By THE WALL STREET JOURNAL
As the election results became clear in 2016, financial markets rose amid a surge of economic optimism. That surge continued for two years as Donald Trump and Republicans pursued a pro-growth agenda of tax reform, deregulation and encouraging domestic energy production. But with Democrats now controlling the House and Mr. Trump already campaigning for re-election, Washington is again taking an anti-growth turn. Don’t be surprised if slower growth follows.
Mr. Trump’s first two years were focused relentlessly on ending the economic malaise of the Obama years. Nearly every policy was seen through a growth prism.
But as he focuses on re-election, Mr. Trump is returning to the issues that marked the worst moments of his 2016 campaign. He is restrictionist on immigration, increasingly protectionist on trade, and more interventionist in regulating business. He favors price controls on drugs and a mandate for paid family leave, and his regulators are revving up what looks like it could become the largest federal antitrust campaign since the 1970s.
Meanwhile, House and Senate Democrats are advancing their own election agenda that includes higher taxes and new regulation on finance and industry.
All of this is already hurting growth, and especially business investment. The Institute for Supply Management’s manufacturing index fell to 52.1 percent in May, its lowest since 2016. Surveys of CFOs show that investment plans for 2019 have slowed sharply amid the new policy uncertainty. A majority of business-earnings calls mention trade as a major concern.
The residual good news is that the policy reforms of 2017 built considerable pro-growth momentum that led to 3.1 percent growth in 2018. The labor market is still buoyant, and wages are rising. Yet these are often lagging indicators, and consumer confidence typically declines if markets and growth fall.
U.S. tariffs have a negative impact on growth around the world, which in turn hurts U.S. exports.
A conceit of nearly all politicians is that they can get away with bad economic policies without paying too high a price.
Mr. Trump and his Republican fellow-travelers think they can impose tariffs willy-nilly with little damage. They say the doomsayers were wrong about the impact of the initial round of China tariffs, and in any case the tariffs are popular with the public. They say Mr. Trump needs wedge issues against Democrats in 2020, and he can run as a trade hawk on China against Joe Biden.
But Mr. Trump campaigned in 2016 on reviving the economy, and the surge of growth has helped to offset his personal unpopularity. Bad policies operate at the margin and their effect is cumulative. The initial tariffs were dwarfed by the growth effects of tax reform and deregulation, but the damage from tariffs will rise if they increase in severity and are imposed impulsively. Sooner or later bad policies always exact a high economic and political cost.
The Wall Street Journal published a longer version of this editorial on June 4.