Nonetheless, I have maintained (since last winter) that the US economy will be fine, not because of Trump’s policies, but in spite of them. For starters, I expected a combination of market discipline, Trump’s more sensible advisers, and Fed independence to prevail, and that is what has happened. Trump has consistently chickened out and pursued trade deals, rather than following through with his Liberation Day tariffs.
Since Donald Trump’s “Liberation Day” on April 2, when he announced sweeping trade tariffs on friend and foe alike, the conventional wisdom about the US economy’s short-term and medium- to long-term prospects has been pessimistic. Higher tariffs will cause a US and global recession; US exceptionalism is over; America’s fiscal and current-account deficits will become unsustainable; the US dollar’s status as the main global reserve currency will soon end; and the dollar will sharply weaken over time.
Certainly, some of the policies that Trump has announced warrant such pessimism. Tariffs, protectionism, and trade wars are likely to be stagflationary (causing higher inflation and lower growth), as are draconian restrictions on migration, mass deportations of undocumented workers, large unfunded fiscal deficits, and efforts to interfere with the US Federal Reserve’s independence. Equally, the US economy would not be well served by a Mar-a-Lago Accord to weaken the dollar, further damage to the rule of law at home and abroad, or tighter restrictions on foreign talent — scientists and students — coming to the US.
