A Recipe for an Economic Downturn?

Even the Wall Street Journal has doubts about President-elect Trump’s tariff-and-tax-cut plans.

Good Morning!

Here are today’s highlights:

• A small manufacturer tries not to think about what the coming tariffs will mean for her business.

• American Express agrees to pay fines for deceiving small businesses.

• As in most disasters, the L.A. fires are producing some economic winners.

• More and more homeowners are risking ruin by going without home insurance.

THE ECONOMY

The Wall Street Journal thinks doing tariffs first and then tax cuts is a mistake: “A review of Trump’s last administration is instructive. After nearly a year of congressional wrangling, the Tax Cuts and Jobs Act was passed in late 2017 and took effect at the start of 2018. It lowered individual income-tax rates, including the top marginal rate, from 39.6 percent to 37 percent. But its biggest impact was on businesses, reducing the corporate income-tax rate to 21 percent from 35 percent. The law was an economic success. Real gross domestic product growth accelerated to 3 percent in 2018 from 2.5 percent the prior year, marking the best year for growth since before the financial crisis. The economy added 263,000 manufacturing jobs that year, the most since 1997.”

• “But Trump’s trade battles soon threw sand into the gears. They began narrowly, with tariffs on solar panels and washing machines imposed in January 2018. Steel and aluminum tariffs followed in March of 2018. Though limited in scope, these affected the economy by disrupting supply chains and raising manufacturing costs. The Peterson Institute for International Economics estimated that tariffs increased the domestic price of steel products by 9 percent, creating 8,700 jobs in the steel industry but at a cost of $650,000 for each one created.”

• “These trade battles led to wild swings in markets. More important, they began to drag on industry, leading to what many analysts termed a ‘manufacturing recession’ in 2019. Manufacturing employment declined by 48,000 from its peak in January 2019 though February 2020. No one knows how this story would have ended if the pandemic hadn’t intervened, but many analysts were concerned that an outright recession was on the way. The ISM Manufacturing PMI, which is effectively a gauge of manufacturer sentiment in the U.S., fell to 47.9 in December 2019, its lowest point since 2016.”

• “This time around, the order is likely to be reversed. The tariffs could also be much wider while the amount of new tax relief is smaller. That seems like a recipe for an economic downturn. ‘Trump’s economic agenda is initially (mostly) negative for the economy, while ‘growth positive’ factors are back-end loaded to the end of 2025 and beyond,’ Longview Economics wrote in a note. The note added that tariffs will effectively act as a tax hike on consumers, similar to high oil prices.” READ MORE