A week into the Trump administration and things are going swimmingly with a brewing trade war with Mexico and a terrifying window into Donald Trump's deranged psychology. Trump is already backtracking on campaign promises to leave Social Security and Medicare alone and not to just rip health insurance away from the tens of millions of Americans who gained it with Obama, letting the GOP-dominated Congress have their way with those life-saving programs.
On the other hand, as Paul Krugman pointed out in Friday's column, Trump "appears serious about his eagerness to reverse America’s 80-year-long commitment to expanding world trade." When the White House said it was considering a 20 percent tariff on imports from Mexico Thursday, it signaled a whole new level of willingness to violate all of the country's trade agreements.
"Why does he want this?" Krugman asked rhetorically. "Because he sees international trade the way he sees everything else: as a struggle for dominance, in which you only win at somebody else’s expense."
It was all there in his menacing inaugural address, in lines like,“For many decades we’ve enriched foreign industry at the expense of American industry,” the threats to impose tariffs and the Steve Bannon's turn of phrase about “rusted-out factories scattered like tombstones across the landscape.”
Krugman isn't buying it.
Unfortunately, as just about any economist could tell him — but probably not within his three-minute attention span — it doesn’t work that way. Even if tariffs lead to a partial reversal of the long decline in manufacturing employment, they won’t add jobs on net, just shift employment around. And they probably won’t even do that: Taken together, the new regime’s policies will probably lead to a faster, not slower, decline in American manufacturing.
How do we know this? We can look at the underlying economic logic, and we can also look at what happened during the Reagan years, which in some ways represent a dress rehearsal for what’s coming.
Now, I’m talking about the reality of Reagan, not the Republicans’ legend, which assigns all blame for the early-1980s recession to Jimmy Carter and all credit for the subsequent recovery to the sainted Ronald. In fact, that whole cycle had almost nothing to do with Reagan policies.
What Reagan did do, however, was blow up the budget deficit with military spending and tax cuts. This drove up interest rates, which drew in foreign capital. The inflow of capital, in turn, led to a stronger dollar, which made U.S. manufacturing uncompetitive. The trade deficit soared — and the long-term decline in the share of manufacturing in overall employment accelerated sharply.
The Rust Belt was born under Reagan, in fact. And Saint Ronnie, supposed lover of free markets, was also a fan of protectionism, Krugman noted, citing his quota on Japanese car exports as having cost American consumers dearly.
Trump is Reagan on steroids, and to extend the metaphor, the steroids are affecting Trump's mood as well. Reagan did not out and out violate existing trade deals as Trump is poised to do. Tax cuts for the rich are coming and the deficit will surely grow as a result, which suddenly does not seem to bother all the hypocritical deficit scolds of the last eight years. Trumpian levels of protectionism may help some American manufacturers, Krugman conceded, but "it will also drive the dollar higher, hurting others."
There is also the fact that the world economy has become so globalized in the intervening years that the parts complex products like cars and planes are made in various countries. Krugman thinks taking a "meat ax to the agreements that govern international trade" will result in "huge dislocation: Some U.S. factories and communities will benefit, but others will be hurt, bigly, by the loss of markets, crucial components or both."
Who will be most hurt by the coming Trump shock? Lots of folks, but especially the white working-class voters who bought the snake oil Trump was selling.