The Economic Situation September 1, 2018 Bruce Yandle With September’s arrival, those seeking to decipher US economic trends are challenged by three daunting puzzles. The Trump adm

The Economic Situation
September 1, 2018
Bruce Yandle

With September’s arrival, those seeking to decipher US economic trends are challenged by three daunting puzzles. The Trump administration’s tariff policy is first and chief among them. Will tariffs be extended to European automobiles? One week yes; the next week no. To additional Chinese products? And will there be retaliation? The second is Fed policy: how many interest rate increases and when? The third is foreign and immigration policy. Although these two policy areas may not normally be thought to be central to economic policy, they affect the flow of people and oil. On top of all this, there is uncertainty regarding treaties and alliances that can have a long-term impact on the performance of the US economy. Mix and stir these ingredients with rocky relations with North Korea and Russia, and Economic Policy Uncertainty Indices hike up. It may be important to remember that higher policy uncertainty correlates with lower growth in US employment. This may be another way of saying that continued high uncertainty can lead, all else equal, to slower GDP growth.

On the trade problem, tariff announcements, threats, and revisions seem to be popping up daily. Understandably, Washington is headquarters for firms and industries seeking protection from foreign competition, appealing for relief from tariffs proposed or already in place or petitioning for relief from markets lost from foreign retaliation. For example, the US auto industry, singing in unison, opposed the imposition of tariffs on foreign-produced vehicles and parts. Some 21,000 US firms sought exemptions from the newly imposed steel and aluminum tariffs. Some firms, such as Whirlpool, that thought they would gain when tariffs were placed on Korean washing machines found that the steel and aluminum tariffs erased those gains. Other calls for mercy came from the previously strong US agriculture sector, now reeling from revenue-crippling Chinese restrictions imposed on soybeans, beef, and other commodities. In this case, the Trump administration responded by implementing a $14 billion government program for supporting the prices of affected agriculture commodities. The Trump response is a textbook example of how one government intervention in the economy − tariffs − leads to more interventions: subsidies.

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