Business Leaders Are Afraid to Tell Trump He's Wrong, But Won't Be Afraid to Cut Jobs and Raise Prices
Trump has squelched public dissent, but that won't save him from business retrenchments that raise costs, kill jobs, and make him and his party unpopular.
Dear readers,
Last week, Donald Trump achieved something no president has before: He singlehandedly caused the S&P 500 to fall 10 percent in two days. The declines have continued today, and the signal from the ticker is unmistakable: His harebrained tariff plan is an economic disaster. A recession is now likely, with all the concrete human harms that entails: job losses, business closures, bankruptcies. Recessions are also political disasters for the governing party, and this one, being unusually obviously the direct fault of the president, is likely to be especially so.
Yet Trump seems undeterred by the market crash. After stocks tanked on Friday, he posted “ONLY THE WEAK WILL FAIL!” to Truth Social and went off to spend the weekend golfing. He continues to post through it, expressing confidence that he’ll be vindicated in the end.
Of course, Trump has said for decades that trade is bad and tariffs are good. But during his first term, he restrained whatever impulses he had on this issue. He moderately escalated tariffs, especially on China, but did not impose enough of them to outweigh his otherwise orthodox conservative economic policy, which allowed the then-ongoing economic expansion to continue until the COVID pandemic hit. This time is different: his cadre of economic advisers is dumber, and of the advisers he has, he seems most inclined to listen to the dumbest ones, who are the ones who share his bizarre views on trade. He is no longer solicitous of the stock market. And the CEO class, which knows fully well that the president is leading the economy off a cliff, has been cowed into silence, afraid of how the president might retaliate against their firms if they speak up against his policies.1
Trump’s efforts to squelch dissent have been very intentional, and on a lot of fronts, I’m sure he’s happy about the results — like with the law firms and the universities he has brought to heel. But he’s likely to regret shutting up the corporate leaders — the honest feedback that he’s discouraged them from providing is feedback that might have saved him from a political disaster.
The thing about the increasing meekness of the corporate executive class is that it reflects their singular focus on making profits for their companies — why risk offending the president if he’ll retaliate in a way that hurts the bottom line? But that same singular focus on profits also means that corporations will need to react to the tariffs in ways that will gravely hurt Trump's political fortunes. We may not hear an outspoken CEO on television criticizing Trump for killing jobs, driving up prices, and making it difficult to do business in America. But that CEO will still react to the economic cost of the tariffs in the normal way: by cutting jobs, raising prices, and seeking business opportunities outside of America.2
Trump is also about to learn — like Biden did before him — that a president cannot talk his way around inflation. He won’t convince voters not to believe their lying eyes when they look at price tags. He won’t persuade companies not to raise prices when it is a business imperative. And if he trots out a Republican version of the “greedflation” talking point — that it’s just these bad, mean companies raising prices — that’s likely to have as little effect on public opinion or corporate behavior as it did under Biden.
I had been somewhat surprised by how ineffective business lobbies have been at influencing front-end policy outcomes in Trump's second term so far. The first big shock for me was when the pharmaceutical industry made no apparent effort to block the confirmation of Robert F. Kennedy Jr., a man with a very negative view of pharmaceuticals, to run the Department of Health and Human Services. I suspect pharmaceutical executives and their lobbyists believed they wouldn't be able to stop the nomination and they'd just draw Trump's wrath if they tried. They were probably right about that.
The same is true for lots of other business leaders who have chosen not to fight: I doubt that Lockheed Martin and Boeing could have stopped Trump from seeking to blow up the transatlantic alliance (and making Europeans wary of buying our defense technology in the process). There's probably nothing auto-company CEOs could have done to stop Trump from breaking the integrated North American manufacturing supply chains they all rely on. And given what we've seen this week, I doubt louder pleas from Wall Street CEOs would have gotten Trump to refrain from crashing the stock market.
But just because you lack the power to stop the president from implementing an economically destructive policy — or just because you choose not to try — does not mean you are stepping up to insulate the president from the political costs associated with his policy. American corporations lack the capacity to protect Trump from the consequences of his actions, no matter how much their executives might be willing to suck up to him in exchange for money.
And while the president clearly believes he has corporate America locked in a room with him, he's likely to realize over the next few months, as firms raise prices and cut jobs, that he's actually locked in a room with them. And he might even end up wishing that he had listened more to his external critics, and that he had brought back some of the smarter voices — like Gary Cohn and Steve Mnuchin — who helped protect him from making economic mistakes like this in his first term.
Very seriously,
Josh
While corporate CEOs have been reluctant to go on television and bash the tariffs, the business associations have been willing to oppose them, albeit in the most polite manner possible. For example, the U.S. Chamber of Commerce warned that the tariffs will raise prices, and suggested that the president focus more on his policies that they agree with, like extending the 2017 tax cuts and reducing regulation. And the Business Roundtable emphasized that it “supports President Trump’s goal of securing better and fairer trade deals with our trading partners,” while urging him to please cut some deals that would make it possible to rescind the new tariffs.
Those costs are going to be major for consumers and hugely politically damaging to the president, and the administration still seems to be in denial about this. In particular, they keep claiming that the cost of tariffs will largely be borne by foreign parties. Scott Bessent claimed in his confirmation hearing that the blow of tariffs would be counteracted by exchange rate moves: that tariffs would cause the dollar to strengthen, increasing the purchasing power of the dollar and counteracting about 40 percent of the cost of a given tariff.
That hasn't happened; in fact, the dollar has significantly weakened as a result of the trade war, because market participants believe the tariffs are going to hurt the American economy and reduce our prospects for economic growth relative to the rest of the world. (That's also why interest rates are falling — the tariffs are going to discourage business investment and make consumers less able to afford homes, and therefore there won't be as much demand for borrowing.)
The combination of the weaker dollar with the trade war means that Americans may bear more than 100 percent of the cost of the tariffs, while price levels in other countries actually fall, as American products become cheaper for them to buy. As the price shocks hit, Republican officials may try the lines they've been test-driving about how a little pain is necessary for a radical restructuring of the economy, or about how there's more to life than material possessions. None of this is going to make voters happy, and just because Trump isn't hearing the complaints about it directly doesn't mean Republicans won't feel them at the ballot box next year.
I (much like… everyone?) radically underestimated how much the MAGA camp actually believed their economic policies vs wanted to focus on culture war bullshit. I figured that Trump would spend more time, like, pressuring Disney into making racist movies again versus evaporating everyone’s 401ks.
Part of the problem is the lack of clarity on the objectives, even amongst the tariff enthusiasts in Trump's camp. Is it reciprocity (which seems to be Bessent's point of view)? Or is it revenue enhancement (the CPA view), or is it to protect strategic industries as part of a national development policy?
The other day, for example, Vietnam offered to eliminate all of its tariffs to gain exemption from Trumo's tariffs. But if the tariffs are eliminated, how do you encourage re-shoring?
If you want a weaker dollar to reduce the trade imbalances, then doesn't that risk a potential diminution of dollar hegemony, as it gives less chance to net save in USD?
Then there's the broader question of whether we should use the stockmarket as the best barometer of America's economic welk-beinf, considering how much it embodies an economic model/status quo that Trump is seeking to eliminate?
And what's the main economic threat? If the problem is losing the industrial base to China or other parts of Asia, then why antagonise Europe (as Tom Friedman notes today in the NY Times)
If you don't get the diagnosis correct, then the wrong medicine can kill the patient. From the wreckage of Liberation Day, something useful might be built. But first it is necessary to recognize that it is indeed a wreck with a simplistic cure that might kill the patient.