John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.” The point being that, even if you’re right about where the stock market is bound to go eventually, the market doesn’t have to follow your route or timetable in getting there.
Since “Liberation Day” last week, when the U.S. announced punishing new tariffs on just about every country in the world, a lot of Americans are learning a corollary to Keynes’ maxim: Donald Trump can stay irrational longer than you can remain solvent.
President Trump’s irrationality on trade is the fundamental problem. Over the weekend, he explained yet again that he sees any trade deficit as a “loss” we need to be compensated for. He believes that trade deficits are “subsidies” paid by America to other countries. His made-up math ignores our trade surpluses in services, to the tune of $250 billion annually. He is oblivious to the relationship of trade deficits to foreign investment in America—when we send dollars abroad for goods and services, most of those dollars ultimately come back to America. And he refuses to grasp that tariffs are taxes paid by domestic importers, not foreigners.
“Like a great many people, I hoped that Trump would listen to the markets more attentively than he does to the retinue of sycophants he surrounds himself with. Tragically, that has not happened.”
As many have noted, Trump’s mercantilism is one of the only policy convictions he’s held for nearly his entire adult life. Indeed, one of the administration’s favored defenses of his policies is that, “Trump’s been talking about this his whole life,” and, “Donald Trump’s been talking about this for 35 years,” as Commerce Secretary Howard Lutnick said in various interviews over the weekend. The idea seems to be that Trump’s consistency on the issue somehow makes him correct on the merits, and that he has a mandate to follow through on his views. So as Lutnick declared on CNN last week, everyone should relax and “let Donald Trump run the global economy.
The first contention is preposterous. If a President Bernie Sanders was trying to socialize medicine or issue his own version of protectionist trade policies, the fact that he’s been consistently wrong his whole life wouldn’t persuade opponents to drop their opposition out of deference to his consistency.
The second argument—that Trump has a mandate—is also ridiculous but has some superficial political merit. Trump was honest and open about his love of tariffs—the “most beautiful word in the world” in his telling—and he got elected. And unlike his first term, there is nobody in his entourage or the Republican Party that can talk him out of the idea that he has a mandate to do whatever he wants.
Back in February, I celebrated the fact that the markets, unlike his human enablers, would not support Trump’s ill-conceived and irrational love for protectionism. Efficient capital markets are valuable for all sorts of obvious reasons, but one of the most underappreciated—and vexatious for politicians— is that they don’t lie. They might be temporarily “wrong” in some sense—hence Keynes’ point about occasional irrationality—but millions of investors don’t put partisan desires ahead of their financial interests. The markets have hated Trump’s views on trade from the get-go, which is a major reason markets have lost some $11 trillion in value since his inauguration.
Like a great many people, I hoped that Trump would listen to the markets more attentively than he does to the retinue of sycophants he surrounds himself with. Tragically, that has not happened.
But there is an upside. The markets are not merely saying that Trump’s policies are bad for stock prices or corporate profits. They are saying to other politicians and policymakers, “We’re not going to save you from Trump’s irrationality.”
That realization is starting to dawn on some Republicans who bought the preposterous idea that Trump has a mandate to unilaterally and irrationally bend the international economy to his will. The Constitution gives responsibility for taxation, including tariffs, to Congress, not the president. Congress ceded that authority over decades to the president, for good reasons and bad. What might have once been defensible is now indefensible because Trump is abusing that authority on a massive scale, claiming emergency powers when the only emergency is the crisis he himself is creating. And Republicans are starting to understand that their political solvency won’t last longer than Trump’s irrationality.
Some Republicans in Congress, led by Iowa Sen. Chuck Grassley and Kentucky Sen. Mitch McConnell are finally moving to claw back that power (and leading conservatives are mounting legal challenges to his trade authority). Of course, Trump has vowed to veto the legislation.
It should never have come to this, but it’s progress when Republicans listen to markets instead of Donald Trump.
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