To ward off recession, Trump should keep his mouth and smartphone shut

A recession is not inevitable, but seems more likely every day. New data suggest job growth over the past year has been a whopping one quarter less than previously advertised. The U.S. yield curve has inverted. The 30-year German bond rate is now negative. The stock market is gyrating big time, but with no trend. The S&P stood at roughly 2900 a year ago – just where it is today. U.S. Industrial production over the past six months is flat. U.S. consumer sentiment is at an annual low and falling. Global economic growth is slowing, with growth in the European Union, United Kingdom and China particularly troubling. Growth in the EU is now zero. In Germany it’s negative. A likely hard Brexit, coming in a couple of months, augurs a British recession. As for China, Trump’s trade wars are surely taking their toll beyond what official statistics convey. 

All this is sufficiently concerning, but it comes against a backdrop of increasingly erratic and unhinged presidential behavior. Trump may think his foray back into real estate, by offering to buy Greenland, had no economic ramifications. But it does. It raises precisely the kind of tail risk that he should be trying to reduce. 

Let’s think about what just happened with Greenland. Yet another inane idea – “Let’s buy Greenland!” – pop’s into Trump’s brain. He then tweets it. This insults the Danes, who promptly and properly tell him that his proposal is absurd. He then insults their female prime minister, calling her “nasty” (his favorite putdown of females) and cancels a state visit all while referencing Greenland’s military importance. 

This leads me and, I presume many others, to wonder if Trump might be crazy enough to annex Greenland and produce a military confrontation not just with Denmark, but with the entire EU and, probably, Canada. That, in turn, would mean goodbye NATO, goodbye trade with the EU, and further U.S. economic isolation. 

Yes, the chance of anything like this happening is remote. But so was starting a major trade war with China. So was ripping up NAFTA. So was insulting one ally after another. So was embracing white nationalists. So was caging children. So was denigrating our intelligence services. So was kissing Putin’s ring. So was calling Jews disloyal. And, well, the sickening list goes on. 

Each of Trump’s deranged actions has economic implications because they signal his capacity to go economically nuts or even a different kind of nuts when the urge suits him. Business seeks stable economic conditions and reliable rules of the road. If things get too scary, I lay off my non-essential employees (other people’s customers) as quickly as possible because I fear others will lay off their employees (my customers). So layoffs anywhere means lower sales everywhere, which promotes more layoffs and even lower sales.  This is a global economic, not a local U.S. economic, syndrome. That’s why bad economic news abroad can produce bad economic news at home and vice versa, also known as economic contagion.

Economists like to pretend that recessions have clear causes and can be avoided with specific policies. Not the case, as I demonstrate in a recent article entitled The Big Con. None of the alleged causes of The Great Recession actually caused The Great Recession. What caused The Great Recession was fear and panic propagated by false or wildly overstated claims about actual economic circumstances.

For example, the view then and today is that fraudulent U.S. subprime mortgages brought down the financial system and the economy, indeed the global financial system and the global economy. In fact, the share of subprime mortgages that fit that billing was quite small and subprime mortgage foreclosures (definitive defaults) were de minimis compared to the overall mortgage market let alone America’s or the world’s massive financial sector.

President Roosevelt had it right back in 1933 and would have said the same in 2008. When it comes to economic downturns, “The only thing we have to fear is fear itself.” Stated differently, recessions are collective psychological rather than economic events. Yes, actual economic outcomes, like oil price shocks, can flip the economy. But this operates by changing collective beliefs about what others are thinking about the economy’s future, not because the economy can’t withstand a higher price of one of its inputs. 

Given this, how do we avoid a recession? The answer is not having the Federal Reserve try to lower what are already extremely low interest rates. Nor is the answer cutting taxes and leaving our kids even larger bills to pay. Our country’s fiscal gap – the present value difference between all CBO-projected future outlays and receipts – is already $240 trillion. That’s a decade’s worth of GDP. So the country is beyond broke. Indeed, fiscally speaking America is Argentina in slow motion. 

The answer is restoring confidence in the country’s economic leadership. In this regard, President Trump should pledge to make no more moves on trade until after the election. If he’s reelected, he can take that as a mandate to further destroy American trade relations and form trade partnerships with the likes of Russia and Belarus. He should also give the economy a break and, to be quite frank, keep his mouth and smart phone shut. 

Laurence Kotlikoff is a professor at Boston University (BU) and professor of economics at BU. He is also a fellow of the American Academy of Arts and Sciences, a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society and was formerly on President Ronald Reagan’s Council of Economic Advisers. Follow him on Twitter: @Kotlikoff.