Trump's economic delusions are already hurting America

Donald Trump’s economic delusions are already hurting America

President Trump is drifting away from reality.

Editor’s note (March 6): The latest news is that Donald Trump announced that tariffs on Mexican and Canadian goods covered by the North American Trade Agreement (about half of their total exports to the United States, according to the White House) will be suspended until April 2. Therefore, large tariff increases and great uncertainty still hang over the world economy - this is exactly what our editorial discusses.

In his speech to Congress on March 4, President Donald Trump painted a rosy picture. He declared that the American dream was thriving at an unprecedented scale and momentum. His tariffs would save jobs, make America richer, and protect America’s soul. Unfortunately, in the real world, that has not been the case. Investors, consumers, and businesses have begun to show signs of dissatisfaction with Trump’s vision. Trump’s aggressive and erratic protectionism is playing with fire. Also on March 4, Trump imposed 25% tariffs on Canadian and Mexican goods, lighting a fire in one of the world’s most integrated supply chains. Although he belatedly postponed the auto tariffs for a month, many other industries will still be affected. He has also raised tariffs on China and threatened action against the European Union, Japan, and South Korea. Some of these tariffs may be delayed, and others may never be implemented. Yet, both in the economic sphere and in foreign relations, policy is clearly being made according to the president’s whims. This will cause lasting damage at home and abroad.

When Trump won the election in November, investors and corporate bosses cheered him. The S&P 500 rose nearly 4% in the week after the election on expectations that the new president would cut red tape and roll out massive tax cuts. Investors hoped that his protectionist and anti-immigrant rhetoric would not be followed through on. A stock market correction or a rebound in inflation would surely curb his worst impulses.

Alas, those hopes have been dashed. Elon Musk’s DOGE is causing chaos and grabbing headlines, but there are no signs of a deregulatory boom. (Trump’s order banning the federal government from buying paper straws did nothing to help corporate America’s profits.) The budget blueprint passed by Congress in February preserved the 2017 tax cuts from Trump’s first term but did not expand them further—although it did add trillions to the national debt. Meanwhile, Trump’s tariff promises will return average effective tax rates to levels not seen since the 1940s, when trade was much smaller.

No wonder markets are flashing red flags despite Trump’s talk of a strong recovery. The S&P 500 has given back nearly all of its gains since the election. While economic growth remains at a respectable level, in recent weeks, 10-year Treasury yields have fallen, consumer sentiment has plunged and small business confidence has slipped, signaling a slowdown is coming. Meanwhile, inflation expectations are rising, perhaps because of all the great new tariffs Trump keeps talking about.

Underlying the concern is a growing realization that Trump is less constrained than investors expected. Even as rising prices have dented Kamala Harris’ presidential campaign, the prospect of inflation has not deterred Trump, who has argued that the damage to the economy from tariffs is worth it. During his first term, he had taken pride in a long boom in the stock market; this time, the market has not figured in his many social media posts. His delay of auto tariffs was too short for the industry to adapt. Trump insists that tariffs are good for the economy.

Equally important, the people around the president seem to lack influence. Treasury Secretary Scott Bessant and Commerce Secretary Howard Lutnick are both financiers, but if they are trying to rein Trump in, they are clearly not doing so successfully. Instead of being wise advisers, they come across as lackeys, constantly explaining why tariffs are necessary and Wall Street doesn’t matter. Few business people are willing to risk Trump’s wrath by speaking the truth. As a result, the president seems to be increasingly out of touch with reality.

This poses a threat to America’s trading partners. For some reason, Trump is particularly hostile to Canada and the European Union. Because his approach lacks any coherent logic, people don’t know how to avoid his threats. It would be worse if he follows through on his promise to Congress to impose reciprocal tariffs that would match the tariffs U.S. exports face abroad. That would create 2.3 million separate levies that would require constant adjustments and negotiations, a bureaucratic nightmare that the United States unilaterally abandoned in the 1920s. Reciprocal tariffs would deal a fatal blow to the global trading system, under which every country has a flat tax rate on every good outside of free trade agreements.

As if that weren't bad enough, tariffs would hurt America's own economy, too. The president says he wants farmers to know he loves them. But protecting America's 1.9 million farms from competition would increase the food bills of nearly 300 million American consumers, and compensating farmers for retaliatory tariffs would add to the fiscal deficit. Whatever Trump thinks, tariffs hurt economic growth by raising input costs. If companies can't pass on the costs to consumers, their profit margins will shrink; if they can, households will face the equivalent of a tax increase.

Trump’s policies are on a huge collision course with the Federal Reserve, which will be torn between raising interest rates to curb inflation and lowering them to promote growth. The Fed, one of the most important independent institutions left in the United States, will have to deal with an angry president who is used to getting his own way. As the administration tries to seize the Fed’s regulatory responsibilities, it is careful to leave monetary policy out of the equation. How long can that distinction last?

“Make America Great Again” Mania

The world economy is at a perilous moment. Trump, who ignored reality (and the Constitution) after losing the 2020 election only to be re-elected in 2024 with a resounding victory, has no patience for being told he’s wrong. The fact that his belief in protectionism is fundamentally wrongheaded may take some time to sink in, perhaps never. As voices grow louder that Trump is hurting the economy, he may turn on those who make those voices, whether it be his advisers, the Fed, or the media. The president may well remain indulging in his protectionist fantasies for some time. And the real world will pay the price.