Back From Vacation...

I was out camping and had a backlog of things to deal with after I got back. So I have been trying to catch up on the latest developments. I had been doing some background work on my tariff primer, but I just wanted to react to events first.

Budget Bill

I am not the person to talk to for handicapping the odds of American legislation passing, but my base case always was that Trump and the Congressional Republicans will be passing a big tax cut of some form. What’s the point of being a Republican donor if the Republicans cannot pass tax cuts?

It is unclear how stimulative fiscal policy will be: the tax cuts will mainly benefit wealthy groups with a low spending propensity, and the spending cuts are hitting people with lower incomes. Theoretically, the net multiplier on the increase in the deficit could be quite small, although it is likely that some bones will be thrown to middle class brackets so that there would be net stimulative effect.

The conventional worry about this point is “what about default risk?” The answer to that is: for a free-floating currency sovereign like the United States, default risk is political, not an economic one. President Trump lacks the intestinal fortitude for a broad-based default, but going after foreign holders of debt under some tax scheme is not something that can be ruled out.

Trade

I missed the TACO story (Trump Always Chickens Out), but his continuous reversals have meant that the worst effects of his tariff whims have been largely postponed. My working assumption is that supply chains are snarled, but the crisis created by 100+% tariffs on Chinese goods has been at least temporarily defused, and trapped shipments are probably being liberated. Everyone now knows what they are up against, and so firms are less likely to be complacent about future tariff hikes. My limited scan of U.S. data seemed to indicate that not much has shown up in aggregate data yet.

As should be somewhat obvious, the effects on the Canadian economy will be harsher, and are showing up. Real GDP growth was decent in the first quarter — but that probably reflects the burst of cross-border activity that hit as firms tried to get shipments through before tariffs kicked in. However, April (first month of Q2) saw a 10.8% retracement of merchandise exports, while oil exports were hit by falling prices. The bright spot is increased trade with countries other than the U.S., so there are some green shoots of rebalancing trade.