It’s hard to focus on ordinary economic analysis amidst this political apocalypse. But getting and spending will still consume most of peoples’ energy and time; furthermore, like it or not the progress of CASE NIGHTMARE ORANGE may depend on how the economy does. So, what is actually likely to happen to trade and manufacturing over the next few years?
As it happens, we have what looks like an unusually good model in the Reagan years — minus the severe recession and conveniently timed recovery, which somewhat overshadowed the trade story. Leave aside the Volcker recession and recovery, and what you had was a large move toward budget deficits via tax cuts and military buildup, coupled with quite a lot of protectionism — it’s not part of the Reagan legend, but the import quota on Japanese automobiles was one of the biggest protectionist moves of the postwar era.
I’m a bit uncertain about the actual fiscal stance of Trumponomics: deficits will surely blow up, but I won’t believe in the infrastructure push until I see it, and given savage cuts in aid to the poor it’s not entirely clear that there will be net stimulus. But suppose there is. Then what?
Well, what happened in the Reagan years was “twin deficits”: the budget deficit pushed up interest rates, which caused a strong dollar, which caused a bigger trade deficit, mainly in manufactured goods (which are still most of what’s tradable.) This led to an accelerated decline in the industrial orientation of the U.S. economy:
And people did notice. Using Google Ngram, we can watch the spread of terms for industrial decline, e.g. here:
And here:
Again, this happened despite substantial protectionism.
So Trumpism will probably follow a similar course; it will actually shrink manufacturing despite the big noise made about saving a few hundred jobs here and there.
On the other hand, by then the BLS may be thoroughly politicized, commanded to report good news whatever happens.
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