Photo by Josh Beech on Unsplash
Hello,
Welcome to Known Unknowns, a newsletter that is still holding out for tax reform.
Trumponomics
It looks like things are not going well. The stock market (depending on the day) is in correction territory, inflation expectations are elevated, and lots of people are talking about a recession. Also—somehow, or inevitably—people are describing the Trump policies using the a-word: austerity. Though, to be fair, when politicians talk about short-term pain for long-term gain, that is normally what they mean.
I hate the word austerity. It has come to mean any time the government spends less than you think it should. People thought 2011 was a time of austerity because they believed the stimulus should have been bigger. But I digress.
DOGE is not austerity either. Yes, it does aim to cut the size of government and how much it spends, but it has to be viewed as part of a larger strategy to shift resources from the government to the private sector. Paired with tax cuts, it could not be called austerity because it has the potential to boost growth. Tax cuts are stimulus too. The entire Trump economic strategy needs to be judged as a whole, which involves a bigger reliance on the private sector, shifting more production to America or friendly allies (maybe), and enhancing efficiency (dare I say supply-side abundance?).
Now, I have my issues with some of this. I am wary of the execution of DOGE, but I do believe the size of government has become too large, and we aren’t getting much bang for our buck. I believe the private sector is better at allocating capital and labor, so this could produce more growth.
How much obviously depends on tax reform—you can’t judge the program without knowing that piece. Extending existing tax cuts may not do much, but full bonus depreciation and other policies that make investment more profitable will. The big unknown is the corporate rate—it may be cut to as low as 15%.
Pension Geeks know I hate tariffs because they are distortionary. They also pose a cost to consumers and increase the cost of production. But so do corporate taxes. A cut there could offset some of the tariff pain—at least in the short and medium run. Longer term, tariffs are bad for other reasons.
I appreciate that tariffs are now the big economic boogeyman. But depending on how and where they are implemented, retaliation, how the exchange rate responds, and any corporate tax cut—they may not cause as much damage as we think. Or who knows, maybe we’ll end up with “better deals.” I need to cut back on drinking European wine and liquor anyhow.
I do have my issues
I’m not cheerleading everything here. First, I think Trumponomics will increase the debt—tariff revenue will not be enough to pay for all this. Also, the madman strategy is causing lots of uncertainty. Hopefully, it will be resolved—since this level of chaos can’t go on for four years. Or, if it does, it will cause a lot of damage.
My other concern is the strategy of bringing back manufacturing. Even “establishment” people are now saying, “Of course we have to reshore and make stuff here now.” No one—other than economists on X—even debates this anymore. Establishment people always do have a sense of where government largesse is coming from and make sure they are recipients of it. In that way, they are good capitalists—sort of. Three years ago it was greening the economy, now these same people are all about reshoring. That’s a bad sign.
Besides—do we really need to reshore? Is such a thing even possible? I mean, I agree we should not rely on China for vital goods and for what we need to make weapons. But we’re not going to bring back manufacturing. It’s just not going to happen—at least not in a way that makes a big difference to the job market. When I’m being charitable, I think this instinct is about helping America’s man problem—too many prime-age men not working. And this is a big deal that we don’t give enough attention, because it means a significant population is shut out and not thriving.
The instinct seems to be: Let’s bring back the economy of the 1960s when almost all men worked. But that wouldn’t work. Here’s what would: make it easier to move, to change jobs, and reform K–12 education to offer men the skills they need to thrive. I guess tariffs are easier, but all they do is impose a cost we all pay—with not much benefit.
In all, I’d call Trumponomics high risk / high reward, with more debt.
Shareholder value wins the day
There is, of course, one clear winner here: shareholder value. Yup—that prescient essay by Milton Friedman still stands the test of time, and more. Once a corporation strays from maximizing shareholder value, their objective becomes unclear, and what they care about becomes a matter of values—which is not only divisive, it becomes political. Half the country thinks you’re against them. Then the other party comes into office. And then you need to do podcasts disavowing everything you said and did four years ago, and fire lots of people—who may have made your company less productive. They then have to find new jobs and rethink their entire career plans. That may be for the best, but it is wasteful nonetheless.
Just focus on profits. We’ve now seen it is not only good for the economy, it is best for society.
Though I do wonder if it makes sense for defense tech.
In other news
I was on Peter Lazaroff’s podcast.
I also interviewed Jason Furman on City Journal’s 10 Blocks podcast. We spoke about what went wrong with Bidenomics, the same mistakes Trump may be making, and how many policymakers’ understanding of the economy got so out of whack.
Until next time, Pension Geeks!
Allison
"since this level of chaos can’t go on for four years."
Do we have any data that would suggest it can't go on for four years? In my experience, the level of chaos trended higher, not lower, toward the end of Trump's first term, COVID excluded.
Austerity “has come to mean any time the government spends less than you think it should.” This is true, but most people also use it in the context of the reduced capacity for growth that comes with reduced spending and entitlements. More in reference to the hangover than the drinking, so to say.