Don't Discount Trump Using Emergency Powers to Rescue the Economy

Tens of millions of Americans tuned in to hear the president's (belated) State of the Union address. At the time, President Trump made no mention of declaring a state of emergency, and instead focused more on appeals for national unity.

The president has since then mentioned emergency executive powers in the context of securing the southern border from illegal immigration. That's not the only type of crisis that may reasonably call for direct presidential action. Lest we forget, presidents in the modern era have invoked emergency powers during economic crises or wartime, as well. (Think: virtually all 12 years of Franklin D. Roosevelt's presidency.)

Other far-reaching emergency measures have subsequently been granted to the chief executive by Congress that go well beyond the scope of building walls or calling the National Guard. We ought to be aware of the possibility those measures could be taken.

Photo: Gage Skidmore via Flickr

Given our current geopolitical conditions and macroeconomic outlook, Trump would have ample opportunity to declare an emergency if there is anything approaching even an isolated financial crisis during his presidency.

President Trump Could Use Emergency Powers

The first question we should be asking is this: What are the president's emergency powers?

Congress specifically enumerated them in legislation, because the Constitution is largely about what government cannot do. The powers were adjusted following Watergate and the Nixon resignation, but the presidential emergency powers are nonetheless wide-ranging in their potential.

What could happen if President Trump does decide to declare an official state of emergency?

Sidestepping the constitutional issue regarding a chief executive diverting funds from the congressional budget and allocating them to another purpose (the border wall), the president has broad authority over other economic matters in an emergency. Trump could temporarily freeze or nationalize banks and generally impose greater government control over the economy.

Pundits often ignore this side of the emergency powers question. Yet it's a far more plausible scenario out of an assortment of otherwise unlikely options. There's actual precedent for such actions in (relatively recent) American history.

Moreover, Congress would likely allow a "grace period" of six months to a year where it would not challenge the use of emergency measures, provided their use was justified prima facie by some crisis.

Growing Economic Risk

So there's little doubt that the president is willing to invoke emergency powers. That begs the question: What might finally prompt him to do so?

An economic crisis, of course.

With that in mind, what are the odds of that scenario arising?

They are admittedly low—thankfully!—but the downside risk of a global economic shock is higher than any time since the 2008 financial crisis. The "rescue mission" following the GFC has also placed the world's financial system in a rather distorted state. There are still a troubling number of unknowns from a policy standpoint despite a decade of recovery.

Already in 2019 the signs of this weakness in the economy are beginning to abound. Consumer sentiment in the U.S. recently touched a seven-year low; credit card delinquencies and auto loan defaults are up; worldwide debt is triple the size of GDP, and many businesses are over-levered; global manufacturing has been in contraction; in the equity markets, forward earnings per share (EPS) have diverged from stock prices; the yield curve for U.S. Treasurys is partially inverted, and bond yields elsewhere in the G-7 are still negative; and markets face the tripartite geopolitical risks of the trade war, Brexit, and seemingly constant palace intrigue and legislative gridlock in Washington.

Although some domestic economic data has been fairly good, this mixed bag is not a convincing sign of a robust economy. We appear to be moving closer and closer to a recession. The greater uncertainty is how painful that cyclical downturn will be.

If the economy does go south before 2021, emergency measures could go as far as the wealth confiscation that followed the Great Depression. Gold was demonetized by executive order in 1933; today, we could see something akin to a bank "bail-in" with depositor money, or perhaps some other form of asset forfeiture through nationalization.

On top of it all, these downside risks are unlikely to abate any time soon. The trade war negotiations, and especially the gridlock over fiscal policy on Capitol Hill, are playing political football with the American economy. Accordingly (for the purposes of this analogy), those dilemmas are all but certain to follow the pattern of this year's Super Bowl, with lots of punting back and forth.[1]

[1]: Super Bowl LIII (53) was the lowest-scoring championship game in pro football in 70 years. Going back to the first NFL title game in 1933, the only two years with lower scoring totals were 1948 and 1949, long before the Super Bowl Era began (1966). The big game also featured the longest-ever punt in a Super Bowl (65 yards) by Johnny Hekker of the Los Angeles Rams.

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