The True Dangers of Trump’s Economic Plans

Many well-informed observers and a substantial share of voters in the United States are calm, if not excited, about the economic program that Donald Trump would pursue in what would be his second term as president. Some focus on his promises to extend tax cuts and deregulation, seeing a continuation of past Republican policies. Others point to the low inflation and high stock market returns that characterized his first term before the COVID-19 pandemic began and argue that Trump’s policies—including his unorthodox approach to tariffs and immigration—were successful, or at least not harmful. Many investors and insiders insist that Trump’s more extreme threats regarding deportation, trade, China, and the Federal Reserve are actually wise strategies for gaining leverage over foreign actors, technocrats at home, or a potential Democratic majority in the House of Representatives. And there is widespread confidence that if any of Trump’s aggressive economic policies were to impose heavy costs, particularly on investors or big business, he would reverse them.

This sense of confidence, however, is rooted in a failure to understand the true danger of Trump’s current economic plans. No U.S. president has ever abandoned his repeatedly proclaimed economic priorities on day one of his administration. Trump and his running mate, JD Vance, have proposed a set of radical, large-scale interventions into the American economy, including tariffs on all imports, at ten to 15 times the level of those Trump imposed in his first term, which were primarily levied on only Chinese goods; the deportation or internment of somewhere between one million and eight million immigrants, including some who are currently in the United States legally; and a power grab that would involve using executive authority to sequester funds appropriated by Congress and to interfere in the Federal Reserve’s independence in setting interest rates. These are an order of magnitude worse than what he pursued in his first term.

The worldview that justifies these policies is nothing like those that shaped the Reagan and two Bush administrations. It is based on Hobbes, not Hayek, and sees the world economy as a game in which other countries are simply out to get the United States—so the United States has to get them first. Trump insists that deterring foreigners’ economic activity will materially improve outcomes for the Americans he favors. This is the through line that unifies all of his proposed economic policies.

Such an approach may pay off in the world of real estate development and online merchandising. But national economies are more than the sum of various deals cut by their governments, even in international trade negotiations. An administration that fails to make this distinction and instead tries to maximize one-off bargains would erode the country’s attractiveness for long-term investment.

Over the last 50 years, the economic agendas of presidential administrations from both parties, despite many differences, have recognized the importance of promoting overall macroeconomic stability. Presidents have favored widely differing amounts of government regulation and public spending, but they have generally been committed to reducing uncertainty in the long term. Other governments around the world have sought to emulate the United States in this regard, to their lasting benefit.

The Trump approach, in contrast, weaponizes uncertainty. But uncertainty is a difficult weapon to control, and it will backfire on whoever wields it too widely.

LOSE-LOSE

According to Trump, deporting huge numbers of undocumented workers; imposing high tariffs on most, if not all, foreign goods; and increasing presidential discretion over fiscal and monetary policy will bring prosperity to American workers. In fact, every one of these measures will do the opposite. By restricting the supply of resources that U.S. businesses, workers, and households value and use, they will reduce the productive capacity of the U.S. economy.

They will also make doing business more expensive and uncertain. Forced to self-insure against insecure access to supplies and markets, many businesses would operate at a smaller scale. And the U.S. commercial sector may separate its sales and production for the rest of the world from that for the North American market. This would reduce the return on private investment in the U.S. economy and lower real income growth for everyone.

Consider the prospect of mass deportations. If carried out as Trump and his surrogates have suggested, it would mean the removal of at least 1.3 million people, the vast majority of whom are working in the U.S. economy. The proposed policy is popular among significant swaths of the electorate, and it is within the legal powers of the president to enact. It also has a historic precedent: Operation Wetback, the Eisenhower administration program that managed to deport more than a million people over an 18-month period, at a time when the overall U.S. population was significantly smaller.

The economic impact of Trump’s deportation plan would be severe. Removing hundreds of thousands of employed workers would cause labor shortages in specific industries and locations, which would in turn generate widespread price increases as supplies shrink. A recent study by the Peterson Institute for International Economics found that such a large negative labor supply shock would lead to stagflation across the economy, increasing inflation by 1.5 percent and shrinking GDP by over three percent within three years.

The shock would be all the more powerful because in the sectors most reliant on undocumented workers—fruit and vegetable farming, hospitality, residential construction, mining, some manufacturing—employers would have great difficulty finding legal workers to replace them. Legal workers enjoy high employment, at higher wages, and better conditions than most undocumented migrants can command, and would not readily take on lower-paying work. Under these circumstances, many businesses would contract or cut labor costs through automation.

Blanket tariffs would mostly be passed on to consumers, through higher prices or shortages of some imported products.

Mass deportations would harm the economy in other ways, as well. As the economist Michael Clemens has shown, immigration creates jobs for citizens and legal residents—roughly one job for every ten employed immigrants. This is because immigrant workers and their families are also consumers. Deporting them would diminish demand for all the goods and services they purchase in the United States—as well as demand for workers in the affected sectors.

Furthermore, migrant workers broaden the tax base, because the profits and consumption they generate are taxed. They also tend to be younger and fearful of deportation, so they are less likely to draw on government benefits. First-generation immigrants also make disproportionately large entrepreneurial and innovative contributions to the economy, which would be lost if the United States becomes less hospitable to immigration. In short, Trump’s deportation plan would lead to slower growth (if not a recession), rising inflation, reduced employment for citizens and legal residents, and less innovation. Deliberately shrinking a country’s labor force is both broadly and deeply self-destructive.

Trump’s tariff plan is similarly reckless with respect to another supply side of the economy. He has proposed tariffs of 60 percent on goods from China and ten to 50 percent on goods from everywhere else. He claims that the tariffs will pay for themselves by boosting local business and creating new jobs. The revenues produced by these tariffs, Trump claims, would also largely offset his proposed extension of tax cuts for corporations and high-income individuals. In reality, the cost of these blanket tariffs would mostly be passed on to consumers, through higher prices or shortages of some imported products. If American companies were able to produce replacements for some imported products, they would do so only insofar as they could charge just below the tariff-driven prices; otherwise, they would leave money on the table.

The result would be inflation, which would particularly affect low-income households, whose budgets mainly go toward imported clothes, toys, electronics, energy, and food. A recent Peterson Institute study found that the tariffs would cost an average household at least $2,600 a year, and other studies have estimated costs twice as high as that. For companies that depend on imported products, a hike in prices and a lack of substitutes could put them out of business. A second Trump administration, therefore, would basically rerun some of the effects of the pandemic’s supply chain breakdowns. These tariffs would differ from the first Trump administration’s in that they would be applied more broadly and at ten to 15 times the rates imposed before.

As far as tax revenues go, tariffs cannot replace any meaningful part of other federal taxes, precisely because the point of tariffs is to compel consumers to shift their purchases. If an administration increases taxes on a certain good, over time taxpayers find a substitute for or reduce their consumption of that good, and the tax revenues collected from it fall. When businesses go under because their costs increase too much, that also decreases tax revenue. Trump’s across-the-board tariffs at 20 percent would yield 1.0 to 1.5 percent of GDP in revenues in the first year and would decline from there; higher tariff rates would yield even less revenue.

EXECUTIVE OVERREACH

Since tax cuts are expensive and the proposed tariffs will not generate a lot of revenue, the Trump program would spur huge federal deficits. Nonpartisan analysts at the Wharton School of the University of Pennsylvania have estimated that these proposals will raise the deficit by an additional $3.5 to $5.0 trillion over ten years. (The economic plans touted by Trump’s opponent, Vice President Kamala Harris, would also increase the deficit, but by less than one-third of that amount.) One recent nonpartisan study by leading public finance scholars showed that Trump’s 2017 tax cuts generated far less growth—and therefore far less tax revenue than the direct loss of taxes collected.

The U.S. federal budget deficit is around seven percent of GDP—much too large at a time when the country enjoys full employment and faces no financial, health, or military crises. Increasing that number by 1.5 percent or more a year would force the government to devote an ever-larger share of the federal budget to interest payments on debt. Since Trump has also proposed new barriers to further discourage Chinese and other foreign investment in the U.S. economy, including a possible tax on foreign purchases of U.S. government bonds, the Treasury would also have a smaller pool of buyers available to finance the deficit. When the Treasury issues more debt but has fewer eligible purchasers, it has to pay higher interest rates to sell it all. Cutting the available supply of savings from abroad, like cutting the supply of goods or labor, imposes costs on the United States.

Trump has also said that, as president, he would assert executive authority to sequester—that is, refuse to spend—congressionally appropriated funds in order to reduce public expenditures that his administration opposes. Through this practice—effectively threatening government shutdowns—Trump would gain leverage in budget negotiations. But even if asserting such authority in this way were upheld as legal by federal courts, it would further erode the transparency and predictability of the already shaky U.S. budget process. Bad fiscal governance causes investors, domestic and foreign, to view government debt as riskier so they require higher interest rates to hold it.

Trump has also threatened to significantly curtail the Federal Reserve’s independence, a key pillar of economic stability in the U.S. economy. Because it can set interest rates without regard to short-term political pressures, an independent Fed can put the brakes on the economy when needed, as it did successfully in 2022 and 2023, when it aggressively raised interest rates to address post-pandemic inflation. A central bank that can credibly respond to inflationary pressures without government interference is essential for preventing upward inflation spirals when prices spike.

Trump could exert influence by politicizing appointments to the Fed, replacing the Fed chair with a political crony, or changing the rules that govern the Fed’s decision-making. Such meddling would result in higher inflation and more frequent boom-bust cycles. Some will object that Trump’s pledge to assert executive branch authority over the Fed is just a bluff. But if private investors deem the threat to be credible, they will factor in expectations of higher inflation and demand compensation for that risk. If a politician creates insecurity in fiscal and monetary policy, investors do not do what the government tells them to do.

MADMAN ECONOMICS

Almost all of Trump’s economic proposals would reduce supplies of labor, industrial inputs, consumer goods, and federal tax revenues. His strategy would impose uncertainty throughout the U.S. economy, as businesses and consumers would fear that prices could go up or that access to resources might be restricted at any time the government chooses. This is the exact opposite of the policies aimed at macroeconomic stability that have a proven track record worldwide of bringing sustained growth and low inflation.

Faced with economic insecurity and a shrinking supply side, as well as rising deficits and prices, investors would charge the U.S. government higher interest rates. Multinational corporations, even those headquartered in the United States, would reduce their plans for investment and employment in the domestic market. They would not have to accept the demands of the Trump approach, even if their governments occasionally were to give in to specific ultimatums at a given moment.

Some investors and observers assert that fears about the Trump economic platform are overblown. They believe that because Trump’s plans would threaten business profits, including those of influential constituencies that support the Republican ticket, they are unlikely to be carried out. According to this thinking, if the stock markets declined or interest rates rose, a second Trump administration would curtail or reverse its policies. Others see a parallel to the “madman theory” of foreign policy: by threatening sky-high tariffs—or mass deportations or a refusal to spend appropriated federal funds—Trump would extract concessions from foreign governments and Democratic members of Congress, without having to make good on his threats.

Trump’s economic proposals would reduce supplies of labor, industrial inputs, consumer goods, and federal tax revenues.

But such assumptions have been proved wrong in the past. The first Trump administration did, in fact, carry out most of its promised trade, fiscal, and labor policies—and maintained them even as the policies delivered poor results. As with the madman approach to foreign policy, threats must be credible to have their desired effect. If enough pundits and investors bet that Trump won’t do the things he says he will, or that he would withdraw them should their costs rise, then he would need to make good on them to demonstrate his toughness. Otherwise, he would be ignored by foreign governments and businesses, which is certainly not his desired outcome.

But the problem with Trump’s agenda is more profound than the fact that his policies would damage the U.S. economy. Unlike in foreign policy, where creating insecurity abroad through unpredictable policy might in certain circumstances yield beneficial results, in the macroeconomic realm, creating insecurity would harm the United States’ productive capacity. In global markets, Washington can try to bargain with governments. But individual businesses, investors, and hundreds of millions of ordinary people, both at home and abroad, will react by trying to reduce their vulnerability to the Trump administration, and the United States cannot control or deter such reactions.

As a result, any short-term benefits gained by driving a hard bargain in bilateral negotiations or in a given industry would be vastly outweighed by the macroeconomic costs of generating uncertainty. This is the fundamental flaw that shapes Trump’s agenda, which is radically different from any economic program pursued by either major U.S. political party during the past half century. If Trump wins, he will at least try to weaponize uncertainty through threats, and the damage to the United States will be difficult to reverse.