W.T.F.?

“W.T.F?” Congressman Horsford, April 9, 2025

Seems the Keynesian’s have won the economic battle in America.  Since 2007, our consumption rate has grown 62%, while our manufacturing output has grown by only 12%.  While we massively boosted our consumption under Keynesian philosophy, other countries around the world have done the opposite – they’ve reduced consumption and live off their exports to our insatiable consumers – more aligned with Friedman philosophy. 

Over the past 60 years, the size of our government has doubled.  We tax our savers to subsidize our consumer spending. And when tax revenue isn’t sufficient, our government borrows to maintain these subsidies. I am NOT saying that programs that help Americans in need are a bad thing – I merely point out that our government debt spending is on an unsustainable path that is bogging down GDP growth.

When you consider that over the past two decades, we’ve experienced some of the greatest technological advancements in the entire history of human existence,  but our GDP growth has been a paltry 2.0% per annum, you must admit something is wrong.

For nearly two decades, we’ve lived in a world of “easy everything”.  Our money supply has grown 300%, from $7 trillion to $21 trillion (Friedman, anyone?).  For the past 15 years, we’ve had near zero interest rates and have come to expect mortgages should be at 3%, as if that’s normal.  Buying the dip in stocks seemed to always work.  The low cost of borrowing has corrupted efficient capital allocation, as zombie companies continue to limp along when they should have closed their doors years ago.

Such extreme liquidity, low interest rates and high market valuations are ARTIFICIAL – we are material girls living in an artificial world with artificially high stock market valuations.

Who or what is to blame for this condition?  Unfair trading partners?  No.  We did this to ourselves.  After WWII, we chose to embark on the globalization of trade, and policing the world to ensure trade security. We helped Japan rebuild their economy, and with their modern new factories, they began to produce the world’s best quality steel at a fraction of what it cost to produce at home – and whoops!  There goes our domestic steel industry, as one example.

Globalization of trade created worldwide gains in wealth and opened the globe to cost efficiencies and production opportunities that were impossible before.

As a result, we have hollowed out our manufacturing base and the middle class, and put our national security at risk among a fragile global alliance.  Our workforce has adapted to the now dominant service economy, as wages are higher in this sector.  Immigrants now fill many production-based jobs that Americans no longer want, particularly those in low-wage and physically demanding sectors of food production, processing, and distribution, agriculture,  and construction.

I don’t like tariffs at all, not one bit.  But I can acknowledge that if we want to try and restore, at some level, our industrial base and middle class, tariffs are Trump’s only tool given how Congress is too divided to be productive.   Too bad it seems his approach is not well reasoned.

His plan is fraught, never tried before, and the extreme disorder has the potential to lead to major economic problems.

Tariffs will destroy demand due to inflation in the short run, causing a recession and job losses.   In the long-run, prices will come down to spur demand, with the US ideally reaching a better economic balance.    But this probably means our lifestyles will change meaningfully forever.  We will have to learn to do without. 

Let’s be real.  We aren’t going back to the days of dominant industrial manufacturing in just two years.  Will companies rush to reshore manufacturing?  Maybe, but it’ll take quite some time for that to unfold.  It takes about 3-5  years to build an aluminum factory, and a decade to install a nuclear power plant. And some companies won’t be able to reshore nor perhaps even survive.  

We have unique challenges to competitive manufacturing, the foremost is the cost of labor.  Americans can’t work for $15.38/day like those in Vietnam, or $34.62/day for those in China.  Without an incredible level of automation, it’s hard to see how American made products will be price competitive.  Tariffs on imported competition could help, but frankly, if prices rise on a Chinese widget, the American made widget will also increase in price – it’s a matter of supply and demand, a reality that is impossible to circumvent.

I can envision more high-value manufacturing in the U.S.  If you haven’t been inside a modern factory lately, you’d be surprised.  Many are now clean, quiet and computerized.   For example, a modern CNC machine, used in industries such as aerospace, automotive, metalworking and electronics, is a fully digital tool, calibrated and operated from a computer screen – workers input the instructions, sit back and watch high-precision and reliable, scalable fabrication.  These are not minimum wage, hard labor jobs – they are well paying jobs requiring specific skills and training. I acknowledge not every manufacturing job is “glamourous”, particularly in agriculture, but to cast all manufacturing jobs as horrible across the board is unfair.

However, Trump’s awful execution of his tariff policy has created a crisis of confidence, particularly since this is ‘single person reliance’, and that single person is rather chaotic and often incoherent.

With every headline that whipsaws the market, CEOs around the world deepen their resolve to wait things out.   No one can make plans to hire, invest or move manufacturing without some stability and certainty.   As a result, forward corporate earnings projections are being revised downward, or guidance has been entirely removed due to the uncertainty of the global trade war.  This will continue to weigh on markets, despite head-fakes caused by headline news.

How does any of this address the elephant in the room – our unsustainable government debt levels?

Hard to see how this plan does anything but increase our debt load.  Interest rates are four times higher now, making the servicing of our debt a much bigger drag on our economy (assuming we still rely on government debt spending, which is a philosophy that I hope you now understand is problematic).   Sure, reducing government expenditures and increasing woefully inefficient systems will help.  But the magnitude of the problem is much, much bigger than any anticipated cuts could possibly bridge.

The cost of tariffs extends beyond the increase in prices and will not raise the revenue we’ve been told they will.  You only need to look back at Trump’s first term in office to see the impact Chinese tariffs had on our agricultural exports – they were decimated.  Many smaller farmers went bankrupt, and the U.S. government was forced to provide subsidies to the tune of $28 billion, much more than any incremental tariff revenue.  We are currently on repeat.

As many economists have said over the past two decades, the only reasonable way out of this unsustainable debt path is stronger GDP growth.  Our dismal 2% growth rate isn’t going to cut it, and thus a reordering of global trade is necessary to turn up the heat on our growth prospects.   Cutting government spending for our current economy will slow or even reverse growth, but necessary to help address the ballooning debt.  Adding revenue (tax) cuts is also counter-productive to the success of this policy.   It’s a tough position to be in, but here we are.

Kendrick Lamar was right: 

"The revolution's about to be televised. You picked the right time but the wrong guy."

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