Trump Offers Short-term Pain in Exchange for…Long-term Pain

MAGA folk reassure themselves that the stock market plunge doesn’t matter and the “real” economy is doing just fine, undisturbed by the looming trade war.

Then when some new gloomy data on the “real” economy is released, they double down and explain we need to accept short-term pain for long-term gain. Trump actually used that ominous phrase.

Both propositions are dangerous nonsense.

The stock market is the heart of the real economy. More than a barometer of economic health, it is an essential mechanism for economic growth.

All companies have “capital structures,” making up the sum of all capital invested in the business. Much of this is varying sorts of debt: secured, unsecured, bonds and lines of credit. For a public company, the crucial support for all of this debt is its equity: the market value of the company’s stock.

When the market value of a company’s stock—its “market capitalization” — comfortably exceeds the face value of its debt, credit markets are happy because the company debt they hold is thereby more secure.

This is because when a company’s stock is high it can raise more money by issuing new stock if it chooses. The company’s ability to do that also increases the amount of money it can borrow at a reasonable rate.

When the stock declines, the ability to raise new funds declines right along. If the decline is steep, creditors will fret.

In the past month or so, the market capitalization of the S&P 500 has declined by roughly $4 trillion, though the exact number bounces around. This is not random. The market is following Trump’s tariff rhetoric obsessively. The $4 trillion is a rough gauge of how much capital has been withdrawn from U.S. companies because of the trade wars so far. And since the S&P 500 represents an astonishing 51% of global market capitalization, the effects reach far beyond our borders.

When Jude Wanniski’s “The Way the World Works” was published in 1978, kicking off the supply-side movement, we were gripped by his step by step, day by day tracking of the progress of the 1929 Smoot Hawley tariff bill against the state of the stock market. The bill’s every advance triggered a market retreat, and every setback to its passage brought some relief.

When passage of the bill became a forgone conclusion, the market crashed and the Great Depression began.

Wanniski notes that the tariff did not take effect until the next year. Didn’t matter. Expectation ruled the day and destroyed the global economy.

The argument made by the tariff’s backers? It would save American jobs. Two years later, the U.S. unemployment rate hit 25%.

As for short-term pain, long-term gain, it’s a myth both economically and politically.

Improvements in economic policy are typically welcomed quickly by the market and the companies that make up the real economy. As for short-term pain, the market is not so easily fooled.

In olden days—the 1980s—the Reagan tax cuts were sometimes counted in the short-term pain, long-term gain column, but that’s all wrong. The pain all came from the Federal Reserve’s drastic. interest rate increases, into the double digits, which were probably unnecessary and caused a deep recession in Reagan’s first year in office. The tax cuts, passed in 1981, were phased in slowly, first at 5%, then followed by two more 10% cuts each a year apart.

Politically, this was a near disaster. In 1982, the GOP had to run on “stay the course,” which is just another way of saying “short-term pain, long-term gain.” The results were abysmal. The GOP lost 26 seats in the House, almost doubling the lead of the Democrats. That’s considerably more than the usual attrition of the party in the White House in a mid-term election.

Happily, by 1984, the tax cuts had taken full effect; it was “morning in America.” Reagan rolled up a landslide.

The Trump 2017 corporate tax cut made a similar story. Even before the cuts hit the books, huge American corporations announced they would hire more workers in response. Soon the unemployment rate sank below 4% for the first time in 50 years, and minority workers got most of the benefit.

The more likely it seems the Trump tariffs will stand, the more likely the short-term pain will continue, right into the long term. Business investment, the key to economic growth, will stagnate, then fall. Recession rumors will become recession realities. In a grand refutation of MAGA triumphalism, the Democrats will regain the House by a large margin and probably impeach Trump again.

They won’t have to impeach Elon: he will understand what’s happening, try to stop it, be denounced by Trump as a traitor and fly off to Mars.

Wish we could come. But we will stay home, faithfully searching for treasures Mr. Market all too quickly tosses out with the trash, and sharing our discoveries in the Gilder Technology Report.

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