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2016-11-18 19:12:17
Economic Trends: The Glaring Contradiction at the Heart of Donald Trump’s Economic Policy

Campaign promises are easy. Governing is hard.

It is a truism that Donald J. Trump and his team will soon learn. And a fascinating example has emerged since the election, courtesy of global currency markets. It is a study in the kind of complex trade-offs that Mr. Trump rarely grappled with during his campaign but will face many times a day in the Oval Office.

A centerpiece of Mr. Trump’s campaign was the United States’ trade deficits. He pledged to eliminate them and create a resurgence in American manufacturing.

He has also pledged tax cuts, infrastructure spending and deregulation. That set of policies has led markets to expect speedier economic growth and thus higher interest rates in coming years. That, in turn, is driving the value of the dollar higher on currency markets. Since Election Day, the dollar is up 2.6 percent against an index of six other major currencies. The value of the Mexican peso has fallen 10 percent against the dollar, a remarkable swing for the United States’ third-largest trading partner.

You don’t need to be an economist to see what that means: A pricier dollar makes it harder for American manufacturers to compete overseas; it gives an advantage to companies that locate operations elsewhere; and it will, all else being equal, tend to make the trade deficit higher rather than lower.

This is not to suggest that the shift in the currency so far is a major disaster for American manufacturers and other exporters (though those that ship their goods to Mexico will feel the brunt of it). There was a bigger rise in the dollar in 2014 and 2015 that damaged export sectors even more.

But let’s imagine that Mr. Trump follows through on the policy mix he’s hinted at so far: a combination of loose fiscal policy (think more spending on defense and infrastructure, and tax cuts) and tighter monetary policy (the Federal Reserve raising interest rates faster than had seemed likely before the election). At that point, the dollar could move more decisively higher, creating a tension that the president and his advisers would have to resolve one way or the other.

As a rule of thumb, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, a 10 percent rise in the dollar would be expected to increase the current account deficit (a broader concept than trade deficit, but closely related) by 1 to 1.5 percent of G.D.P. in the ensuing two to three years.

In that scenario, Mr. Trump’s pledge to eliminate the $500 billion United States trade deficit would have just become $180 billion to $270 billion harder.

This is the kind of dilemma presidents face all the time. The Oval Office debate might go something like this: The Commerce Secretary complains, “Mr. President, this strong dollar is just killing our manufacturers; they can’t compete with this kind of appreciation.” The Treasury Secretary, who is in charge of the currency, responds, “It’s a necessary evil, Mr. President; our economy is booming so much that global investors just can’t get enough of United States assets.”

When there are these kinds of disputes, the president has to decide. And when a president tries to find a solution that answers both concerns, there are always complex ripples. For example, “let’s appoint Fed officials who will cut interest rates” might temporarily let you have both a booming domestic economy and a competitive export sector, but would mean an increase in inflation — which will make both the bond market and many retired Americans living on fixed incomes unhappy.

The tension between currency policy and trade policy is just one example. Mr. Trump’s promises to repeal Obamacare while keeping some of its most popular features would be hard to carry out in practice. Virtually every issue in tax policy, diplomacy and regulatory policy features similar complex trade-offs.

None of this is to say that these tensions are unsolvable, or that Mr. Trump won’t overcome his lack of a policy background to arrive at good solutions. But he will almost certainly find out soon that “Make America Great Again” is a slogan, not an answer.