Streetwise Professor

Although I broadly support Trump on foreign policy and many domestic issues (notably immigration) I find his pronouncements and policy proposals on economic issues to be cringey at best, and downright idiotic at worst. As I discuss below, the emphasis is on “his”–many administration policies are actually quite laudable. But when he pontificates on economics–oi.

Tariffs are obviously front and center of any discussion of Trump policies. Here matters are more complex, precisely because one cannot evaluate them purely in terms of economic policy. Yes, like most economists, I believe tariffs qua tariffs are objectionable (with a caveat–see below). But with Trump, tariffs are a negotiating tactic, and even as such not just a means of extracting trade concessions from other countries. He employs them to achieve geopolitical objectives, such as forcing India to wean itself from Russian oil.

Even though one cannot evaluate Trump tariff-o-philia in purely economic terms, certain aspects of his tariff policies are positively daft. The most principled economic argument one can offer for tariffs is derived from the “theory of the second best.” Specifically, yes, tariffs are distorting, but so are other taxes. It is at least conceivable that raising revenue via tariffs is preferable to doing so through other taxes (including future income taxes, capital gains taxes, etc.).

But then Trump completely undermines that defense by promising/proposing to use tariff revenues to give every American a check, $2000 if memory serves. If implemented, this would leave us with all of the distortions of tariffs but none of the fiscal benefits.

Then there is the proposal to prevent corporate purchases of single family homes, purportedly to reduce the cost of homeownership. In justifying this proposal, Trump engages in all the blue sky and apple pie rhetoric about the wonders of home ownership that rationalized the policies of the 1990s and 2000s that culminated in the Great Financial Crisis.

The proposal and the rhetoric fail to answer–hell, even raise–a crucial question: why have corporations invested in single family homes? Are there some other underlying economic factors or policies that have driven this?

My conjecture is that it is the consequence of banking and lending policies adopted as a response to the (housing policy-driven) GFC that made mortgages more expensive and difficult to obtain. People who want to live in single family homes find it more economical to rent them than buy them, and the corporations are responding to that.

So if you believe the post-crisis regulations were needed and beneficial, the corporate purchases are a feature not a bug. Maybe you don’t think that these regulations are on the whole beneficial, but if that’s the case constraining corporate purchases will make things worse, not better. This won’t remove the constraint that is driving the purchases, but will reduce the supply of SF rentals.

In any event, suppressing a symptom without even attempting to understand the cause is a recipe for failure.

And then the other day Trump turns around and says he wants home prices to be higher. Choose one, man.

Then there is the policy of capping credit card interest rates. Here one cannot even make an argument like that for tariffs (i.e., there is some economic benefit that could offset the effect of the distortions). The effect of this will be to harm many of those it is intended to help. Credit card interest rates reflect the credit risk of those who use cards to borrow regularly, and often heavily. Capping rates will result in those people losing cards, and therefore access to that credit. Some will do without credit altogether. Others will turn to even more marginal and expensive sources of credit, such as payday or auto title loans.

All of these policies have something in common: they are fundamentally populist. Populist critiques of the current American system have considerable validity. However, populist policies are seldom salutary responses to those critiques.

The irony is that overall, Trump administration economic policy is pretty good. This is especially true regarding deregulation, with this week’s elimination of the Obama EPA’s CO2 “endangerment” finding being a particularly welcome example, but by far from the only one. Across the spectrum of energy, environmental, financial, and telecom regulation considerable progress has been made.

Maybe the best thing that can be said for Trump’s personal forays into economic policy is that his unmatched ability to attract attention and criticism is preventing critics from going after these good policies with the same intensity they otherwise might. Cringe has its uses, I guess.