Normally, any one person’s decisions have little economic effect… but we’re not in normal times.

Last year voters in the world’s leading democracy gave one person – Donald Trump – vast power over their economic fate. We who analyze the economy for a living are therefore in the awkward position of having to analyze Trump.

As I wrote back in March, this president has few external constraints. He can get almost anything he wants. The challenge is figuring out what he wants.

Source: Pixabay

We can’t see inside his head. We can, however, think about where his goals and methods will logically lead.

Let’s start with tariffs.

Trump has been remarkably consistent on trade issues. Going back to the 1980s, he’s said other countries are taking advantage of US weakness, trade deficits are terrible, and tariffs are great.

Right or wrong, he really, really believes those things. We should expect him to act accordingly.

That’s what is happening, too. Congress has given presidents broad authority to impose tariffs. Previous presidents used it more sparingly. Trump isn’t.

Nor does Congress seem interested in stopping him. They could pass laws limiting the various legal provisions Trump is using. Sen. Rand Paul (R-KY) even introduced a bill to that end. It’s going nowhere.

For now, at least, majorities in the House and Senate are willing to let Trump do whatever he wants. Some may not like it, but they’re also not stopping him.

Could the courts force a change?

Various legal challenges are moving through the process. Ultimately, though, I suspect the Supreme Court will defer to Congress. Legislators have the ability to change the law. If they choose not to use their authority, this court isn’t likely to override them.

Source: Pixabay

If Congress and the Supreme Court aren’t barriers, what else might stop Trump?

He’s shown signs of listening to the businesspeople in his political base. Just last month I wrote about his order to stop rounding up the immigrant workers whom farmers and hotel owners need.

But the ICE raids resumed within days. The Republican business owners who are being hurt by tariffs may have less influence than they thought.

Only one force has successfully slowed Trump’s tariff campaign: financial markets.

Back in April, when he announced “reciprocal tariffs” on almost the whole world (including penguins), stocks plunged, the dollar fell, and bond yields soared. Trump noticed, saying markets were getting “a little yippy.” Then he postponed the new tariff rates for 90 days. Markets bounced back.

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Those 90 days are now past, and something weird is happening.

Trump is again announcing super-high tariff rates on countries near (Canada) and far (Bangladesh). But unlike April, markets aren’t crashing. Why not?

Maybe it’s because investors think Trump will reverse course again. But why would he do that if markets aren’t falling? He’s getting what he wants – high tariffs on countries he believes are ripping off Americans – and investors don’t mind. Why back down?

This whole “TACO” idea (“Trump Always Chickens Out”) doesn’t fit how Trump works. He pushes until something stops him.

My best guess: Trump really believes he can use tariffs to raise a lot of revenue – enough to reduce or even eliminate other taxes. He wants to rerun the McKinley era, when tariffs provided almost all government revenue.

He further believes foreigners, not Americans, will bear the cost.

You may say that’s crazy. Trump disagrees.

I don’t think he will chicken out. I think he’s probing to see how high he can set tariff rates without crashing the markets and the economy.

That’s a dangerous game. But Trump has been playing dangerous games his whole life. They’ve always worked out for him.

We don’t know how this will end…. but I wouldn’t bet it ends soon.

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See you at the top,

Patrick Watson
@PatrickW

P.S. If you like my letters, you’ll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.

• tariffs
• trade
• trump