What would Donald Trump do to the economy?

Donald Trump's public statements are often described as unbalanced. When he talks about his economic policies, a better description could be limitless. Last week, during a two-hour peroration at the Detroit Economic Club, he unveiled a new tax proposal, designed to please the Motor City and its customers: making interest payments on auto loans tax-deductible . He also talked giddily about his plan to impose high taxes on goods imported into the United States, what are usually called tariffs. It's one of the most beautiful words in the world, he said. This will make us rich again.

Earlier this year, Trump pledged to set tariffs at ten percent for products made in most foreign countries and sixty percent for Chinese goods. But he also offered many other figures. In his speech in Detroit, he said, referring to China: “We're going to go cold turkey and we're going to go for one hundred percent and one hundred and fifty percent tariffs. Touting his determination to prevent cars made by Chinese companies in Mexico from entering the United States, he added: I will impose whatever tariffs are required, one hundred percent, two hundred percent, one thousand percent.

As always with Trump, the standard warning applies: don't take him literally, but take him seriously. As the campaign continued and he intensified his rhetoric, particularly on trade, some of his Wall Street supporters suggested he was exaggerating for strategic reasons. My general view is that at the end of the day he's a free trader, Scott Bessent, a hedge fund manager who advises Trump, told the Financial Times last week. This is an escalation for de-escalation.

Such comments are wishful thinking or self-rationalization. Since Trump announced he was running for a second term, he has made three main promises to his supporters: tariffs, tax cuts and mass deportations. He also pledged to cancel all unspent funds from the Biden administration's Inflation Reduction Act of 2022, which provided a tax credit of up to seven thousand five hundred dollars for purchase of electric vehicles and other financial incentives for green manufacturing. In addition, he has repeatedly asserted his right to rely on the Federal Reserve, which is supposed to be free of political influence when setting interest rates. As the campaign progressed, he redoubled his efforts on all of these policy positions.

The actual results would depend precisely on the measures Trump adopts, and it is difficult to predict. A ten percent tariff with discounts for some of our key allies and trading partners would be less inflationary than a blanket tariff of fifteen or twenty percent. Expelling a million workers would have a less drastic effect on overall labor supply than expelling ten million. (Of course, any mass deportation would have a huge impact on the deportees and their families.) Trump's ability to implement his tax agenda would depend on other election results: If Democrats control at least one house of Congress, he would have much less freedom. to maneuver.

Another complicating factor is that some of Trump's policy proposals go in different directions. Tariffs would increase prices and reduce consumers' purchasing power. Large-scale evictions would reduce the overall labor supply. In both cases, these are supply shocks, which tend to have a negative impact on GDP and employment. In the short term, at least, tax cuts would increase demand and act as a stimulus. It is therefore important to examine the proposals together.

Several economic forecasters have attempted to do this and their results are quite consistent. They show that the combination of Trump's policies would reduce GDP and job growth, increase inflation and blow the budget. Moodys examined a Republican sweep scenario, in which Trump permanently extends the 2017 Republican Party tax cuts, carries out mass evictions, and imposes tariffs of ten percent on all imports and sixty percent cent on Chinese products. Between 2024 and 2028, the analysis concludes, inflation-adjusted GDP would grow at an annual rate of 1.3 percent, well below the 2.8 percent annual rate seen since Joe Biden took office. . Analysts at the Penn Wharton Budget Model fed Trump's campaign promises into their computers and extended the outlook to ten years. They predicted a smaller impact, but it was still negative: by 2034, GDP would be 0.4 percent lower than in the baseline scenario and the amount of debt would increase by 9.3 percent.

Under some scenarios, the outcome could be much worse. Trump seems oblivious to the dangers of starting a global trade war. Even if he adopted the lowest import tariffs he has talked about, between 10 and 60 percent, the overall effective tariff rate would rise from 3 to nearly 19 percent, according to Moodys. That would be the highest rate since Congress passed the Smoot-Hawley Tariff Act of 1930, which led to retaliation by foreign countries that many economic historians say worsened the Great Depression. In his speech in Detroit, Trump brushed aside the comparison, falsely claiming that U.S. tariffs were only introduced in 1932.

Many economists are not so cavalier. Recently, three researchers working with the Peterson Institute for International Economics used a mathematical model of the economy to examine two policy scenarios, including a high-combination scenario in which Trump's tariffs were imposed at rates of ten percent and sixty percent; foreign countries retaliated; 8.3 million workers were expelled; and Trump managed to erode the independence of the Fed, prompting it to loosen its policies and financial capital to flee the United States. In this scenario, analysts conclude, by 2026 the inflation rate would have increased by more than seven percentage points compared to the baseline scenario, representing a huge increase. jump and something akin to what we saw in 2021-22 post-COVID. The impact on production and employment would also be dramatic. The baseline scenario, which called for Congress to extend the 2017 Republican Party tax cuts or an equivalent-sized package, projected that between 2024 and 2028 GDP would grow by about 2 percent annually. Tariffs, evictions, and bashing the Fed would be so damaging that they would wipe out all that growth and actually cause the economy to slow down. In 2028, at the end of four years of the second Trump administration, the U.S. economy would be more than 1% smaller than in 2024, according to the analysis.

Such projections should be seen as illustrations of what could happen, not what will happen. Economic forecasting is a precarious art rather than a science. In 2016, economists warned of the dangers of a Trump presidency, but, until the pandemic hit, the economy enjoyed healthy growth with low inflation. It's not 2016, however. Over the past eight years, a number of developments have made the U.S. economy more vulnerable to reckless policies.

The budget deficit, for example, doubled as a percentage of GDP and the federal debt-to-GDP ratio increased from seventy-three percent to ninety-seven percent, raising questions about the long-term sustainability of finances. of the country. . If Trump's proposals were adopted, they would create a new sea of ​​red ink. According to the nonpartisan Committee for a Responsible Federal Budget, his economic program would cost up to fifteen trillion dollars over ten years, with a central estimate of $7.5 trillion. Trump claims that tariffs and stronger economic growth would generate enough revenue to close this huge gap, but that's wishful thinking.

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