Protectionism: Trump’s Black Swan

Coming out of the election, a fragile economic recovery gained instant momentum. We experienced a wave of confidence sweeping across the investment world as change, away from an anti-business environment, seemed inevitable. The president is trying to pull a triple-play; Relieve over-regulation, pass real tax reform and, as it turns out, be a protectionist.

The first two are the life blood for a marketplace starving to free up seed capital which grows the economy. On the other hand, the protectionist ideology which has crept into the agenda must be resolutely resisted at all cost!

Upon examining the first two parts of the Trump’s agenda one can understand that overregulation had become an obstacle to growth over the last few years. It became necessary to clean up the regulatory mess. Whether it was the EPA with stringent standards making it next to impossible to build a new refinery, or the NLRB insuring interference with Boeing’s move out of Washington state, congressional and executive actions were choking off growth. The Trump election and subsequent sweep of congress changed that mentality overnight. It was time to unleash the suppressed American entrepreneurial spirit.  

The first part of the agenda was simple. Over regulation was a job killer and Trump knew that. He did what was necessary to relieve the burden built over years of beaurocratic gluttony.

The second part of the president’s agenda was tax reform. Since there is so much comparison to Reagan and supply side, a review of the effects of the Reagan tax cuts on the economy is good analysis.  In 1981, the Economic Recovery Tax Act (ERTA), reduced personal tax rates by about 25 percent. The claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is not correct.

The official Reagan revenue projections following enactment of ERTA, did not have huge revenue increase projections. In fact, they were very close to the Democrat controlled CBO revenue projections which showed that deficits would fall after the enactment of the Reagan tax cuts. The fact is that individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989. The Trump tax plan which took corporate tax rates down to competitive global levels is precisely what the economy needed to grow. Reagan proved that and, as Larry Kudlow points out in his latest book, JFK and the Reagan Revolution: A Secret History of American Prosperity, Kennedy knew that too.

Unfortunately, protectionism is another story altogether. The announced tariffs on steel and aluminum are a disaster waiting to happen. As a huge believer in free markets and global trade, the very notion of incorporating protectionist measures into a responsible pro-growth agenda nauseates me! In May 1930, the Smoot-Hawley tariff was signed into law by then President Herbert Hoover, which was followed by massive retaliation on U.S. made products from our foreign trading partners.

The Smoot-Hawley tariff, or as I call it the poison, helped bring about one of the worst periods for the US economy in history. SH was supposed to stimulate growth, increase tax revenues and reduce the budget deficit.  Flawed logic led lawmakers to believe that the American public would ‘buy American’ which would lead to growing U.S. production and an increase in jobs. Does that sound familiar?

The best description of Smoot-Hawley is by the Department of State after an analysis of the events: ‘The Smoot-Hawley tariff ‘provoked a storm of foreign retaliatory measures’ and came to stand as a symbol of the 'beggar-thy-neighbor' policies (designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade.’

By circumstances, we find ourselves as the bearers of free market ‘American’ style capitalism which has helped lift billions of people around the world out of poverty. Globalization, and the free markets which make it a reality, must be nurtured and fostered by those who helped created it, the United States. Whether we like it or not, we are the vanguard of modern day capitalism. 

The US has inherited the title of policeman for the worlds’ free markets. A protectionist mentality at the forefront of international trade will only prove to be a hindrance; Something which every free market economist understands to be a dogmatic fact. In a fragile, global political climate free markets for trade could only prove to be an asset towards peace.

If there is a Black Swan looking to hit the market unexpectedly, let’s hope it’s not a self-inflicted wound caused by an ill-advised move towards 1930’s style protectionism. President Trump should take the ideas of tariffs along with other brilliant pieces of failed liberal legislation such as the windfall profits tax and bury them deep in a governmental ‘Black Hole’. Now is the time for the US to step-up and proclaim the power of the free markets, not put up barriers to free trade.

The Trump pro-growth agenda has shown great potential and progress relieving the economy of over regulation and lower taxes to reasonable levels to enable growth…now if they can only get this tariff thing right we should be in great shape.