Record Income Inequality + Trade War = Recession?

Popular Economics Weekly

The Smoot-Hawley Tariff Act, so called, was imposed in 1930 when the Hoover administration raised tariffs on 20,000 foreign, mostly agricultural, imports in an attempt to protect American farmers as we were entering the Great Depression.
Sound familiar? I mean the part about raising tariffs after the heady prosperity of the Roaring

Twenties followed by the Great Depression. Tariffs were raised after the 1929 Black Friday stock market crash, which panicked investors. It was also a time of record income inequality, when the top 10 percent of income earners owned more than 40 percent of our national wealth, as they do today.

The Trump administration is raising tariffs on steel and aluminum after another 9 years of uninterrupted prosperity, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this business cycle.

No reputable economist attributes the Great Depression solely to Smoot-Hawley tariffs, or Black Friday, or the record income inequality of that time, but these events certainly exacerbated its affects, as factories and banks folded like dominoes in 1930-32, until Roosevelt enacted the New Deal legislation in his first 100 days that put millions back to work and saved the day.

And economic history teaches us the very interdependent trading world we live in today was set up to reduce the costs of production to levels that would allow consumers to benefit from cheaper prices, and cheaper prices meant a larger consumer market, which now powers two-thirds of economic activity in the U.S.

So what can happen when our trading partners reciprocate by boosting their own tariffs on our exports? The cost of everything goes up—not just everything made from aluminum and steel, but soybeans going to China (if they continue to buy them), and Kentucky whiskey popular in Europe.

It’s a No-win situation for American exporters, in the name of national security. In fact, the Trump trade policies are a clear and present danger to U.S. national security, since by breaking up western alliances in order to make alliances with our adversaries and enemies that seek to undermine western democracies, we are breaking away from the only friends that would protect us in the event of a war, as western democracies have done ever since World War II.

Now we have to live with tax cuts that former Fed Chair Ben Bernanke just warned were done at the wrong time for the wrong reason. Pouring more gasoline on already red-hot markets may cause a larger conflagration, but then markets will burn out that much sooner, as happened with the most recent Great Recession after years of easy money busted the housing bubble.

The economic effect of President Donald Trump's $1.5 trillion tax cut and $300 billion bump in federal spending will wear off in two years and then "in 2020 Wily E. Coyote is going to go off the cliff," according to former Federal Reserve Chairman Ben Bernanke.

The stimulus is coming at "the very wrong moment," Bernanke said during a panel discussion at the American Enterprise Institute, as reported by Bloomberg. "The economy is already at full employment." Congressional Budget Office forecasts have the stimulus lifting economic growth this year to 3.3 percent and then 2.4 percent in 2019. But it slows to 1.8 percent in 2020.

And this was a Republican Fed Chairman appointed by GW Bush with the nickname “Helicopter Ben” for his multiple Quantitative Easing programs that showered money on the U.S. economy in order to prevent the Great Recession from turning into the Great Depression.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress. “That amount is far greater than the debt in any year since just after World War II,” CBO said, adding that the debt is now about 77 percent of GDP, a measure of the size of the economy.

The Republican tax legislation, passed by Congress without Democratic support, along with a recent bipartisan $1.3 trillion spending package, are expected to drive economic growth faster than initially expected, CBO said.

Now is not the time to shower more money on the U.S. economy that the Congressional Budget office has also said will benefit just the top 10 percent of income earners, and actually reduce wealth and benefits for the rest of US.

Why does this look like 1929 is happening all over again?

Harlan Green © 2018

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