BREAKINGVIEWS-Trump’s confidence-sapping policies echo the 1930s

By Edward Chancellor

LONDON, March 13 (Reuters Breakingviews) - Donald Trump fervently wishes to boost domestic manufacturing. His administration is rolling out tariffs on his country’s largest trading partners to encourage companies to shift their operations to the United States. The U.S. president appears blithe about any potential economic disruption caused by such actions. Yet history shows periods of heightened policy uncertainty are often associated with weak economic growth. For example, President Franklin Roosevelt’s New Deal reforms of the 1930s ultimately failed because his economic policies discouraged companies from making new investments. Trump is making the same mistake.

In the public’s mind, Trump and Roosevelt could scarcely be more different. The Republican Trump talks up business while his Democrat forerunner openly scorned it. Yet the two have much in common. Like the current occupant of the Oval Office, Roosevelt was a great political showman. He also cultivated particular enmities. Whereas President Trump today decries economic “globalists”, Roosevelt’s bogeymen were the business elite and Wall Street titans, whom he condemned as “economic royalists” and “organized money.” He was also thick-skinned. “I welcome their hatred,” he declared of his well-heeled critics.

Roosevelt believed that by overturning the existing economic order a more just and prosperous society would emerge. Some of his economic notions were conventional for his day, such as a dislike of fiscal deficits and a fear of inflation which made him reluctant to use monetary policy. Others were kooky. For instance, the New Deal’s agricultural policy aimed to raise farm incomes by reducing food production at a time when millions were on the breadline. Roosevelt favoured “bold experimentation.” Yet a contemporary described the New Deal as a “hodgepodge of policies which are sometimes conflicting... and which create in business minds the impression that the government is in a state of great indefiniteness and confusion.”

Roosevelt initially racked up some significant achievements. His declaration of a Bank Holiday in early 1933 helped to end the financial crisis. A year later he boldly reduced the dollar’s gold value, which dispelled deflationary pressures. Yet, as George Selgin shows in his brilliant new book, “False Dawn: The New Deal and the Promise of Recovery, 1933-1947”, the president’s economic policies did not enjoy the success that many now assume. U.S. unemployment remained elevated throughout the 1930s. Investment was abnormally depressed. The economy moved up and down, in fits and starts.

Selgin ascribes the New Deal’s failure to achieve an enduring recovery to the uncertainty created by Roosevelt’s wayward economic policies. The president started out by encouraging the formation of cartels with the aim of stabilising industrial production. Later, he changed tack and ramped up antitrust actions against dominant businesses. Pro-union legislation unleashed a wave of strike activity in the second half of the decade. Roosevelt complained that corporations were engaged in what he called a “capital strike.” So, in 1936, he introduced a tax on undistributed profits, which hurt smaller businesses that had no access to the capital markets.

The president often fell out with his economic advisers. Raymond Moley, a disenchanted New Dealer, claimed that Roosevelt’s “veiled threats of punitive actions tore the fragile texture of credit and confidence upon which the very existence of business depends.” Leading business figures and economists agreed. Alfred Sloan, the head of General Motors, observed that “fear as to the future of American enterprise and the rules upon which it is conducted” was slowing recovery. John Maynard Keynes fretted that animal spirits were being snuffed out, advising the president early on that “the important but intangible state of mind, which we call business confidence, is signally lacking.”

Economists have since devised a measure of policy uncertainty, based largely on searches for key words in the published media. Unsurprisingly, researchers find a strong negative relationship between capital investment at the individual firm level and uncertainty about future government policies and regulations. The effect is more pronounced for capital-intensive businesses. Spikes in the uncertainty index tend to coincide with recessions. Periods of heightened uncertainty are also associated with market volatility – as measured by Wall Street’s “fear” gauge, the VIX Index – and stock market declines.

Over the past week, the U.S. Economic Policy Uncertainty Index has soared to an all-time peak. The level of uncertainty among small American businesses is also close to its highest level. It is not just that Trump’s lauding of tariffs goes against everything that economists have advised on trade since the days of Adam Smith, as well as the bitter experience of the early 1930s when trade barriers proliferated, and global trade collapsed. Outside observers struggle to discern the White House’s political and economic rationale for the tariffs, which countries and industries it will target, and how much others will retaliate. Indeed, even the level of tariffs and whether they will persist is in doubt. On Tuesday, Trump threatened to double the levy on imports of Canadian steel and aluminum to 50% before reversing course within hours.

Global investors are now openly wondering whether the administration desires the U.S. dollar to remain the global reserve currency or even whether overseas capital is still welcome in the United States. Then there is the question of the impact on the workforce from the potential mass expulsion of undocumented immigrants. Strained geopolitical risks are another turnoff. A recent paper from the Federal Reserve Bank of Boston shows, again unsurprisingly, that such risks are also associated with weak investment. The impact of all this on inflation and interest rates is anyone’s guess.

Shortly after the U.S. imposed the retained profits tax in 1936, the economy slumped. The S&P Index dropped 35% from peak to trough. Business investment collapsed. A survey of Illinois manufacturers found that 83% had deferred or abandoned plans for expansion. It was called the “Roosevelt Recession.” Lammot du Pont, president of the Dupont chemicals giant, complained to the National Association of Manufacturers in December 1937 that “industry is blanketed by a fog of uncertainty... the whole future is a gigantic question mark.” The same holds true today. Investment strategist Gerard Minack is warning of an adverse supply shock. Given the uncertainty already unleashed by Trump’s White House, it may already be too late to turn back.

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