Trump Goes To War

We went to war last night.  It's a trade war, so you probably didn't see stirring footage on CNN.  Trade wars are almost always disasters.  Since World War II, the United States has led the way in creating an international business order that relies on reducing and eliminating tariffs.  The reason is that the history of tariffs is the history of exacerbating the "business cycle."  The best example of this is Smoot-Hawley tariff during the Great Depression. 

Most depressions are demand-based. With the absence of consumer demand, the economy slows, which reduces consumer demand, which slows the economy and so on.  Adding a tariff reduces external consumers.  If Americans aren't buying your goods, and then the Europeans aren't either - because of tariffs - your demand sinks further and the depression deepens.  The history of protective tariffs from the 1820s through 1945 is a history of global depressions.  With the increased productivity of the industrial revolution and the interconnectedness of trade, tariffs proved to accelerate local and regional economic downturns.

The "invention" of modern macroeconomics by John Maynard Keynes created the idea that demand was central to economic health, and free trade smoothed out and increased demand.  GATT was created after World War II as a response to the lessons of Smoot Hawley, a massive tariff that basically shut down trans-Atlantic trade in 1930. 

Since the creation of the global free trade regime by the United States, the advanced global economies have managed to avoid the crushing depressions that typified the late 19th and mid 20th centuries.  The closest we came was 2008, which of course was partially created by the globalization of finance since 1980.  Trump's trade war has nothing to do with the globalization of finance.

Instead, Trump has - as per usual - focused on solving problems that don't really exist.  Violent crime?  It's been decling for years.  Immigration?  Also declining for years.  Chinese currency manipulation? Stopped a few years back.  Now we can add trade wars.

As Ezra Klein notes, Donald Trump has bizarre polling numbers.  While they are as low as people like Reagan, Clinton and Obama at similar points in their presidencies, those three presidents had struggling economies in their second year.  Trump is presiding over the late stages of a long recovery and expansion.  Just yesterday, Bloomberg (I think) ran a piece about how full employment could force wages to rise.  (This prompted people in my Twitter feed to respond, "That's what's supposed to happen.") 

A trade war could create a wave of economic hardship that could force Trump's approval into the 30s.  Europeans, being more versed in actual policy, will target their tariff reprisals at "red state" businesses, like agriculture and heavy industries.  Of course, nothing will penetrate the Fox News/Deplorable bubble, but sufficient economic hardships could knock away one of the few traditional supports that Trump's popularity still enjoys.