A Chaos Crash?
President Trump announced last week his intention to impose a 100% tariff on movies filmed abroad but imported to the United States.
“Our movie making business has been stolen from the United States of America, by other Countries, just like stealing candy from a baby,” President Trump proclaimed.
This tariff, like all the other Trump tariffs, would invoke the International Emergency Economic Powers Act (IEEPA), which gives Presidents powers to impose economic sanctions during national emergencies. We confess to not fully grasping how the state of the U.S. movie industry qualifies as a national emergency.
This threat, even more than most of Trump’s threats, is unlikely ever to be realized because the Berman Amendment to the IEEPA specifies the President cannot regulate the import of information materials, including movies. The movie tariff would be even less likely than most of his other proposed duties to survive the courts.
That does not make these relentless, random announcements harmless. Tariff friends and foes are looking for their evidence in all the wrong places. The impact of tariffs is not chiefly a matter of near-term price increases or even medium-term booms in newly protected industries.
The real damage of protectionism comes in the long-term misallocation of capital in industries that would not flourish in America under a free enterprise regime.
A short-term impact of Trump’s tariff talk is markets do not like chaos. Faced with chaos, consumers and businesses alike tend to freeze.
A good friend of ours is an outstanding car salesman for a Ford dealership. He normally brings in a robust six-figure income. In the last few months, sales have dropped to less than half his usual pace. No one, he tells us, wants to make a commitment because they have no idea what’s going to happen next.
Statistics put meat on the anecdotes. The index of consumer sentiment sat at a far from robust 55.1 as of the end of September, down from August’s level of 58.2. Far more worrying is the fall of the index by some 21% year over year since last September’s 70.1 level.
Director of the survey Joanne Hsu noted that although September’s decline was “relatively modest,” it was felt by “a broad swath of the population, across groups by age, income, and education, and all five index components.” Nationally, she noted, macroeconomic expectations fell, “particularly for labor markets and business conditions.”
A discouraging word comes from our esteemed Eagle colleague and economics professor Mark Skousen, who heads the Forecasts & Strategies investment newsletter and has the esteemed role as a Presidential Fellow at Chapman University in California. One of our greatest living economists, Mark is the creator of the GO (Gross Output) measure which has been officially adopted by the U.S. government. GO, Mark explains, is a much more reliable measure of the economy than GDP “because it measures spending at all stages of production, totaling an estimated $63 trillion this year—more than twice GDP of $30 trillion.” Not only is business spending almost twice as big as consumer spending, it “is more volatile, and it is a leading indicator. When business puts on the brakes, employment slows, and recession strikes.”
The most recent quarterly GO numbers, says Mark, “revealed that economic growth is slowing to a crawl, ahead only 1.2% in real terms.” Mark calculates that “overall business spending fell sharply, by an annualized 5.6% in real terms,” noting that this result is “much more consistent with the weak labor-market data.”
Worryingly, for “the first time since the financial crisis of 2008, we’re seeing a huge gap between consumer and business spending. While consumption is still robust (up a real 2.6%), business is pulling in its horns largely due to higher tariffs and the uncertainty of the trade war.”
Over many months, Trump has threatened tariffs on dozens of broad categories of products and materials from aluminum and agricultural products to wind turbines and unmanned aircraft. Altogether the threatened actions would affect thousands of individual products. The key word in that sentence is “threatened.”
The threats appear at apparently random times. What exactly provoked the president to threaten tariffs on the movies of all things? The unpredictability and lack of any apparent logic conveys a sense of chaos that is almost unbearable. It would be a miracle if business were not, as Mark says, “pulling in its horns.”
If it pulls them in much further, the Trump chaos will overthrow our economy and possibly his presidency.