The Future of the Trump Economy
I pulled this segment from a much longer commentary on PIIE. It was too long to post on Angry Bear. As it is, this segment is longer than what I wanted to post. A key to the commentary at PIIE by Oliver Blanchard is it was written in November 2024.The nation and Tr__p administration supported by a scared of TR__p Republican party has already moved in this direction. However, the 2017 tax breaks did not pay for themselves and were made permanent by taking from the lower income levels of most of the population by cutting public benefits.
As the essay states, the impact of the tax breaks will go years into the future in the form of deficits and again economic growth will not pay for it.
“How will Trumponomics work out?” Peterson Institute for International Economics PIIE
. . . . the Congressional Budget Office forecasts were for primary deficits of about 3 percent as far as the eye could see.
“The measures that Trump is considering would increase that number by roughly 1 to 2 percent, leading to a 4 to 5 percent sustained primary deficit and a rapid increase in the debt ratio. Were the interest rate and the growth rate to be roughly equal, which looks like a reasonable hypothesis, this would imply an adjustment of the primary deficit of 4 to 5 percent of GDP, or equivalently, 16 to 20 percent of the federal budget, to stabilize the debt ratio. This is an extremely large number. There is no reason to think corporate tax rate cuts (even if they boosted investment and potential growth) will substantially reduce the deficit over the next few years.
If Trump enacted all the measures he has suggested, a question would be how many years it will take for investors to question the risk-free status of US Treasuries. Nobody knows for sure whether such questioning would start during his presidency or after. If it were to happen, and investors started pricing a risk premium, it would probably lead to a more responsible fiscal policy. Leaving aside this risk issue and what is likely, is a further fiscal expansion, starting from an economy close to full employment, will lead to inflation and, by implication, higher Fed policy rates and a stronger dollar. Once again, this scenario will trigger a potential conflict with the Fed.
Thus, perhaps the most crucial issue is what the Fed will do. If it sticks to its mandate, it will stand in the way of some of Trump’s hopes from the use of tariffs, deportation, and tax cuts. It will have to limit economic overheating, increase rates, and cause the dollar to appreciate.
The big question is thus whether Trump can force the Fed to abandon its mandate and maintain low rates in the face of higher inflation. Fed Chair Jay Powell has made clear he remains committed to the mandate and to staying at the Fed as chair until his term as chair expires in May 2026 (his term as board member ends in 2028).
Current Fed board members are unlikely to follow a different line. But one board position opens in January 2026, and Trump could seek to name a more docile board member to the seat. If this is the case, and the board goes along (which is unlikely), the result will be low rates, overheating, and higher inflation. Given the unpopularity of high inflation, not to mention the reaction of financial markets to the loss of Fed independence, this prospect may be enough to make Trump hesitate to pursue this option.”