from Mexico. The very next day, Kevin Hassett, the chairman of the Council of Economic Advisers, who has long been an advocate of free trade, sent Trump a resignation letter that said, “I am looking forward to spending more time with my family and hope to continue to be a resource to you from the outside.”
On Sunday night, after Trump announced that Hassett was leaving, via Twitter, the fifty-seven-year-old economist insisted that his decision wasn’t connected to the President’s passion for tariffs, which last month saw him threaten to expand levies on Chinese goods. “The trade story and the departure story are completely different stories,” Hassett said to the Washington Post, adding that he always saw the White House post as a two-year assignment. (Trump nominated him to the job in April, 2017.)
Even in Washington, coincidences do happen. Let’s take Hassett’s explanation at face value and assume that he was planning to leave anyway. The fact remains that this is an opportune time for someone in his position to jump ship. Although the tax-and-spend stimulus that Congress passed at the end of 2017 and the start of 2018 stoked a period of strong hiring and accelerating G.D.P. growth, the U.S. economy is now sailing into some rocky waters. Whoever replaces Hassett will be taking on a tough job.
The first challenge, obviously, is Trump’s trade wars. As hopes of a rapid trade deal between the United States and China have receded, the stock market has fallen for six weeks in a row, bond yields have plummeted, and economists on Wall Street have issued ever-graver warnings about the possible consequences of Trump’s policies. On Sunday, following Trump’s threat to Mexico, Morgan Stanley warned its clients that it saw “a litany of downside risks,” including “higher chances of recession or a bear market.”
When CNN’s Poppy Harlow interviewed Hassett on Monday, she said to him, “You have long been this big proponent of free trade, not really a big advocate for major tariffs. Is slapping tariffs of up to twenty-five per cent on Mexico good for the U.S. economy?” Hassett, a tax expert who advised John McCain, in 2000, and Mitt Romney, in 2012, knows perfectly well that tariffs are a form of taxation, which would hit American consumers and depress economic activity. But, rather than simply saying no to Harlow’s question, he replied, “What would be good for the U.S. economy would be to get the border situation under control, and it’s clear Washington is so broken that Congress isn’t going to help the President do that.” It was only after Harlow pressed him several times that Hassett conceded the obvious, saying, “If we got to twenty-five per cent tariffs, there would be costs to that, for sure."
Defending the indefensible is part of the job of working for Trump, of course, and it isn’t restricted to trade policy. After a replacement is found for Hassett, who is leaving at the end of the month, the new adviser will also have to wax lyrical about Trump’s other signature economic policy: the Tax Cuts and Jobs Act of 2017. This, too, is getting even harder to do.
The justification that Hassett and other conservative economists offered for the highly regressive tax cuts was that sharply lower rates of taxation on corporations and unincorporated businesses would produce a sustained surge in capital investment, which, in turn, would generate a permanently higher rate of economic growth and significantly higher wages. Nearly eighteen months after Congress passed the Trump-G.O.P. tax law, there is little evidence of any of these things materializing.
The national accounts maintained by the Department of Commerce show that private fixed non-residential investment—the broadest measure of business spending on things like software, machinery, and factories—did pick up sharply in the first half of 2018. Since then, however, the growth rate has fallen back to an annual rate of roughly three per cent, which is far from impressive. In the first quarter of this year, the figure was just 2.3 per cent. With the Federal Reserve Bank of Atlanta’s “GDPNow” estimate for over-all second-quarter G.D.P. growth standing at just 1.3 per cent, it seems possible that there has been a further slowdown in business investment during the past two months.
Why hasn’t cutting the corporate tax rate to just twenty-one per cent prompted more companies to build new facilities and upgrade their information technology? In part, it is because many corporations spent the proceeds from the tax cut on stock buybacks, which can boost the value of the stock-compensation packages that their senior executives enjoy. Last year, according to a study from Citigroup that was recently highlighted by Axios, “companies spent more buying back their own stock than on [capital expenditures] for the first time since 2008.”
But buybacks aren’t the entire explanation for the missing surge in investment. Since the start of this year, Trump’s smash-mouth trade policies have also played a role. “Executives at several companies said lingering trade tensions with China were making them and their customers cautious, raising the prospect that slower business spending could hamper economic growth later in 2019 and in 2020,” the Wall Street Journal reported last month. The Journal’s story appeared before the President issued his latest threat to Mexico, which further alarmed corporate America. The Business Roundtable called it a “grave error” and said it would “create significant economic disruption."
All in all, the economy is exhibiting weakness in some key areas as Trump’s reëlection campaign approaches—for which the White House has only itself to blame. The Trump-G.O.P. alliance was always courting the danger of a letdown toward the end of 2019 and into 2020, as the effects of the big tax-and-spend stimulus started to wear off. That is the prospect facing the Administration now, and Trump’s tariff threats are only adding to the danger that the hangover will be a painful one.
On Monday, the National Association of Business Economics published the results of its latest survey of private-sector economic forecasters, which said that the probability of a recession starting in 2020 is now sixty per cent, up from thirty-five per cent three months ago. “Increased trade protectionism is considered the primary downside risk to growth by a majority of respondents, followed by financial market strains and a global growth slowdown,” Gregory Daco, of Oxford Economics, who chaired the survey, said.
Of course, economic forecasting is an imprecise science—and that is putting it kindly. During his interview with CNN, Hassett dismissed talk of a slump and pointed to a formal statistical model that currently estimates the risk of a recession to be less than three per cent. He could be proved right when he says that Wall Street is overdoing the dangers on the horizon. But, given the recent slowdown in G.D.P. growth, the rundown of the stimulus, the escalation of the trade war, the twitchiness of the financial markets, and the nature of the man in the Oval Office, it is also easy to see why this might end up being a good moment for Hassett to spend some quality time with his family.
