Trumps policies falter; 'The economy, stupid' -- once again

 

Gordon L. Weil

“The economy, stupid.”

That phrase, posted by strategist James Carville in Bill Clinton’s 1992 campaign headquarters, has entered American political mythology as a revelation of dazzling brilliance and simplicity.

It isn’t.  It’s an eternal political truth; campaigns are always about the economy, though that’s not always recognized.

Inflation is the immediate problem.  Reacting to voter unhappiness with prices under the Biden presidency, Trump promised: “Starting on day one, we will end inflation and make America affordable again, to bring down the prices of all goods.”  Apparently, many voters, having lost faith in the Democrats, believed him.

Yet, inflation in September was higher than in the last full month of the Biden administration.  Trump runs the risk of facing the same kind of voter frustration with prices that brought him to office.

He asserts that the economy is sound, and people will soon see that he has kept his campaign promise.  Of course, that’s not quite the same as the “day one” promise.

Trump may claim that all is well and getting better for several reasons.  The stock market is soaring, and he may see it as a good representative of the national economy.  Yet its performance might reflect excess optimism about the rapid deployment of AI, which may not happen.  If that bubble bursts, it could harm both the market and the economy.

He may also be only looking at a slice of the American public.  Surveys suggest that Republicans, the wealthiest people and investors are positive about the economic outlook.  But they are out of step with everybody else.  While they wield great economic power, they are not the mass of voters.

Trump’s tariff policy contributes to inflation, though not as quickly as foreseen in some dire forecasts. His team takes credit for the limited early impact, ignoring the lags inherent in economic change, and that inflation will thus increase as the months roll by.  Importers will absorb less of higher tariffs than at the outset, with more costs being passed on to consumers.

By applying across-the-board tariffs, Trump failed to take account of American dependence on certain products that cannot be replaced by U.S. production.  Big price increases have occurred in coffee, women’s clothing and electronics.  Seeing the trend, he has begun lowering some agricultural tariffs.  There may be more reductions to come.

When President Reagan took office facing high inflation, he left it to the Federal Reserve to take the unpleasant measures needed to lower it.  The policy amounted to saying it will hurt more before it gets better.  Reagan remained blameless, while the Fed raised interest rates.  The Fed tamed inflation, but caused much pain in doing it.

By contrast, Trump has plunged in and tried to get the Fed to cut interest rates, which he argues will promote growth.  His pressure may have influenced the Fed, slowing a reduction in inflation.  To the extent that his policy fails, Trump, unlike Reagan, may get the blame.

Housing is a special problem, with demand exceeding supply.  Inevitably, that scarcity drives up prices.  One underlying factor is that by eliminating immigration, the government has cut labor force growth needed for housing construction.

The tariff policy has also had an unanticipated rebound effect.  The U.S. may cut imports and bring production home, but it may lose exports due to retaliation.   After U.S. auto tariffs forced two American carmakers to close some Canadian production, Canada removed a tariff-free exemption on some of their exports to its market, costing the carmakers solid sales. 

One key to Trump’s approach is his heavy reliance on cheerleading to overcome people’s worries about the economy.  An old song included this line: “Wishing are the dreams we dream when we're awake.”  

Unlike the song’s lyrics, wishing won’t make it so.  Trump offers dreams more than paycheck reality.  People pay the price at the check-out counter, an experience that Trump may have missed.  No amount of telling them that it will soon be better, without evidence for the claim, can change the higher costs that people pay.  Dreams can become nightmares.

Trump’s problem, one he shares with many others who have occupied the White House, is in taking responsibility for the state of the economy.  This overstates presidential influence; the economy is usually influenced by a myriad of factors outside of their control.  

In this case, however, Trump’s trade, immigration and Fed games have put him squarely in the game.  He exudes confidence in these initiatives, while they produce uncertainty and come up short on promised results.

Even if he abruptly alters policies, the inevitable economic lag will mean the effects of his past moves will be felt next year.  In short, he has handed Democrats a major issue to boost their 2026 congressional campaigns.  The economy, stupid.