In the run-up to this week’s Republican National Convention, the Donald Trump-dominated Party adopted a new policy platform that largely avoided specific commitments and contained softer language on abortion and same-sex marriage than its previous version. In the area of economics, however, there has been no sign of the former President backing down from his protectionist America First agenda. Despite recent warnings from economists that his plan could raise inflation, hurt consumers, and even knock the economy into a recession, he still seems intent on subjecting an economy that is just getting over a period of rapidly rising prices to a new inflationary shock—three of them, in fact.
On the campaign trail, Trump has floated a ten-per-cent tariff on all imported goods, and a sixty-per-cent levy on those from China. He has promised to deport millions of undocumented workers, which would accentuate labor shortages that already exist in some parts of the economy, including construction and agriculture. And he has pledged to extend the 2017 Republican tax cuts, which were heavily slanted toward the rich and which would otherwise expire at the end of next year. Extending the tax cuts would increase the budget deficit, which is already at a level never before seen during a period of peace and full employment.
Amid all the media coverage of Joe Biden, Trump’s economic platform hasn’t attracted the level of scrutiny that it deserves. In the business community, which would be greatly affected, there seems to be an assumption, based on the experience from 2017 to 2020, that things would work out fine. But a victorious Trump would be inheriting a very different economy than the one he inherited in January of 2017. Back then, interest rates and inflation were low; the unemployment rate was 4.8 per cent; and the budget deficit was 3.1 per cent of G.D.P. Today, interest rates are high, especially for consumer loans and credit-card balances. The labor market is at full employment, and studies suggest that a good deal of recent job growth has depended on immigrants. Meanwhile, the Congressional Budget Office is projecting the 2024 budget deficit at seven per cent of G.D.P., more than double the level it was at eight years ago. If you put all these things together, there is much less room for damaging policies of the sort associated with Trumponomics.
In a study released last month, Moody’s Analytics, a sister company of the big credit-ratings agency, used its proprietary statistical model of the economy to examine four different policy scenarios tied to election outcomes, ranging from a Trump victory in the Presidential race twinned with a Republican sweep of Congress, to a Biden victory coupled with a Democratic sweep. In the scenario of a Trump win and G.O.P. sweep, Moody’s analysis assumed that Trump would be able to enact virtually his entire economic program next year, including universal tariffs and mass deportations.
The analysis suggested that, as tariffs pushed up the prices of imported goods, inflation would rise from roughly three per cent this year to 3.6 per cent in 2025, which, in turn, would prompt the Federal Reserve to keep interest rates on hold, rather than reducing them, as markets currently expect. “The higher inflation and interest rates weigh on real incomes and consumer and business sentiment, and the economy suffers a recession beginning in mid-2025,” the study said. The unemployment rate, which currently stands at 4.1 per cent, would rise to more than five per cent by the middle of 2026, according to the analysis.
In theory, Congress or the courts could rein in some of Trump’s harmful policies. One of Moody’s scenarios examined an electoral outcome in which Trump returns to the White House, but Capitol Hill remains divided. The analysis assumed that, in this environment, a new Trump Administration would raise tariffs by five per cent instead of ten per cent, be somewhat less aggressive in deporting migrants, and be unable to extend the 2017 tax cuts for the rich. Based on these assumptions, the Moody’s model predicted that inflation would remain stuck at three per cent next year, and the Fed would keep interest rates elevated for longer. Consequently, G.D.P. growth would slow to about one per cent, and the unemployment rate would rise to 4.7 per cent. In other words, the Trump economy would stagnate, but the slowdown wouldn’t meet the technical definition of a recession.
To be sure, economic projections are far from infallible. Defenders of Trump have argued that the economy performed strongly during his Presidency despite his having slapped tariffs on goods from China, the European Union, Mexico, and Canada. They have also disputed claims that imposing broader tariffs would lead to higher inflation. “Consumers will boycott high prices, forcing businesses to cut back on their [profit] margins,” Larry Kudlow, the Fox Business host who headed the National Economic Council from 2018 to 2021, said on his show last week. “Or Chinese companies, for example, will have to cut their prices and profit margins. That’s not inflationary.” Kudlow also argued that Trump’s promise to eviscerate restrictions on fossil-fuel production would lead to a substantial fall in oil prices, which he said would amount to “major-league counter-inflation.”
Trade economists who have looked closely at the evidence on how tariffs affect prices paid by consumers say Kudlow’s argument simply doesn’t hold up. “Trump has consistently been saying that China pays these tariffs, but study after study using microdata has shown that’s not true,” Mary Lovely, a senior fellow at the Peterson Institute for International Economics, in Washington, D.C., told me. “Tariffs are a tax, and businesses pass them along to consumers.” In May, Lovely and a colleague, Kimberly A. Clausing, published a study that found that Trump’s tariffs would cost a typical middle-income American household about seventeen hundred dollars a year, which is about 2.7 per cent of its spending power.
If Congress were to extend the 2017 tax cuts, including the relatively small portion of them that applied to middle-income households, the financial hit on the middle class would be reduced somewhat, but it would still lose out, Lovely and Clausing found. Taking the tariffs and the tax policy together, these households would see an annual reduction in their spending power equivalent to 1.4 per cent of its after-tax income. The poorest twenty per cent of households would suffer even bigger losses in percentage terms—about 3.7 per cent—while the richest one per cent would enjoy a net gain of about 1.4 per cent. “It’s reverse Robin Hood,” Lovely said.
Mark Zandi, the chief economist at Moody’s Analytics, and one of the authors of the firm’s recent study, told me he agreed with Kudlow on one thing. “Sure, consumers will adjust to the tariffs,” he said. “But they are going to be adjusting because their real incomes are being crushed. That is how you get consumer spending falling and a recession emerging.” Zandi also dismissed Kudlow’s argument that Trump’s energy policies would lead to a big fall in oil prices. He pointed out that the oil price is set at the global level, and U.S. production is only one factor determining it. Moreover, he noted, the United States is already producing a record 13.3 million barrels of oil each day, and most existing wells are running at or close to full capacity. “It is going to be extraordinarily difficult to ramp up production, and it’s certainly not going to happen quickly,” he said.
Other defenders of Trump point out that the Biden Administration has kept some of Trump’s tariffs and recently imposed new ones on a range of Chinese goods, including semiconductors, electric vehicles, and solar cells. Though that is true, there is an enormous difference in scale between the Biden policies and the Trump proposals. According to the White House, the new Biden tariffs apply to about eighteen billion dollars of Chinese exports. Based on Trump’s statements, it appears that his new tariffs would apply to the entire $3.4 trillion of goods that the United States imports each year. “It’s the difference between a scalpel and a sledgehammer,” Zandi said.
It should also be noted that neither the Moody’s study nor the Peterson Institute study considered the second-round effects of Trump’s policies. These would likely include retaliation from America’s trading partners and serious tensions between the White House and the Federal Reserve. When Trump imposed tariffs on some Chinese goods in 2018, Beijing retaliated with levies on American imports which hurt American farmers and manufacturers. If a new Trump Administration introduced universal tariffs, many other countries would face enormous domestic pressure to respond with similar measures. In the worst-case scenario, Trump’s policies could lead to an all-out trade war.
During Trump’s first term, the federal funds rate, which is controlled by the Fed, peaked at 2.5 per cent. That didn’t prevent Trump from repeatedly criticizing Jerome Powell, the Fed chairman, for raising rates, and, subsequently, for not reducing them rapidly enough. If next year the Fed put rates on hold at five per cent, say, to offset the inflationary pressures of Trump’s tariffs and deportation policies, Trump would likely go nuts. Earlier this year, the Wall Street Journal reported that some people close to him believe he would have the legal authority to oust Powell from the chair role before 2026, when his current term is up. More recently, Peter Navarro, an economist who worked in the first Trump Administration and is currently serving a federal prison sentence for contempt of Congress, predicted to Politico that Trump would get rid of Powell during his first hundred days in office.
Trump’s election campaign and other former aides pushed back against the Journal story. Many Trump supporters on Wall Street are evidently reassuring themselves that he would appoint a responsible Secretary of the Treasury, who would keep the boss’s Fed-bashing in check. In this area, as in others, however, nobody really knows what a newly empowered Trump would do, especially if the Republicans were to sweep the congressional elections. And that can’t be good news for the world’s largest economy. ♦
An earlier version of this article misstated the annual amount that tariffs might be expected to cost a typical middle-income American household and inaccurately described the relationship between Moody’s Analytics and the ratings agency.
