(Bloomberg Opinion) -- If President Donald Trump hopes to bring economic conservatives back to his side, this was the case he needed to make. In a speech Tuesday at the Economic Club of New York, he offered a strong defense of his record on both economic growth and job creation.
His argument for his trade war, on the other hand, was compelling as rhetoric but utterly lacking as economic analysis.
The president was at his best reminding the audience of the policy stakes. His administration has cut taxes, pursued a deregulatory agenda and encouraged the growth of the U.S. energy industry. As a result, the economy has grown far faster than economists predicted.
All of this is in jeopardy if a Democrat wins the White House. Even a return to the relatively moderate policies of President Barack Obama would mean a reversal on deregulation and a long fight over the extension of the tax cuts. And while Obama pursued a pro-fracking policy, no Democratic president would in 2021.
Trump was also measured in his criticism of the U.S. Federal Reserve, in marked contrast to his Twitter persona. On social media, Trump’s attacks on the Fed inflame fears about over the central bank’s independence. On Tuesday he made the more modest, and largely correct, case that the Fed was too quick to raise rates in 2018 and too slow to lower them in 2019.
As for that trade war: The president admitted that it was taking a toll, but said that the strong economy gave him some room to maneuver. During the Q&A after the speech, an audience member pushed the president further on this point, noting that investment was robust in 2018 but not this year. Trump didn’t dispute the premise, instead responding that the real risk would have been to do nothing.
He thus confirmed something that economic observers have long suspected — that the economy is stuck in an OK-but-not-great path because of the so-called Trump put. The theory is that the president will pursue his trade war so long as the economy is strong, but will dial back his efforts if it appears to be weakening.
A less-than-stellar economy was worth it, Trump said, because the status quo was unsustainable.
Economists have begrudgingly conceded that they underestimated the disruptive impact of increased trade with China. In particular, they didn’t adequately account for adjustment costs.
Standard economic analysis suggests that while trade may lead to job losses in some sectors, it will lead to job growth in others. The problem is that it’s not easy for workers to switch sectors. If the economic shift is gradual, then the natural churn of older workers retiring and younger workers entering the job market will ease the transition. When the shift is rapid, however, hundreds of thousands of workers can be caught mid-career with few good options.
The pressures of trade transition build over time, but they are most likely to result in mass layoffs when the economy falls into recession. This is precisely what happened during the Great Recession. Moreover, while the job market is finally tight again, the scars from that rapid transition remain.
But a new trade war can’t do anything about those scars. Indeed, its likely to make them worse by causing more disruption and uncertainty in the sectors that are most exposed to international competition. This is why the very Rust Belt workers that the president says he is trying to help are suffering the most from his policies.
Nonetheless, Trump doesn’t seem inclined to reverse course on trade. Rather, he is trying to sell workers on a tradeoff: Manageable pain now for better growth later. Unfortunately, this claim is at odds with the facts. His next best argument is simply to remind economic conservatives of the rest of his agenda. That’s what he did so effectively on Tuesday.
To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.
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