Tariff Chaos and Fiscal Ineptitude Are a Bad Economic Recipe

Though many of us wanted to believe otherwise, it appears we’re still living in an age of obnoxiously high tariff threats on America’s friends, trading partners and — this is a relatively new one — home-grown corporate superstars. On Friday, President Donald Trump warned that goods from the European Union would attract a 50% tariff from next month and Apple Inc. may be hit with special levies of “at least” 25% if it doesn’t manufacture iPhones in the US. This episode comes at a uniquely bad time for the economy: borrowing costs are even more elevated than they were before, consumption strength is flagging and the labor market is adrift.

Let’s start with borrowing costs. Yields on 30-year Treasury bonds entered this bout of volatility about half a percentage point higher than they were before the April 2 “Liberation Day” trade shock, a reflection of markets jitters about persistently high fiscal deficits. Senate Republicans are now taking their first crack at a sweeping tax and spending plan from the House, which — at least in its current form — would worsen the already unsustainable fiscal trajectory. Adding to the signs of agita, Moody’s Ratings downgraded the US by one notch last week, the last of the big three credit assessors to do so. The negative sentiment in the market was reflected in this week’s sub-par auction of 20-year bonds. None of this means that yields can’t drop from their current levels, but lower borrowing costs may not be quite the release valve for the economy that they’ve been in the past.