Economy Will Drag On Trump’s Re-Election Hopes

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Posted: Aug 14, 2019 11:34 AM
Economy Will Drag On Trump’s Re-Election Hopes

Source: AP Photo/Evan Vucci

The U.S. economy is delivering bad news to the White House. Second-quarter growth was only 2.1% and is not likely to return to 3% on a sustained basis. Significant wage increases, booming corporate profits, and double-digit stock grains SPX, -2.05%  are not likely in the months leading up to the presidential election.

Lackluster economies sunk the re-election hopes of Jimmy Carter and George H.W. Bush. Donald Trump’s failure to deliver meaningful health-care reform and the pain inflicted on Midwestern farmers by Chinese retaliation against his tariffs make matters worse.

Forces having nothing to do with who occupies the oval office, negatively affect U.S. growth. His trade wars notwithstanding, China and Europe are stuck in the mud and saddled by political dysfunction.

Chinese President Xi Jinping’s strategy for dictatorial control penalizes private companies and entrepreneurs to boost its highly inefficient state-owned enterprises and squanders a lot of economic resources and credibility with foreign investors.

Germany’s trade surpluses require southern European Union states to endure endless growth sapping trade deficits, and German and Italian banks are in terrible shape. The euro EURUSD, -0.2775%  is imposed on a collection of countries that lack many preconditions for a common currency—a unified fiscal policy that directs social benefits to regions with the greatest need and a uniform education system, common language and shared culture that enables worker mobility and a continental labor market.

The U.S. economy is creating lots of jobs but skills shortages abound because the nation’s higher education system spends too much and delivers too little. It graduates fewer than 60% of students admitted, many graduates lack critical thinking and problem-solving skills essential for professional work and even more lack job-ready, specialized skills.

Trump’s learn-while-you-earn private-sector apprenticeships are a great answer but most parents won’t accept that not everyone should go to college.

Trump’s top advisers—National Economic Council Director Larry Kudlow and Treasury Secretary Stephen Mnuchin—need some soul searching about tax cuts and resisting measures that could more quickly resolve trade issues with China.

On the demand side, growth must be driven by consumer spending, business investment and fixing the trade deficit—the latter sends too many dollars abroad that don’t come back to purchase U.S. goods.

Consumer spending has proven robust but is shifting from big-ticket autos to high-tech gadgets, Uber and other services. Notably a good deal of the job growth is in low skilled and highly skilled categories—middle-skilled occupations are hollowing out. Not surprising, many poorly trained college graduates end up at venues like Starbucks, and income inequality worsens.

Principal competitors—China, Japan and Germany—have growth policies premised on undervalued currencies that cheapen exports and protect domestic manufacturing—but Trump’s trade war is a bust. The trade deficit is up over $100 billion on his watch.

Negotiations with China are at a stalemate, because the president is reluctant to deliver a knockout punch.

For example, cutting a deal with ZTE and imposing only partial measures on Huawei, when absolute restrictions on their purchases of U.S. components and sanctions on foreign businesses and banks that enable their piracy would put ZTE out of business and seismically shake Huawei and Xi’s grasp on power.

Multinationals are diversifying supply chains from China. Despite the promises of Trump trade adviser Peter Navarro, factories have moved to other Asian locations, not America. Consequently, American businesses are investing their tax-cut money abroad and U.S. imports of manufactures are shifting their origins rather than creating new jobs here.

Meanwhile, Chinese retaliation has pushed down U.S. exports.

Huawei and other Chinese companies are investing in indigenous technologies. The net effect is an even bigger trade deficit that drags on good-paying jobs in the United States, more dollars for high tech innovation in China and fewer in the United States.

Not able to get China off the table, Trump can’t take on German and Japanese protectionism—once and for all.

Tweeting and telling voters what a great relationship he has with a dictator and human-rights abusers like Xi only works when you want to become president. More than bravado and halfway measures are needed to fix what’s broken with the American economy.

This article originally appeared on MarketWatch.