Outgoing White House economist says tariffs and deficits are bad for America

Outgoing White House economist Kevin Hassett voiced concern on Monday about the consequences of America’s trade wars and rising mountain of debt, two of the legacies of the first two years of the Trump administration.

Hassett told CNN’s Poppy Harlow there are growing risks to the economic outlook because of mounting trade tensions with China and now Mexico.

“The uncertainty about the forecast is much higher than the last time we talked,” Hassett said, referring to his last CNN interview a month ago.

NEW YORK, NEW YORK - MAY 31: People A walk along Wall Street on May 31, 2019 in New York City. The Dow closed down over 300 points on Friday as investors weigh proposed new tariffs against Mexican goods and continued negotiations with China. (Photo by Spencer Platt/Getty Images)

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Hassett, chairman of the White House’s Council of Economic Advisers, informed President Donald Trump on Friday that he will retire by the end of June after nearly two years on the job.

His admission about the potential economic repercussions of tariffs and tax cuts doesn’t constitute a public rebuke of President Donald Trump’s policies. But it represented a rare admission from a White House adviser that the administration’s aggressive trade agenda could produce some negative side effects.

‘Much more harmful’ for Mexico

Hassett acknowledged there would be “costs” to a 25% tariff on Mexico. Trump shocked investors by threatening to impose escalating tariffs on Mexico if the country does not step up its immigration enforcement actions.

However, Hassett suggested that producers, not consumers, will bear the brunt of those costs. And Hassett said consumer prices are “not setting off alarms right now” related to tariffs.

“This is much more harmful for the Mexican economy than for the US economy,” Hassett said.

That’s probably true.

UBS warned investors to expect a recession in Mexico if the United States applies the full 25% tariff.

“All bets are off for the Mexican economy,” UBS economist Rafael De La Fuente wrote in a note to clients on Friday.

Of course, a full-blown recession in Mexico could only worsen the migration crisis that Trump is aiming to solve. Countless Mexican citizens could seek better economic prospects in the United States. And a recession in Mexico would not help the US economy either.

Ignore the inverted yield curve?

Still, Hassett is standing by his call for the US economy to grow at a healthy 3% clip this year, though he anticipates second quarter growth to be “closer to 2%.” While job and wage growth has been “strong,” Hassett noted that other economic metrics have been “a lot weaker.”

The Atlanta Federal Reserve’s GDPNow model, a running estimate of economic growth, estimates annualized GDP growth of 1.2% during the second quarter.

The American manufacturing industry, dinged by tariffs, has slowed sharply. Factory activity expanded in May at the weakest pace in two-and-a-half-years.

Due in part to tariffs, there is a 60% chance of a US recession by the end of 2020, according to a survey of economists published on Monday by the National Association for Business Economics.

Hassett downplayed the risk of a recession, saying those fears are being driven by the bond market. The yield curve – the gap between short-term and long-term yields – has inverted. In the past, that has been a reliable recession indicator.

However, Hassett argued the yield curve is an unreliable “signal” right now because interest rates are being held down by poor economic growth in Europe and unorthodox central bank policy.

‘Concerned’ about debt

Low interest rates have helped keep down the cost of financing America’s $22 trillion national debt.

The national debt has increased by $2 trillion under Trump, reflecting a surge of government spending and a decline in tax revenue due to the 2017 tax cuts.

“I’m very much concerned about it,” Hassett said of the national debt, adding that the United States should “absolutely” attempt to reduce the budget deficit.

Hassett denied that his concerns about the national debt and tariffs played a role in his decision to depart the White House. He noted that CEA chairs typically leave after about two years in that role.

“It’s that time for me,” Hassett said.