What Would Donald Trump Do to the Economy?

Donald Trump’s public declarations are often described as “unhinged.” When he’s talking about his economic policy, a better description might be “unbound.” Last week, in a two-hour peroration to the Detroit Economic Club, he unveiled a new tax proposal, one that’s designed to appeal to the Motor City and its customers: making interest payments on car loans tax-deductible. He also giddily discussed his plans to impose high taxes on goods imported to the United States, which are usually referred to as “tariffs.” “It’s one of the most beautiful words in the world,” he said. “It’s going to make us wealthy again.”

Earlier this year, Trump pledged to set tariffs at ten per cent for items produced in most foreign countries and sixty per cent for Chinese goods. But he’s floated lots of other figures, too. In his Detroit speech, he said, referring to China, “We’re going to go cold turkey, and we are going to go with a hundred-per-cent and a hundred-and-fifty-per-cent tariffs.” Touting his determination to prevent cars manufactured by Chinese companies in Mexico from entering the U.S., he added, “I will impose whatever tariffs are required, a hundred per cent, two hundred per cent, a thousand per cent.”

As always with Trump, the standard warning applies: don’t take him literally but do take him seriously. As the campaign has gone on and he’s escalated his rhetoric, particularly on trade, some of his Wall Street supporters have suggested he’s 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 is advising Trump, toldthe Financial Times last week. “It’s escalate to de-escalate.”

Such comments smack of wishful thinking or self-rationalization. Ever since Trump announced that he was running for a second term, he’s made three main promises to his supporters: tariffs, tax cuts, and mass deportations. He’s also pledged to rescind any unspent funds from the Biden Administration’sInflation Reduction Actof 2022, which provided a tax credit of up to seven thousand five hundred dollars for the purchase of electric vehicles and other financial incentives for green manufacturing. On top of that, he’s repeatedly asserted a right to lean on the Federal Reserve, which is supposed to be free from political influence when it’s setting interest rates. As the campaign has proceeded, he’s doubled down on all these policy stances.

The actual outcomes would depend on precisely what measures Trump pushed through, and that’s hard to predict. A ten-per-cent tariff with cutouts for some of our major allies and trading partners would be less inflationary than a blanket tariff of fifteen or twenty per cent. Deporting a million workers would have a less drastic effect on the over-all labor supply than deporting ten million. (Of course, any mass deportations would have a huge impact on the deportees and their families.) Trump’s ability to enact his tax agenda would depend on other election results: if the Democrats control at least one chamber of Congress, he’d have much less freedom to maneuver.

Another complicating factor is that some of Trump’s policy proposals cut in different directions. Tariffs would raise prices and reduce consumers’ spending power. Large-scale deportations would reduce the over-all labor supply. These are both “supply shocks,” and they tend to have a negative impact on G.D.P. and employment. In the short term, at least, tax cuts would raise demand and act as a stimulant. So, it’s important to consider the proposals together.

Several economic forecasters have tried to do this, and their results are pretty consistent. They show that the combination of Trump’s policies would depress G.D.P. and employment growth, raise inflation, and bust the budget. Moody’s examined a Republican-sweep scenario, in which Trump permanently extends the 2017 G.O.P. tax cuts, carries out mass deportations, and imposes tariffs of ten per cent on all imports and sixty per cent on Chinese goods. Between 2024 and 2028, the analysis concluded, inflation-adjusted G.D.P. would grow at an annual rate of 1.3 per cent—much lower than the 2.8-per-cent annual rate seen since Joe Biden came to 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, G.D.P. would be 0.4 per cent lower relative to baseline, and the amount of debt would rise by 9.3 per cent.

Under some scenarios, the outcome could be much worse. Trump seems oblivious to the dangers of sparking a global trade war. Even if he enacted the smallest import duties he has talked about—ten per cent and sixty per cent—the over-all effective tariff rate would rise from three per cent to nearly nineteen per cent, according to Moody’s. 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 deepened the Great Depression. In Trump’s Detroit speech, he brushed off this comparison, wrongly claiming that the U.S. tariffs weren’t introduced until 1932.

Many economists aren’t 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” one in which Trump’s tariffs were imposed at rates of ten per cent and sixty per cent; foreign countries retaliated; 8.3 million workers were deported; and Trump successfully eroded the independence of the Fed, prompting it to loosen policy and financial capital to flee the U.S. Under this scenario, the analysts concluded, by 2026 the rate of inflation would have risen by more than seven percentage points relative to the baseline—a huge jump and something akin to what we saw in 2021-22 after the COVID pandemic. The impact on output and employment would also be dramatic. The baseline scenario, which incorporated Congress extending the 2017 G.O.P. tax cuts or some equivalently sized package, predicted that between 2024 and 2028 G.D.P. would grow by about two per cent a year. Trump’s tariffs, deportations, and Fed-bashing would be so damaging that they would offset all this growth, and actually cause the economy to shrink. The U.S. economy “would be more than 1 percent smaller in 2028—at the end of the four years of the second Trump administration—than in 2024,” according to the analysis.

Projections like these should be taken as illustrations of what could happen, not what will happen. Economic forecasting is a precarious art rather than a science. In 2016, economists warned about the dangers of a Trump Presidency, but, until the pandemic hit, the economy expanded at a healthy rate with low inflation. This isn’t 2016, however. In the past eight years, a number of developments have left the U.S. economy more vulnerable to reckless policies.

The budget deficit, for instance, has doubled as a percentage of G.D.P., and the ratio of federal debt to G.D.P. has risen from seventy-three per cent to ninety-seven per cent, raising questions about the long-term sustainability of the country’s finances. If Trump’s proposals were enacted, they would create another sea of red ink. According to the nonpartisan Committee for a Responsible Federal Budget, his economic agenda would cost up to fifteen trillion dollars in the course of ten years, with a central estimate of $7.5 trillion. Trump claims tariffs and stronger economic growth would generate sufficient revenues to make up this huge gap, but that’s magical thinking.

Another difference between now and 2016 is that the Fed is a lot more concerned about inflation than it used to be. Since Trump’s tariffs and tax cuts would both be potentially inflationary, there is a very real possibility of a blowup between the White House and the central bank. Early this year, Trump said that he’d allow Jerome Powell, the Federal Reserve chair, to serve out his term, which ends in May of 2026. If the Fed didn’t bring down interest rates as rapidly as Trump wanted, or even considered raising them, Trump could change his mind and try to fire Powell. A confrontation between Trump and Powell would surely spook the financial markets, which are currently priced for economic nirvana. (In the past eight years, the S. & P. 500 has risen by a hundred and seventy-five per cent, and the Nasdaq has risen by more than three hundred per cent.) Trump might ultimately back down, but who knows?

Another distinguishing factor between 2024 and 2016 is that Trump has grown even more extreme, not just on trade and immigration but also in his eagerness to disregard or even dismantle certain governing institutions and trample on the rule of law, by, for example, using government agencies to target those he perceives as enemies. Unlike a tax cut or a tariff hike, actions of this nature can’t be fed into an economic model and quantified, but they would weaken the legal and institutional environment on which a prosperous economy rests.

So, even if it’s impossible to predict the exact economic outcome if Trump wins on November 5th, some of the results do seem eminently predictable: a trade war, higher prices, labor shortages, a bigger deficit, rising concerns about long-term debt sustainability, a reversal of efforts to transition to a low-carbon economy, and an undermining of the rule of law. All in all, it’s an alarming prospect—one that could soon come to pass. ♦