In the middle of the Frank Capra classic It’s A Wonderful Life, there is a sudden run on the banks—just as George Bailey is about to leave on his honeymoon, naturally.
You remember the scene.
The hardy working-class folks of Bedford Falls rush to the ramshackle Bailey Building and Loan, determined to pull their money out of the institution. George defuses the situation by appealing to their common sense. The money his investors want isn’t in the safe, he reminds them, because it’s invested in other things. “You’re thinking of this place all wrong,” George tells one irate investor demanding to be paid the lofty sum of $240. “The money’s not here. Your money’s in Joe’s house. That’s right next to yours. And in the Kennedy house, and Mrs. Makelin’s house, and a hundred others.”
George is right, of course. And the analogy works in the modern world too. When stock prices climb, for example, the money made by investors doesn’t get sucked out of the market and tucked away into a vault. Sure, savings are important, but George Bailey knew what all saavy money managers do: Money has to be put to use to be any good. The wealth created by a near-decade of solid economic growth isn’t sitting in a bank somewhere. It’s in Joe’s business, and the Kennedy venture, and in Mrs. Makelin’s retirement account.
Which brings me to President Donald Trump.
Trump, in an interview that CNBC aired over the weekend, tried to wave away the potential negative economic consequences of his trade war by suggesting that “we’re playing with the bank’s money.”
As CNBC goes on to explain, the stock market is up 31 percent since Election Day 2016. Trump seems to believe that those gains give him the necessary flexibility to engage in a trade war.
To paraphrase George Bailey: Mr. President, you’re thinking of this place all wrong.
This notion that any losses incurred by a trade war won’t hurt because we’re only risking recent economic gains is a dangerous misunderstanding of how economies operate. That logic might work in one of Trump’s casinos—win a few hands of blackjack, and it’s easy enough to set aside your original chips and “play with house money,” as the saying goes—but the president is forcing ordinary Americans to risk economic gains they might prefer to put to other uses.
Trump might measure the success of his trade war by the consequences on the stock market, but that ignores the far more practical effects felt by workers and businesses from coast to coast. It ignores the jobs that could be shipped overseas to avoid tariffs, and the loss of jobs at businesses that simply can’t compete with artificially higher costs for raw materials such as steel and aluminum. The administration’s plan to slap tariffs on imported cars and car parts alone could reduce U.S. economic output by $59 billion, the Commerce Department was told at an administrative hearing last week.
Trump continues to escalate the trade war. On Friday, he also said he’s willing to impose tariffs on $500 billion worth of Chinese imports—in other words, just about all of them—after already hitting $34 billion of Chinese goods with tariffs earlier this year.
If that happens, the economic consequences of the trade war will outweigh the economic boost created by last year’s tax cuts, according to a new analysis from The Tax Foundation, a nonpartisan think tank.
“If all tariffs announced thus far were fully enacted, U.S. GDP would fall by 0.47 percent ($117.6 billion) in the long run, effectively offsetting one-quarter of the long-run impact of the Tax Cuts and Jobs Act,” write Tax Foundation analysts Erica York and Kyle Pomerleau. “Wages would fall by 0.33 percent and employment would fall by 364,786.”
Just the bank’s money? Hardly.
This isn’t just an economic blunder; it’s probably a political blunder, too. After two years of touting economic growth and a rising stock market as proof that his administration is doing the right thing, it’s odd to suggest that those gains are only collateral against future mistakes. And it’s hard to imagine voters that voters will shrug off the costs of a trade war by saying “Well, it was just the bank’s money anyway.”
Other Republicans seem to be picking up the same line that the White House is pushing:
Lindsey Graham says on CBS that his voters will need to experience a little pain over the tariffs in order to win trade war with China.
Good luck with that message for the long haul.
— Josh Kraushaar (@HotlineJosh) July 22, 2018
At the risk of overanalyzing anything Trump says for deeper meaning, his comments to CNBC also seem to be the first indication that the president believes this trade war might be something other than “good and easy to win,” as he famously tweeted in March.
After all, if he’s admitting the “bank” might lose some of its money—well, that’s a pretty clear acknowledgment that a trade war will have costs, right? His attempts to downplay those costs with a misunderstanding of how the economy works is scary, but at least there’s some indication that the White House is, maybe, starting to see a bit of reality.
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