Perspective Matters
Like many of you, I've spent the past five days processing the results of the presidential election and considering its implications. During times of political transition, it's natural to feel uncertainty about what lies ahead. On Wednesday, I wrote about the importance of patience as events unfold over the coming weeks. As your financial planner, I believe it's crucial to separate economic issues from other aspects of current events, focusing on what matters most for your long-term financial wellbeing.
CAMPAIGN PROMISES VS. ECONOMIC REALITY
We've all experienced the familiar rhythm of election seasons, from school elections to presidential campaigns, where candidates make promises based on what they believe will win votes. While this may sound cynical, history shows that campaign promises often differ from actual policy implementation once a candidate takes office - and this can be reassuring during uncertain times.
Our current challenge - and I say "our" because we're all in this together - is assessing which campaign promises are likely to be implemented and to what degree. There are two well-known campaign promises made by the Trump campaign that if fully implemented would have a devastating effect on the global economy, in my opinion. It shouldn't surprise anyone if these promises end up being tempered following the Trump campaign’s success, and in fact I believe we should hope that the Trump administration has no qualms in pivoting away from these key promises.
The extent of implementation could significantly impact not just the United States, but the global economy for years to come. Since World War II, America's prosperity has grown largely through expanding global trade and economic cooperation. While not everyone has benefited equally from this growth - and I've heard directly from many of you about these challenges - the overall economic trajectory has been positive from a macroeconomic perspective. Some of the most significant economic impacts often come from changes to trade policy, which brings us to the critical question of how potential tariffs might affect our economy.
UNDERSTANDING OUR CURRENT LABOR MARKET
The U.S. labor market statistics currently show historically low unemployment rates - less than 5%. However, as many of you have shared with me in our discussions, these numbers don't tell the complete story of what's happening in American workplaces and households. The challenges we're facing aren't simply about finding jobs - they're about adapting to fundamental changes in the type of work available and the skills required to succeed.
Throughout my career in financial planning, I've observed how this transition from an industrial to a service and information-based economy has affected families and communities across the country. Over the past 20 years, we've seen a growing divide in wages, with technology jobs paying significantly more than service positions. While entry-level technology positions often offer promising salaries, many service industry careers struggle to provide adequate income for basic necessities. This disparity creates real anxiety for many families trying to plan for their future.
The impact has been particularly significant for those between 40 and 60 years old - a generation many of us belong to or have family members in. This group was educated and trained for an industrial economy, with expectations shaped by the post-World War II era of expanding middle class opportunity.
This mismatch between this segment of labor and the needs of the economy has contributed to the appeal of the Trump campaign's promises of mass deportation and tariffs on foreign imports.
It is an appealing message to those struggling with the structural changes in our economy. “Your economic pain is because of those people. Give me the power and I will get rid of those people and your life will be better.”
Economically, it is unlikely that implementing mass deportation campaign promises is going to create high paying jobs for people educated and trained to work in an industrial society. The challenge of adapting to new career requirements while maintaining financial stability is one I've discussed with many clients, and I understand the very real stress it creates. This economic transition, and the anxiety it creates, often leads to calls for protective measures like tariffs. However, history suggests we should carefully examine such solutions. We can debate how many of the low paying service jobs are being filled by whom, but we have better data to look at regarding the effect of tariffs.
THE TARIFF QUESTION
When considering economic policies like broad tariffs on imports, it's natural to hope for simple solutions to complex problems. However, history offers important lessons we should consider carefully. The Smoot-Hawley Tariff Act of 1930 provides a compelling example of how well-intentioned economic policies can lead to unexpected and far-reaching consequences.
In 1930, amid growing economic concerns, Congress passed this legislation that raised tariffs on over 20,000 imported goods to record levels - pushing the average tariff rate to nearly 60%. The intent was appealing and straightforward: protect American farmers and businesses from foreign competition during an economic downturn. Many politicians and citizens believed these measures would shield American workers and strengthen the domestic economy.
However, the actual results were dramatically different from these intentions. Rather than strengthening the American economy, the tariffs triggered a cascade of retaliatory measures from our trading partners. U.S. exports fell by roughly 61% between 1929 and 1933, and international trade dropped by about two-thirds during this period. These effects contributed significantly to deepening the Great Depression, not just in America but globally. Today, there is a broad consensus among economists that these protectionist policies were counterproductive, harming the very industries and workers they were meant to protect.
To understand modern market dynamics, consider the popularity of "Shark Tank" - a show many of us enjoy watching. Beyond its entertainment value, it illustrates fundamental principles about business success that contrast sharply with protectionist policies. The show's investors consistently emphasize that sustainable success comes from meeting market demands through innovation and efficiency, not through artificial barriers to competition. When entrepreneurs on the show have high production costs because they produce their product in the US, the investors typically challenge them to innovate, improve efficiency, or find unique value propositions rather than seeking protection from competition.
While targeted tariffs can serve a purpose in specific situations - such as countering unfair foreign government subsidies - they require careful, surgical application. Like many observers of the economy, I'm concerned about the potential impact of broad-based tariffs on household budgets, as companies typically pass these additional costs to consumers. In our interconnected global economy, attempts to protect domestic industries through broad tariffs often end up harming those same industries by reducing their export opportunities and increasing their input costs.
The lessons of Smoot-Hawley remain relevant today: while protecting domestic industries might seem like a straightforward solution to economic challenges, the complexity of global trade means that broad protectionist policies often create more problems than they solve. In our modern, interconnected economy, the ripple effects of such policies can be even more rapid and far-reaching than they were in the 1930s.
LOOKING AHEAD
In times of uncertainty, it's helpful to focus on what we can monitor and control. Over the coming weeks, several key indicators will help clarify the likely direction of economic policy:
Potential cabinet appointment nominees
Initial policy priority announcements
The progress of the transition process
Reactions from international trading partners
While the lessons of Smoot-Hawley and other historical examples inform our analysis, each economic situation is unique. That's why monitoring these specific indicators will be crucial in the weeks ahead. My team and I understand your concerns about the future, and we'll continue providing updates as significant trends emerge that could affect your investment strategies and financial planning decisions.
If you're not currently working with a Certified Financial Planner™ professional, this period of change makes it an excellent time to consider doing so. Our role as CFP® professionals is to help you navigate uncertainty while staying focused on your long-term financial goals. We continuously monitor fundamental investment and planning principles while considering global economic contexts. If you'd like to discuss your specific situation and concerns, please feel free to schedule a conversation by clicking HERE.
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