The economic consequences of Trump 2.0

Trump’s “populist” agenda is a failure foretold. Trump inherits a strong economy, but his signature policies will do almost nothing positive for less educated workers or significantly improve the lives of most other Americans.

Simon Johnson

The author, a 2024 Nobel laureate in economics and a former chief economist at the International Monetary Fund, is a professor at the MIT Sloan School of Management.

U.S. President-elect Donald Trump’s second administration starts at noon on Jan. 20. Trump’s non-stop election campaign since losing to Joe Biden in 2020 suggests a better-organized redo of his first term, with the same focus on tax cuts to boost the economy, higher tariffs to reshape U.S. trade with the world, and deporting as many immigrants as possible to generate more opportunities for American workers. But times have changed, and reality is unlikely to match rhetoric.

In 2016, when Trump first won the presidency, the United States was experiencing a prolonged period of low inflation. The Federal Reserve kept interest rates near zero throughout his administration. This time, however, is quite different. Inflation spiked during the COVID pandemic, and the Fed is still on guard against a resurgence — hence interest rates remain relatively high. Trump’s proposed tax cuts imply a fiscal stimulus for an economy with low unemployment. Any signs of overheating will be met by tighter monetary policy.

Trump has made noises about changing the leadership of the Fed, but he cannot fire Fed Chair Jerome Powell without risking both higher long-term interest rates and higher inflation. There will be tax cuts in 2025, mostly for rich people, and the consequent loss of revenue will undermine long-term fiscal sustainability. Larger deficits will keep interest rates higher than they would be otherwise, and the dollar may strengthen, creating difficulties for U.S. exporters and for countries that have borrowed in dollars.

On tariffs, the world’s leaders (and financial markets) have come to understand that Trump talks loudly and carries a pretty small stick. He will no doubt noisily impose some high-profile tariffs, but U.S. business interests will immediately begin seeking loopholes and lobbying for exceptions. Foreign leaders will make the pilgrimage to Mar-a-Lago, play some golf and negotiate mutual carve-outs.

Trump could ignore all this special pleading and insist on higher tariffs across the board. But that will bring more retaliation from trading partners and more protests from the big companies that now back him. The last thing Trump wants is to cause domestic job losses, which could happen if U.S.-based companies must pay more for imports and lose competitiveness in export markets. If foreign leaders don’t make him look bad on the golf course and emphasize the jobs their companies create in the U.S. (particularly in Republican-controlled states), everything will be up for reasonable discussion.

On illegal immigration, Trump is sure to have impact. The “border wall” is an illusion with no real meaning. But Trump is already threatening to punish Mexico and other countries (even Canada!) with high tariffs and other measures unless they hold back immigrants, and this will have some effect. Trump may also be clever enough to relax U.S. sanctions on Venezuela, allowing more oil onto the world market and also helping the Venezuelan economy. That would reduce pressure on Venezuelans to emigrate, while also squeezing Iran and Russia (both of which rely on oil sales to finance purchases of electronic parts from China for use in weapons).

Trump could go further by rounding up and deporting millions of people who are in the U.S. illegally. But mass deportation would harm major sectors of the economy (such as agriculture and construction), fuel massive social disruption, and cause his business allies to cut back on their investments (and job creation). Again, we should expect to see political grandstanding and sensational headlines, but the reality will not be much changed.

So, what will Trump really do? Will he purchase Greenland (or Canada!) or somehow reacquire control over the Panama Canal or reduce U.S. support for NATO? None of Trump’s recent statements on these topics are meaningless, but nor should they be taken literally. Again, Trump wants to get what he considers (and what he can portray as) a “better” deal for the United States. If he doesn’t say what that means now, it just means he is open to suggestion — or he can just define whatever the endpoint turns out to be as a strategic victory.

A broader reshaping of the world is afoot, but this has nothing to do with the incoming administration, which is unlikely to respond effectively. For example, Trump is still using bellicose language about confronting China and Iran, but both are already in bad economic shape and hardly pose a threat to regional order — let alone international peace. And, as he did in his first administration, Trump promises to withdraw from foreign interventions (Afghanistan and Iraq then; Ukraine now). But Russia’s need for drones and missiles to launch at Ukraine has made President Vladimir Putin fully subservient to China. Does Trump (and the Republican Congress) really want to hand a weakened President Xi Jinping an illegitimate and bloody victory in Ukraine?

What American voters really care about is good jobs and the cost of living. But Trump’s “populist” agenda — a smoke-and-mirrors program, sustained by fear of imagined enemies — is a failure foretold. Trump inherits a strong economy, but his signature policies will do almost nothing positive for less educated workers or significantly improve the lives of most other Americans. Instead, the rich will get richer, the richest will get a lot richer, and everyone else will most likely struggle with higher inflation, cuts to public services, and the effects of runaway deregulation.

Copyright: Project Syndicate, 2025.