Catherine Rampell: Trump's two worst economic ideas collide

On Friday, at 12:01 pm, President Trump's two worst economic ideas finally collapsed and escalated.

Admittedly, this president has adopted many terrible economic theories (tax cuts pay themselves, government closures are fun, crooks should walk freely, etc.). But the specific bad ideas I'm talking about are:

1. Trade wars are good and easy to win; and

2. It makes sense for the president to publicly strike the Federal Reserve.

Last fall, Trump began to complain about the Fed's interest rate hike, in defiance of the decades-long White House policy of never commenting on the decisions of the Fed. Fed. The reason for this norm is clear: central banks must be politically independent, both in practice and in their perception, in order to be able to make a credible commitment to price stability. If the public believes that it is politicians rather than independent technocrats who control the printing press, inflation can easily degenerate. Many other countries throughout history (Venezuela, Argentina, Italy prior to the euro) have served as warning tales.

But none of this was of importance to Trump. He launched crises on modest interest rate hikes by the Fed, saying they threatened both the US economy and its presidency. At one point, it was even reported that Trump was considering taking the unprecedented and cataclysmic step of dismissing the Fed chairman whom he named, Jerome H. Powell.

Markets have been careful. It turned out that China too.

According to the Wall Street Journal, Beijing has noticed the latest Trump crises related to the Fed and interpreted them as evidence that the president was panicked about the underlying health of the US economy. They suggested that he could be secretly desperate to reach an agreement, no matter what deal, with China.

In other words, our main negotiator did not understand that endorsing the Fed is not only detrimental to the long-term credibility of the central bank; this has also hurt its short-term trading position with China.

After having previously expressed its willingness to make serious concessions, China has started playing hard. Negotiations failed, then Trump reacted by doubling existing tariffs on Chinese imports for $ 200 billion, from 10% to 25% Friday. It also threatened to add an additional $ 325 billion in tariffs for untaxed Chinese products.

Trump seems to believe that these tariffs are an end in themselves because they bring "wealth" to the country by forcing China to pay "billions" to the US Treasury.

This is, to be clear, incorrect.

Two separate studies by teams of star economists revealed that 100% of the tariffs imposed by Trump were transferred and paid for by US consumers. One of these studies also revealed that it was the workers of the very Republican counties who were the most affected by Trump's trade wars, thanks to the President's customs duties on our imports and the mutely ruthless reprisals inflicted on our exports. .

In other words, Trump's war with the Fed compounded his trade war. And in a particularly painful turn, the trade war could also soon intensify its war with the Fed.

After all, the worsening of trade tensions could put the Fed in a stalemate. Escalating tariffs is likely to increase uncertainty, slow down business investment and hiring, and ultimately curb growth. But it could also drive up prices because, as noted in these studies, the cost of tariffs so far has been passed on to US consumers.

This first effect – a slowdown in growth – would prompt the Fed to relax its monetary policy. The second effect – higher inflation – could instead push the Fed towards tighter Monetary Policy. If the rise in inflation is clearly due to a transitory shock (such as a single increase in tariffs), Fed officials should ignore it; But even then, it may be difficult to say exactly what is behind a given change in the pace of price growth.

Powell recognized these challenges when Marketplace's Kai Ryssdal asked last year about the tools available if trade wars slowed down the economy:

Powell: We basically have our interest rate tool. Therefore, if the economy weakens, we can lower interest rates. We can slow down the pace at which we increase them. This could have an effect on inflation. I do not want to, as you know, dive into a lot of assumptions, but I would say you can imagine very difficult situations, where inflation goes up and the economy weakens.

Basically, the escalation of trade tensions could further complicate the already difficult work of the central bank more fodder for Trump to complain about Fed policies.

The moral of history: Neither trade wars nor the wars of the Fed are good and easy to win. But especially not when you fight simultaneously.