RICHARD EPSTEIN: Bad Trump still battling good Trump

From the time he first stepped onto the national stage, Donald Trump’s good and bad alter egos have battled to control his economic policy.

The good Donald follows the principles of small government, and he has a lot to crow about. Small government leads to both economic growth and wage increases that produce gains up and down the economic scale, including sustained wage growth for blue-collar workers, minors, former criminals and other supposedly disfavored groups. In contrast, progressive Democrats labor under the eternal delusion that high minimum wages, strong unions, universal loan forgiveness and free public goodies for education, housing and health — all financed by backbreaking taxes — will reduce income inequality and increase growth.

Sadly, they are half right. Inequality will be reduced as incomes drop more rapidly for the wealthy than for poorer people. Why? Because every restriction on what employers can offer operates in practice as a restriction on what workers can receive, leading to the kind of downward spiral that occurs in such progressive meccas as Connecticut, California, Illinois and New York.

If domestic economic policy were the only issue on the economic front, Trump should win the election in a walk. After all, why should the electorate choose to upset the economic applecart with wild promises whose adoption would paralyze a nation? Elizabeth Warren is proof positive that academic background is neither a necessary or sufficient condition for economic sobriety.

But then there is the bad Donald twin who, in the blink of an eye, jettisons in the international arena the free-market principles that work so well in the domestic market.

Domestic Donald worries about growth; foreign Donald is obsessed with the balance of trade and thinks trade deficits are a huge sign that the United States is being ripped off by foreign countries. At no point does he even grasp that the primary consequence of a trade deficit is that foreign economic players increase their capital investments in the United States, which in turn increases job opportunities and wages at home.

Yet driven by the delusion that it is easy to win trade wars, bad Donald jeopardizes all the gains from his domestic policy by his uninformed truculence in international affairs. Granted, something has to be done to bring China to heel for its abuse of intellectual property rights and its discriminatory application of its local antitrust laws to foreign businesses. But on these issues, the United States has many allies who are in the same boat. Yet bad Donald disdains any alliances with parties with whom he shares a common interest. Instead he is prepared to bring about an on-again-off-again tariff war, which results in mutual losses on both protagonists.

Econometricians can try to figure out how threats of tariffs on passenger cars and raw metals can hurt the U.S. economy. But no one should take the slightest comfort in the willingness of bad Trump to kneecap his best trading partners in North America and Europe in pursuit of some evanescent edge that will, in fact, lead only to mutual economic misery.

For both Trumps, the vital political question is the extent his irresponsible trade policies will interfere with the domestic boom.

Exhibit A for this problem are the American farmers who are caught in the crossfire that results in heavy Chinese tariffs on key American products such as soybeans, with sharp declines in units shipped. Farming is a long-term business. Any prolongation of the tariff wars could lead to a mass exit from the industry, which may not return to its former size if and when the tariff wars are over.

Good Trump is aware of this risk, but bad Trump fails to understand that there is no second-best solution that can cure these massive dislocations or make up for lost revenue. Thus one of Trump’s initiatives is to try to hand out subsidies to those farmers caught in the economic crosshairs. But his program fails for two reasons. First, the cross subsidies are too low because as a stop gap measure they only mitigate the losses, they don’t eliminate them. Second, the subsidies are too high. These payments do not emerge out of thin air, but have to be financed in the usual way: higher taxes, greater deficits or larger debt. Pick your poison, for all three methods have this in common: They increase overall social losses that ripple through the rest of the economy.

The danger does not stop here. One of the dumbest federal mandates requires gasoline manufacturers to include ethanol in their fuel. The policy is clearly indefensible. If it made sense to include ethanol in gasoline, no mandate would be needed. But once the mandate is in place, it distorts both the market for gasoline and for agriculture foodstuffs.

Ethanol is bad for car engines and for the environment. It also diverts land more suitable for producing foodstuffs into making ethanol. A sensible political imperative is to cut down on the subsidies. But given the trade wars, bad Trump has doubled down on ethanol by ordering the Environmental Protection Agency to suspend the rule that bans 15 percent ethanol fuels from reaching the market during summers, increasing market distortions for fuel and food. Bad regulatory policy is never justified as a desperate effort to offset bad trade policy.

The longer that Trump maintains his economic jingoism, the worse it will get. The president can continue his fruitless efforts to ensure minimum U.S. content in motor vehicles produced by supply chains that run from the United States to Canada to Mexico in serpentine fashion. But in the end everyone loses — including, perhaps, the president himself. The crazy democratic economic proposals have nothing to commend them. But they all seem a little less crazy when juxtaposed with Trump’s gratuitous economic blunders.

Adam Smith famously argued for low domestic taxes and free trade in “The Wealth of Nations.” It would do wonders for both Trump and the nation if he were to read and follow the condensed version.

— Richard A. Epstein is a professor at the New York University School of Law, a senior fellow at the Hoover Institution and a distinguished service professor of law emeritus and senior lecturer at the University of Chicago. His Review-Journal column appears monthly.