Commerce Secretary Lutnick recently had this to say:
Donald Trump’s commerce secretary Howard Lutnick Thursday said that people should just let the president run the global economy because he knows what he has been doing.
One thing he presumably knows is that his recent announcement destroyed $2.5 trillion in stock market wealth in the US, not to mention additional damage to non-traded firms and foreign firms. That’s one of the largest one-day destructions of wealth ever achieved by a single individual, perhaps the largest.
And here’s the very first article of the US Constitution:
Article. I.
Section. 1.
All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.
Notice that it says All legislative Powers, not “Most”. I’m still looking for the part of the Constitution where it says the president should “run the global economy”.
There was a time when Congress did actually determine US trade policy. The Institute for Policy Innovation recently produced a list of 15 treaties passed by Congress that President Trump violated in the past 24 hours. I won’t list them all, but here are the first two and then the last two, to give you a flavor:
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On May 23, 1985, Congress passed a US-Israel free trade agreement.Donald Trump just broke it.
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On September 19, 1988, Congress passed a US-Canada free trade agreement.Donald Trump just broke it. . . .
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On October 12, 2011, Congress passed a US-Colombia free trade agreement.Donald Trump just broke it.
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And on January 16, 2020, Congress passed Donald Trump’s USMCA, a free trade agreement with Mexico and Canada. Donald Trump just broke his own four year-old trade agreement.
I can recall a time when Congress had the power of the purse. Decisions on taxes and government spending were made by Congress, and the job of the executive branch was to enforce those laws. Today, congressional spending authorizations are treated as mere suggestions, which the president is free to accept or reject. The President can enact the largest tax increase in history.
Throughout history, intellectuals have repeatedly dreamed of the benevolent dictator, a leader that would cut through the messy job of reaching consensus and would rule in a bold and decisive fashion. On a few occasions it even worked out, as we saw in Lee Kuan Yew’s Singapore. But for every Lee, there are a dozen Maduros, Castros or Putins. The wisdom of the crowd is not always correct, but on average it is less wrong than the wisdom of a single individual.
The tariffs recently adopted by the Trump administration never would have been enacted by Congress. We’ll see how they work out. Bloomberg reports that the tariff announcement hurt the US stock market much more than foreign markets:
US equity index futures tumbled more than 4% after Trump announced a sweeping series of tariffs following the market close on Wednesday, and a gauge of the dollar slumped. But the impact elsewhere was less extreme. The Stoxx Europe 600 was down 1.9%, while the euro was up 2.2% against the dollar, hitting its highest level since October. A broad gauge of Asian stocks fell as much as 1.7%.
I wonder how that difference would be explained by mercantilists, especially those who have claimed that tariffs are an effective way of preventing America from being “taken advantage of by foreigners”. Is this what they expected? Did they expect the dollar to depreciate on the news?
It’s worth noting that some of these trade treaties were clearly more than economic policy initiatives. It is no coincidence that Israel was the first country to achieve a free trade agreement with the US—we have close ties with Israel related to security issues in the Middle East. Trump’s repeal of this treaty is more than just economic policy, it’s also foreign policy.
The IPI also had this to say:
When did it become okay for a president to break treaties lawfully passed by Congress?
President Trump is relying on the 1977 International Emergency Economic Emergency Powers Act (IEEEP), which empowers the president to act in cases of “unusual and extraordinary threat.” Can anyone argue with a straight face and a sound mind that the United States faces an unusual or extraordinary threat from literally every country on Earth?
A 10% tariff was placed on Heard Island, which has a population of zero humans and a few penguins. It does have a nice mountain however, a bit reminiscent of our Mt. Rainier:
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READER COMMENTS
MarkW
Apr 4 2025 at 7:14am
My longshot hope is that Trump is going so over the top with executive order abuse that the courts and Congress will finally rein it all in and return us to something resembling the constitutionally established separation of powers. If it happens, it’ll probably be more the courts than Congress doing the work as most members of Congress apparently don’t actually want the power that the constitution assigns them (if you never have to cast any potentially unpopular votes, it’s easier to keep getting re-elected).
Jose Pablo
Apr 4 2025 at 2:34pm
most members of Congress apparently don’t actually want the power that the constitution assigns them
What members of Congress care about most is getting re-elected, just like any rational politician would. And right now, it’s become very difficult to win re-election without Trump’s support.
Once that changes, their behavior in Congress will change too. But I don’t see how that shift could happen before the midterm elections.
MarkW
Apr 5 2025 at 6:01am
And right now, it’s become very difficult to win re-election without Trump’s support.
Among Rs, that has been true for the last few years. But we may be watching the end of that dynamic in real time with the market meltdown. But some Republican defections have already been happening. If the sell-off gets worse and Trump’s favorability goes negative, we can expect to see a lot more where that came from.
Jose Pablo
Apr 5 2025 at 7:49pm
I hope you’re right. Republican representatives are undoubtedly receiving many angry calls from their constituents.
Warren Platts
Apr 4 2025 at 7:40am
Isn’t that what we want?
Jon Murphy
Apr 4 2025 at 7:48am
I don’t want my money worth less, no.
And it’s not even what you want. A depreciating dollar implies a weakening terms of trade and potentially weaker demand for US made goods, services, and assets.
And it’s not what the Trump administration wants. A key assumption in the model is that these tariffs will have no exchange rate effects. The fact they are having those effects implies the tariffs imposed are too high, even for their standards.
So no, none of t his is what “we” want, however one defines “we.”
Scott Sumner
Apr 4 2025 at 12:49pm
“Isn’t that what we want?”
Never reason from a price change. And you need to pay attention. For years the mercantilists have been telling us not to worry that tariffs will be inflationary, as the dollar will appreciate on the news. Now, they are silent.
Travis Allison
Apr 4 2025 at 5:09pm
@Scott: actually that is what Greg Mankiw said about tariffs causing the dollar to appreciate:
https://gregmankiw.blogspot.com/2025/03/kevin-hassett-forgets-econ-101.html
Then he posted yesterday why the dollar is depreciating:
https://gregmankiw.blogspot.com/2025/04/why-dollar-is-depreciating-today.html
Good thing that economist have two hands. They can’t be wrong!
Out of curiosity, what is your model for currency moves with tariffs?
Scott Sumner
Apr 4 2025 at 7:44pm
I agree with Mankiw. The first post focused on the substitution effect, implicitly holding GDP constant. But if the trade war triggers a recession then the dollar may fall.
steve
Apr 4 2025 at 9:28am
Even the communists at least had committees to run their economies. We have one person. That’s about as centralized as you can get.
Just a note. It’s not every country. He left off Russia and North Korea.
Steve
TMC
Apr 4 2025 at 10:57am
We have heavy trade sanctions on Russia and North Korea. An added tariff wouldn’t do anything.
Bob Loblaw
Apr 4 2025 at 5:39pm
Similar arguments could be made about applying tariffs to the sparsely populated and in some cases uninhabited Islands Scott mentioned.
Todd Ramsey
Apr 4 2025 at 10:43am
If the US economy contracts significantly because of terrible policy choices like these tariffs, will NGDP level targeting cause inflation? If real GDP is down 4%, and NGDP is up 4%, is there necessarily an 8% rise in prices?
I’m a huge believer in NGDPLT, but I never anticipated such terrible policies actually being implemented.
I’m hoping you will write a post addressing my scenario.
Scott Sumner
Apr 4 2025 at 12:51pm
Yes, if you targeting NGDP at 4% then inflation moves inversely from RGDP. That’s a feature, not a bug.
Prices would be higher, but that’s the fault of the tariffs, not NGDP targeting. The specific figures you cite are implausible.
TMC
Apr 4 2025 at 11:01am
I hope the end result of this is that Congress finally starts doing its job again. The Supreme Court kind of made them by disallowing agencies from making their own rules.
My take on this is that none of this has anything to do with tariffs. Trump wants something, and he negotiating with the countries behind closed doors. Just like what happened with Mexico. I have an econ buddy who thinks it’s all about the 10 yr bond rate. Trump is getting a better deal on our huge debt. No idea though, except it has little to do with trade.
Scott Sumner
Apr 4 2025 at 12:54pm
“I have an econ buddy”
I get a new econ buddy, one that doesn’t engage in reasoning from a price change. And no, Trump does not have any secret plan or negotiation here.
During Trump’s first term his supporters assured everyone that the stock market proved he was doing well. What do they say today?
TMC
Apr 4 2025 at 3:39pm
I think you misread that. Trump wants lower bond rates in order to lower our actual cost of carrying the debt, not using it as a signal.
“And no, Trump does not have any secret plan or negotiation here.”
He literally just did this with Mexico with the effect he wanted.
Scott Sumner
Apr 5 2025 at 1:53pm
“He literally just did this with Mexico with the effect he wanted.”
I disagree. Unless the effect he wanted was a fake victory.
And lowering interest rates via an economic slump does not lower the cost of carrying the debt. That’s reasoning from a price change.
Jon Murphy
Apr 6 2025 at 8:27am
Your econ buddy should also know that these tariffs will increase interest rates (as they did in 2018), as now there will be less supply of loanable funds.
I second Scott’s comment.
Jose Pablo
Apr 4 2025 at 4:08pm
During Trump’s first term his supporters assured everyone that the stock market proved he was doing well. What do they say today?
I’m genuinely curious what theory they’ve come up with to explain why something that’s clearly good for America’s future is supposedly bad for the market value of American companies.
To the untrained eye, it all looks a bit puzzling.
nobody.really
Apr 6 2025 at 1:23am
What about a secret plan to fight inflation?
Jose Pablo
Apr 4 2025 at 3:14pm
I have an econ buddy who thinks it’s all about the 10 yr bond rate. Trump is getting a better deal on our huge debt.
Despite all the talk you hear about it, only around 20% of the U.S. government’s debt is held by foreign entities.
So, if your econ buddy is correct, that would mostly be about some Americans getting a better deal on debt held by other Americans (and by themselves).
As for the other 20%, if the trade deficit decreases, foreign demand for U.S. debt will also decline. With less foreign demand, and all else being equal, interest rates would likely rise.
Jose Pablo
Apr 4 2025 at 5:57pm
As a side note, for all the senseless noise and worries surrounding interest payments on U.S. government debt, the reality is that, by and large (about 80%, in fact), these payments are simply transfers from some American taxpayers to others.
It’s not unlike food stamps, except with far better incentives and far worse redistributive effects.
Jose Pablo
Apr 4 2025 at 2:43pm
One of the “sideshows” of mercantilism was colonialism.
At least the Trump administration is ideologically consistent, which helps explain its otherwise puzzling obsessions with Greenland, Canada, and Ukraine’s rare earth resources. These fixations only make sense within a worldview where “kings”, not consumers, are seen as the driving force of the economy.
Neither mercantilism nor colonialism ended well.
Mactoul
Apr 4 2025 at 11:03pm
Perhaps you deplore the existence of USA itself as it was a colonial entity.
Along with all of Latin America, and if we go back in time to China, India and in fact all the existing countries.
Jose Pablo
Apr 6 2025 at 7:58am
The genocide of Native populations and the massive “importation” of enslaved labor (aka American colonialism) would, fortunately, be unacceptable by today’s standards.
Perhaps the most extreme case of colonialism was the Belgian Congo. Confusingly, the Congo was not owned by the Belgian state, but by King Leopold II personally. The structure of this arrangement bears a striking resemblance to Trump’s already forgotten proposal for Gaza.
It’s remarkable how similar mindsets can produce disturbingly similar outcomes.
Mactoul
Apr 4 2025 at 11:09pm
Where are the CEOs of big multinationals, the trade associations, the Chambers of Commerce?
How they have been reduced to nullity?
Peter Navarro, WH consulor on trade, supposed to be the architect of the tariffs, is an (ex-?) economist. He has actually published a well-regarded book from free market perspectives in 1980s.
Scott Sumner
Apr 5 2025 at 1:57pm
Yes, in the 1980s he clearly explained the problems with protectionism.