One year since the first wave threatened to engulf the nation, Covid-19 has reoriented business and spending in the United States in ways once thought unfathomable. It also has become a line of demarcation: The trajectory of Donald Trump’s final year as president was suddenly and sharply rerouted — with many of the administration’s key priorities upended as the nation’s commercial infrastructure was thrown into chaos.
Before the pandemic, economists and pundits had been keeping a wary eye on a mercurial president with an unorthodox, polarizing approach to governing. Were it not for Covid-19, Trump’s interventions in three critical areas of economic policy had the potential to leave the U.S. in a very different economic position than it is today.
With Republicans coming out of the 2016 election controlling the White House as well as both chambers of Congress, the party pushed through a sweeping package of corporate tax cuts, which Trump promised would usher in skyrocketing economic growth. “I think it could go to 4, 5, and maybe even 6 percent, ultimately,” he said in December 2017, just before signing the Tax Cuts and Jobs Act into law.
Yet despite the tailwind of massive tax cuts, annual GDP only hit 2.9 percent in 2018. By early 2020, the stimulative effects of those tax cuts were in the rearview mirror, with little additional economic output to show for the plan. With an eye on the 2020 election, the Trump White House had already flirted with the prospect of additional tax cuts, but provided little substantive insight into how to pay for them — raising concern that ballooning debt during an economic expansion would leave policymakers with few tools for the next downturn.
“There were basically no coherent policies being offered at all,” said Eric Toder, institute fellow at the Urban-Brookings Tax Policy Center. “What we did infer from the budget … was that his plan was to extend the tax cuts” for individuals, he said.
Many economists said attributing even 4 percent GDP growth to the TCJA had been an unrealistic expectation all along. Others said growth was constrained as a result of the added expenses shouldered by American businesses, particularly in the goods-producing sector, as Trump waged his trade war on China. An escalation of tit-for-tat tariffs raised costs for companies by an estimated $46 billion over roughly two years.
Trump proclaimed himself a “tariff man,” and on that, he delivered. He also asserted, “Trade wars are good, and easy to win.” This was less accurate, as the costs on both businesses and consumers weighed on economic growth. Researchers from the Federal Reserve Bank of New York and Princeton and Columbia universities calculated that U.S. consumers paid $6.9 billion more in 2018 alone as a result of tariffs.
As 2020 began, market participants hoped that the so-called phase one trade deal signed in January between the U.S. and China would provide at least a temporary reprieve, but they also expected more trade-related disruption, particularly in light of the election cycle. “The big concern was this lingering trade war issue,” said Ross Mayfield, an investment strategy analyst at Baird. “Leading up to a presidential election year, I’m sure there would have been political volatility and that uncertainty may have resurfaced,” he said.
“I think we would see more tariffs on tap,” said David Wagner, portfolio manager and analyst at Aptus Capital Advisors. “Everyone was fair game.”
What worried investors wasn’t just the saber-rattling and tough talk directed toward Beijing, which the U.S. had tangled with on trade issues for years, but also against the E.U., Canada and Mexico. Many of the tariffs the Trump White House pursued or threatened against allies were justified under dubious claims of national security. “There’s no doubt that the national security tariffs would have been a much bigger issue. It proved to be and still is a very sore point for American treaty allies,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.
The Federal Reserve had begun raising interest rates before 2020, but, with an eye on the upcoming presidential election, the White House stepped up its criticism of the central bank’s actions. While most presidents — especially those running for a second term — want easy monetary policy so they can leave office or campaign on an economic high note, the frequency and bellicosity of Trump’s attacks on Fed Chairman Jerome Powell were unprecedented.
Experts say the Fed had been on the right track toward rate normalization. “From a dual mandate standpoint, the Fed didn’t have much incentive to further lower interest rates,” said Stifel chief economist Lindsey Piegza, noting both the low unemployment rate and below-target inflation level that existed in early 2020. “I think the level of policy they had in place was very appropriate,” she said.
Trump excoriated Powell on Twitter and suggested that he might fire or demote him. Fed watchers said the president most likely didn’t have the power to carry out that threat, but the prospect of compromising the Fed’s independence worried the market.
“I think you’d have Trump being more vocal to keep rates low,” Wagner said. That kind of interference could have easily backfired, he added. “He might have tried to strong-arm the Fed into saying something that may spook the markets.”
In particular, Trump’s push for negative interest rates was both out of the ordinary and potentially risky. “Negative interest completely undermines pension payments, retirement programs, any kind of insurance or financial instrument,” Piegza said.
“The Fed would much rather grow the balance sheet than move into negative territory,” she said, since other economies that have flirted with negative interest rates, such as Germany and Japan, have struggled to rebound. “Negative interest rates don't provide a lot of upside and present a lot of downside.”