After rising on Tuesday, stocks tumbled on Wednesday. The Dow Jones Industrial Average fell more than 700 points on news that major European economies might be headed for recession.
At home, American analysts and investors have been spooked by President Donald Trump's ongoing trade war with China, which has raised uncertainty about future investment and clearly triggered broader fears about macroeconomic stability. Looming over these worries is the fact of the inverted yield curve: 10-year bonds are now offering lower interest rates than 2-year bonds, a sign that investors are scrambling for somewhere safe to keep their money long term.
Economist Paul Krugman argued Wednesday that, while the world doesn't appear to be facing a repeat of the 2008 financial crisis, the risk of a recession is indeed rising. And despite his boasts about his economic performance, Trump himself appears to be driving at least one major factor in the increased risk, while the GOP blocks potentially countervailing measures.
"These low, low rates are telling us several things: (a) private investment demand is really weak despite tax cuts (b) recession risks are pretty high (c) infrastructure! I mean, with borrowing virtually free, why not fix all those falling-down bridges?" Krugman wrote in a tweet.
In other words, Krugman was pointing out that given the frantic desire for low-risk bonds, the federal government could be borrowing more money to invest in infrastructure at essentially no cost. During the 2016 campaign, Trump even suggested he would take advantage of such an opportunity, promising a major infrastructure package. But that never happened.
"[Senate Majority Leader] Mitch McConnell and his wing of the party oppose any kind of government program, no matter how much good it might do — actually especially oppose programs that might work, and make people think better of government," he said. "Another is that Trump and co just can't bring themselves to advocate anything that doesn't include scams on behalf of their cronies; so their vague suggestions for infrastructure always look more like stealth privatization than public investment."
He added: "So we're left, as I said, with markets basically begging the government to do some investment, but this plea falling on deaf ears."
Private investment, of course, is struggling in part because of the trade war. As Krugman explained in a recent newsletter:
At the same time, Trump’s trade war may be starting to take a toll. In particular, the uncertainty may be deterring business spending. Whether new tariffs would hurt or help your business, it now makes sense to hold off on plans to expand, until you see what he actually does.
Of course, Trump and the GOP aren't completely to blame. Even this level of recklessness would be unlikely to force the economy into recession on its own.
"The trade war is just one ingredient," Krugman acknowledged. "There's also a decline in housing permits, maybe reflecting the bursting of a mini-bubble in real estate; European weakness, maybe home-grown, spilling over to the US ... the petering out of the tax cut; tensions in Asia, etc. etc. The inverted yield curve is NOT an independent cause, but rather a reflection of worries about all this."
The Washington Post's Jennifer Rubin, too, noted that if the economy falls into a recession, the Trump administration will be poorly equipped to handle it. It already spiked the deficit with its unhelpful tax cut. And while it's unclear how much debt is too much, the GOP has certainly brought us closer to the limit that is necessary; and whenever it's convenient for the party, it will begin screaming about the deficits again, regardless of its own role in ballooning the debt or the costs austerity could have. The GOP is also ideologically opposed to many of the best countermeasures to a recession, which include an expanded and hearty social safety net and financial support for state governments.
"In sum, Trump claimed the economy he inherited as his own," wrote Rubin. "He rationalized tax cuts on the notion he’d boost growth above 3 percent; now we’re on recession watch. He told us a trade war would be quick and good for the economy; it’s now stymieing business investment decisions. So yes, if a recession hits, Trump will richly deserve blame."
And instead of offering policies to shore up the economy, Trump is lashing out at the Federal Reserve chair — whom he appointed — for supposedly not doing enough.
Of course, Trump and his ilk haven't just claimed credit for the economy. They've claimed that Trump is a financial genius who is driving the United States to an economic renaissance. Some of the factors pushing us toward a recession are certainly beyond his control, but his prowess as a guardian of the economy is being continually undermined.
"Amazing how many people have spent time trying to project some rationality onto Trump trade policy," Krugman said on Twitter. "What looks like raw ignorance and prejudice is, in fact, raw ignorance and prejudice."