Are we on the verge of an American economic and social revival as Donald Trump promises, or on the eve of destruction as his critics claim? That sounds extreme, but in this partisan world we live in binary events are all we care about. 

 

If all unfolds according to the Trump policy playbook, inflation will be lower, the country more substantial, and we will be able to grow our way out of this debt crisis through higher tax revenues from a booming economy. This land of plenty will take time to achieve, they warn, so for now, you must have faith in the narrative.

 

The bull case continues with tax cuts, government spending reductions, and tariffs that will supercharge the economy, but only after a period of pain unfolds. It is an unorthodox multi-faceted approach. It carries a great deal of risk, and several of its main pillars fly in the face of most economists' wisdom.

 

I wrote last week about how both the demand and supply sides of this economic equation face pitfalls. Many of the country's future growth hinges on the success of supply-side economics that have only increased income inequality in this country for decades. This week, we look at the supposed benefits of tax cuts and tariffs. 

 

The much-heralded tax cuts of 2017-2018 during Trump's first administration, were supposed to benefit rich and poor alike. However, the trickle-down assurances of people like Larry Kudlow, Trump's former economic adviser, never occurred. Roughly 90 percent of  Trump's last round of tax cuts benefited the wealthy and corporations.

 

This time around, despite the media and the administration's use of the word tax cuts, the present plan is only to extend the existing tax cuts first passed during his first. As such, both individual and corporate tax rates will remain the same. There is no economic impact therefore unless the extension of tax cuts fails to pass the House. If so, then we will experience a tax hike. I think the risk of that is small.

 

The good news is that some lessons were learned, and some lower-income Americans may get a reduction in taxes this time around. Trump has promised no taxes on tips, overtime pay, and Social Security benefits for retirees. At the same time, Congress is actually toying with the possibility of increasing taxes on millionaires to 40 percent.

 

Given that tax cuts may not provide the economic stimulus needed, the focus on tariffs becomes more important. Tariffs "are going to raise $600 billion a year, about $6 trillion over a 10-year period," according to Trump's chief trade adviser, Peter Navarro. That may be a revenue source to offset spending and tax cuts, but it comes with baggage.

 

As I have written many times in the past, tariffs are taxes. They are paid for by American companies and individuals that buy imported goods. Those taxes accrue to the government just like your income taxes. That means Americans are facing a hefty tariff tax increase. How large? It would be the largest tax hike since 1951, representing 2 percent of Gross Domestic Product if they are implemented.

 

Tariffs will not only hurt consumers but will also slow the growth rate of the economy. If our trading partners retaliate in kind, the damage will be greater. In this case, the global economy will also slow. This negative feedback loop could feed upon itself. The recent tariff on Chinese goods is an example of what might happen with other nations.

 

The total tariff rate on imported goods from China is now 70 percent. China recently retaliated by slapping a 34 percent tariff on American goods. In return, the U.S. increased our tariffs again by 50 percent last week, totaling 104 percent. China then upped its tariff again and so did we. Fortunately, this kind of tit-for-tat action has not spread among the other nations we trade with.

 

Just yesterday, the president announced a 90-day pause on those reciprocal tariffs he announced last Wednesday and instead settled for a much milder 10 percent tariff across the board. His one exception was China. He increased tariffs to 125 percent on that country's imports. His comments indicated that the pause was always part of his tariff plan.

 

Clearly, other elements of the administration's plan are working. The dollar has declined as has interest rates. Both help American exporters and will help the trade deficit. The oil price has also plummeted. That will go a long way in reigning in inflation. If the economy slows further, in the absence of more fiscal spending, inflation should remain modest. Those are remarkable achievements in such a short time.

 

The challenge will be reviving a faltering economy. That will depend on a successful conclusion to the tariff question. Many doubt the wisdom of Trump's actions. Corporations, financiers, and business leaders, along with Democrats, have warned that we are on the eve of destruction if the president did not relent on his tough stance on tariffs. It seems clear that he was listening.

 

This was a massive turnaround in Trump's recent attitude, which I suspect has more to do with the 20 percent-plus fall in the stock market and a near-meltdown this week in the credit markets. What is true is that the ultimate success or failure of much of this economic program lies squarely on the shoulders of Donald Trump, the negotiator-in-chief. He seems comfortable in that role and relishes it.

 

No plan is foolproof. Sometimes, against all odds, one approach will work, or if it doesn't, another one will. I am not sure that this burn-it-down approach to economics will succeed, nor will a return to growth come about as quickly as planned. I am guessing Trump feels the same way. He knows the time it will take to carry out these plans is in years, not weeks or months, even if he is successful in all his trade objectives.

 

As for today's populist generations, especially those most impacted by income inequality, some of the policies I outlined above are different from the same supply-side, trickle-down B.S. that created this level of income inequality in the first place. Others are not. Yet, the country demands change and change it will get. I am willing to give it a chance, despite my misgivings, knowing full well that any change is uncomfortable, if not painful.

 

However, I am older, made more than my share of mistakes, and have acquired the patience to see what happens over the long term. Let's face it, we live in a country that has lived well beyond its means for decades. Change is long overdue, even if it isn't the change you had hoped for.

 

I am rooting for the country and its future generations, not for any party or politician. I am hoping that Trump's voters, Wall Street, and the country at large will have the willingness, fortitude, and patience required to weather the changes and challenges we face now and into the future.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.