A history of the Trump slump

LOOKING back from the vantage point of 2025, economic historians are starting to write their analyses of the Trump slump. It seemed to appear from nowhere with the economy growing at around the trend rate (2.3% in 2017) and the stockmarket booming. The abrupt change came in March 2018 when President Donald Trump decided to impose tariffs on steel and aluminium imports. "Trade wars are good and easy to win" he said. Both China and the European Union (EU) retaliated in kind without trying to escalate the tensions. It might have ended there.

But unfortunately, the president's more mainstream advisers like Gary Cohn had been sidelined by a more aggressive group that saw the trade deficit as the key measure of economic progress. In this mercantilist view, any American deficit was proof of cheating. Unfortunately, the president had also enthusiastically passed a tax-cutting programme which resulted in demand sucking more imports into the country. The trade deficit widened rather than declined. So in late 2018, just before the mid-term Congressional elections, an enraged President passed a general tariff along the lines of the Smoot-Hawley tariff of 1930. The other leading economies had no choice but to respond in kind, in the hope of dragging America back to the negotiating table. Business confidence—and the stockmarket—slumped.

In the early months of 2018, the Federal Reserve had continued to tighten monetary policy in response to the low unemployment rate and the prospect of fiscal stimulus. That tightening only had a significant impact in early 2019, just as the trade war got nasty. While the Fed swiftly cut rates again, its actions were too little and too late. Meanwhile the Republican Congress, alarmed at the rising budget deficit, had used the opportunity to attack entitlement programmes, cutting welfare benefits and spending across the board to shrink the state. Unemployed Americans started to set up shanty sites, nicknamed "Trump towns" in memory of the "Hoovervilles" of the 1930s. Right-wing media claimed all those people living rough were actors paid for by George Soros.

All this might have led the Democrats to sweep to power in the mid-term elections. But with his popularity in decline, President Trump, in search of an easy foreign-policy win, launched a pre-emptive strike on North Korea in the autumn of 2018. The resulting war cost 2m lives, disrupted Asian trade and added to the economic downturn. But it allowed the Republicans to paint themselves as the patriotic party, and they expanded their majority in Congress.

So the American economy was hit by a triple whammy: the lingering effects of tighter monetary policy; a fiscal policy that hit demand by transferring money from the poor to the rich; and a slump in global trade. The trade war also damaged growth in China. So the world's two biggest economies pulled the rest of the world into a slump. Global supply chains were disrupted as many of the efficiency gains of the previous 20 years dissipated.

Economists berated the Trump administration for their actions. But just like the 1,028 economists who signed a petition against the Smoot-Hawley tariff, they were ignored. “The public have had enough of experts,” the President proclaimed. His philosophy of “never retreat” prevented him from changing course; in China, nationalist pressure insisted that President Xi stand up to the Americans; while the EU was too preoccupied with Brexit to make a difference. Britain emerged from the EU in 2021 to pursue free trade policies in the middle of a tariff war.

It might not have happened just as the Great Depression might have been averted with the right combination of fiscal and monetary policies. That downturn also came out of a blue sky when the economy was doing well and the stockmarket was at a high. But the political elite of the world were too preoccupied with headline-grabbing measures to head off the disaster.

This piece came to us via a hole in the space-time continuum