An interesting discussion this morning on CNBC with White House economic adviser Larry Kudlow beings to highlight the principal purpose of his forte’.
President Trump is the first U.S. president who came to the table of economic policy with a plan of action that is uniquely his own. POTUS doesn’t need “advisers” to frame possible policy, he already has the program mapped out; POTUS needs ‘advisers” who are not actually “advisers” per se’ but rather a sales-force to explain and advance his program agenda to the world markets as the policies are implemented….
…Because this is such a substantial shift from historic reference, President Trump’s unique position of actually creating the economic policy must be emphasized and continually repeated. It’s not Kudlow creating the policy; these are President Trump’s policies. The granular details are carried out by U.S.T.R Lighthizer, Commerce Secretary Ross, Treasury Secretary Mnuchin.
Trade explainer Peter Navarro and Economic explainer Larry Kudlow are people specifically enlisted by President Trump to explain Main Street action (policy) and Main Street consequence (outcomes) to Wall Street markets.
It’s easier to understand the importance of Navarro and Kudlow when you remind yourself MAGAnomic policy is operating in a space between two historic economic engines. As Trump de-emphasizes multinational interests, and re-emphasizes domestic Main Street interests, a generation of financial and economic media have no frame of reference.
MAGAnomics operates in the space between two entirely divergent economic engines.
Go through the archives and you’ll note a strategy unfolding that few, including us, could fully conceptualize when it first appeared. Way back when candidate Trump first began to put his economic plans into platform outlines the subtle signature was there, but few were paying attention.
In order to reverse three decades of middle-class economic erosion, there were indicators that Trump’s strategy was a radical change in approach. In essence the strategy was to split the economic policy into two areas and sequence the policy: highly-consumable goods (first) and durable goods (second).
Both product sectors have historically been viewed and approached by economic policy makers using a single financial strategy. That singular approach gave rise to Wall Street benefiting and Main Street suffering. Investment-class gained; middle-class suffered.
Trump outlined an approach –albeit vaguely– that was multidimensional.
His policy would first target multinational corporations, using the U.S. Treasury (Mnuchin) to weaken their grip and influence; simultaneously, he would use energy policy to drive down domestic prices in highly-consumable products (fuel, food, energy sector). These sectors are not measured in fed inflation indexes; however, if lowered, these facets of consumer spending can also increase the amount of disposable income available for workers.
In essence, expand the economy by lowering the aggregate cost of living for the middle-class who live paycheck-to-paycheck. Use monetary policy, fiscal policy and trade policy to entice domestic investment and create jobs; and ultimately put upward pressure on wages.
When the tax cut and reform package passed in December 2017, phase-one cemented and a new phase immediately began. Phase II, 2018.
The second aspect, or second phase of Trump economic policy, is geared toward ‘durable goods’. That’s where the trade imbalance plays a larger role in the strategy.
As the economy expands, Americans can now afford rises in the prices of durable goods. However, as with all manufacturing systems -geared toward retaining market share inside a consumer economy (ie. the U.S. market)- the foreign creators will first seek to retain competitive pricing structure by making efficiencies within their own business models.
When foreign manufacturers entering a phase of cost-cutting analysis (note what happened when Trump left Asia after visit) you immediately hit them with stronger forecasted trade rules on their products.
The financial analysis and five-year-plans, being conducted by the manufacturers, then has to contain the possibility of new rules. That’s where Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer come in:
On Oct. 5, 2017 the ITC [International Trade Commission] voted unanimously in favor of Whirlpool, which brought a complaint forward accusing Samsung and LG Electronics, its South Korean competitors, of flooding U.S. markets with cheap washing machines and pricing out domestic manufacturers. While the ITC didn’t say material harm was coming from South Korea in particular, Whirlpool alleged the country’s manufacturers shifted production into other countries (Thailand and Vietnam) in order to avoid U.S. anti-dumping tariffs imposed in previous years.
The ITC’s recommendations will be sent to President Donald Trump, who will have two months to make a final decision.
This second phase is where the two economic engines: Wall Street and Main Street; begin to come into parity again. The FED (monetary policy) does measure the cost of durable goods in their inflation index. Rises in durable goods are recorded in inflation indexes and monetary policy (interest rates) is influenced accordingly.
Trump’s phase-one befuddled the FED who were perplexed over inflation being virtually non existent. Most of the reason for this disconnect has been the downward price pressure on (non-measured) highly-consumable goods; and static prices on (measured) durable goods. The FED could see the economy expanding, but they cannot, or at least couldn’t until now, reconcile the lack of inflation.
Wages are growing, albeit modestly at first – but now gaining speed, as a result of economic expansion and increased employment. This wage growth, in combination with keeping downward pressure on high-consumable prices, allows Trump to begin a series of aggressive trade policies that will slowly raise durable good prices.
The trade policy, tightly executed by Trump, Mnuchin, Ross and Lighthizer, will put increased pressure on manufacturers to make products in the U.S. In turn this puts further demand on U.S. workers; which, in turn, drives up the wages – to afford the prices of durable goods as they increase. This action/consequence is not accidental, it is planned.
Simultaneously, it must be remembered that every dollar removed from imports actually increases the GDP. The value of all imported goods is deducted from the combined value of all goods and services we produce. If we drop $1 billion in imports on Washing Machines, and simultaneously manufacture $1 billion on Washing Machines in the U.S., the U.S. GDP gains $2 billion in value. The U.S. economy actually expands by more than $2 billion because the attached manufacturing wages are also inside the U.S.
This multi-prong approach is one of the reasons why it still doesn’t seem to be part of the strategy to keep the U.S. inside NAFTA as it currently is constructed. Perhaps, just perhaps, the NAFTA exercise is more optical than actual. Perhaps, it’s more about the outside world seeing the U.S. trade position as executed, than actually negotiating. Regardless of motive we shall soon find out.