Photograph Source: The White House – Public Domain
Past recessions have been the result of policy errors or disasters. The most typical policy error is when the Federal Reserve Board raises interest rates too much to counter inflation. That was clearly the story in the 1974-75 recession, as well as the 1980-82 double-dip recession.
Then we have recessions caused by collapsing financial bubbles, the 2001 recession following the collapse of the stock bubble, and the 2008-09 recession following the collapse of the housing bubble. And of course, we had the 2020 recession because of the COVID-19 pandemic. But now Donald Trump is threatening us with a recession — not because of something that is any way unavoidable, but rather because as president he has the power to bring on a recession.
While a recession may not be fully baked into the cards at this point, the risk is evident and it’s almost entirely coming from Donald Trump’s policies. First and foremost are the costs associated with his import taxes (tariffs), or at least the threat of tariffs.
The impact of Trump’s threats should not be underestimated. If you were an auto executive trying to decide whether and where to expand capacity right now, what would you be doing? Would you look to continue to take the lowest cost route and further integrate your operations with Canada and Mexico? That would be a pretty bad choice if we have high taxes on imports from these countries going until Trump and his offspring have all left the White House.
Alternatively, you could go the MAGA route and invest in the United States. This would mean you would have far higher costs and likely be wiped out if the tariffs on Mexican and Canadian imports came down at some future date. Alternatively, it is possible President Xi, or some future Chinese leader, would make a visit to Mar-a-Lago and we would be able to buy high quality Chinese EVs for $17,000. Again, you would be wiped out.
Needless to say, the smart move here is to put off any major new investments until Donald Trump figures out what he wants to do with tariffs. And even then, it would probably be smart to limit investments, since we know Trump can change his mind at any time, depending on who shows up at Mar-a-Lago. Most industries are not as thoroughly integrated into the world economy as the auto industry, but almost all have some degree of integration, so we can expect many companies putting off investment plans to see where things go. This means that even without actually imposing new tariffs, Trump is already hurting the economy.
And if Trump does impose his taxes, it will undoubtedly be a big hit to the economy. It’s hard to gauge how big a hit since the threatened size of the tariffs and the items subject to the tax change daily or even hourly, but we could easily be looking at an increase in our annual taxes of $200 billion to $300 billion a year. That would be 0.7-1.0 percent of GDP or $1,600 to $2,400 per household.
To take some concrete examples: if Trump imposed a 25 percent tax on Canadian oil, which he has sometimes threatened, that would increase gas prices by more than 40 cents a gallon for large parts of the Midwest. He has recently talked about upping his tax on imports of Canadian lumber to 250 percent. This would effectively cut off a source of lumber that has accounted for close to 30 percent of the US supply in recent years. Lumber prices have already risen by more than 20 percent since Election Day due to Donald Trump’s clown show. This would be a huge hit to the housing industry.
These economic disruptions would be understandable if there were some rationale, but it is hard to see what it is. Trump’s stated reasons for his import taxes change constantly. He has complained about fentanyl and illegal immigration from both countries. The complaint about fentanyl from Canada is absurd on its face. A very small share of the fentanyl in the US comes from Canada and the Canadian government is engaged in cooperative efforts to reduce the amount further. It’s the same story with immigration, with only a small share of the flow of undocumented migrants coming from Canada.
Both of these are bigger issues with Mexico, but Mexico’s government has been cooperating with the United States for years in trying to limit the number of undocumented immigrants crossing the border, as well as the flow of fentanyl. In fact, President Biden reached an agreement with Mexico in June that cut the flow of immigrants by close to two-thirds. There is no obvious reason that Trump has to make threats of taxes for further reductions in these areas.
Trump has also complained about both countries’ trade surpluses with the US. He regularly gets Canada’s surplus off by a factor of 150 percent — it’s $60 billion, not $150 billion. Furthermore, the reason for the deficit is imports of oil that Trump himself tried to foster in his first term.
The trade deficit is larger with Mexico, but this is largely the result of the USMCA trade deal that Trump himself negotiated. That deal led to further integration of the two economics, which is presumably what was expected.
In short, the trade imbalances story does not make much more sense than the fentanyl and immigration story. There is also the possibility that Trump just sees these taxes as a good way to raise revenue without taxing his billionaire campaign contributors.
This is plausible, since tariffs are an extremely regressive tax. Low and middle-income families spend a much higher share of their income than the rich, and a larger share of what they spend goes to goods as opposed to the luxury services purchased by the Elon Musks of the world. A big tax increase might not sound great to Trump’s MAGA base, but that could be what they are looking at.
There is also the possibility that Trump is actually serious about wanting to make Canada the 51st state. That story likely ends up in warfare and occupation, since Canada is not likely to capitulate based on Trump’s tariff threats. Trump often tried to portray himself as the peace candidate during the campaign. It’s not clear how a war against our closest ally and the subsequent occupation would sell with his base.
The Smashing Government Route to Recession
Donald Trump’s tariff games are just one possible route to recession; the other is Elon Musk’s DOGE team attack on the government. If there was ever any doubt, it is now clear that this outfit has nothing to do with increasing government efficiency.
They show up at government agencies without even knowing what the agency does. They then do large-scale layoffs without knowing what the fired workers do. When they find out what they do, they often have to hire them back, as happened with air traffic controllers and workers keeping our nuclear weapons safe. There is no evidence that Musk or his “super-high IQ” DOGE boys have ever spent five minutes reviewing the evidence of waste and fraud that has been assembled by Government Accountability Office or the various agency inspector generals, most of whom have been fired by Trump.
But the direct impact of Musk’s job cuts on both the budget and the economy is likely to be small. The bigger impact is the uncertainty they have created in large sectors of the economy. This is most evident with medical research and universities more generally. Their funding streams through fiscal year 2025 (which ends October 1) and later have been called into question by Musk and Trump’s actions. Many of them are cutting back hiring, and even retracting job offers now that funding streams are no longer secure.
The uncertainty is also hitting the larger healthcare sector, which has been the major source of job growth in the last two years, accounting for more than one-third of the February job growth. Hospitals, nursing homes, and other providers can no longer be sure of their funding streams going forward, therefore they are likely to be far more cautious in hiring.
This will also be true for state and local governments which now have no idea when Donald Trump will arbitrarily decide to cut off a flow of federal money. These cutoffs may be illegal, but no one knows what the courts will decide and when and if Trump will respect the Constitution. As a result, state and local governments also have to be careful in their hiring and spending more generally.
The End of the Rule of Law
The large sectors of the economy forced to be more cautious in their hiring and spending as a result of the DOGE routine give us a second possible route to a recession in addition to the Donald Trump tariff reality TV show. But the impact of replacing the rule of law with the rule of Mar-a-Lago goes much further.
Most immediately, we are likely to see many fewer foreigners coming to the United States, as it comes increasingly to be seen as a “shithole country.” Foreign tourists spent almost $170 billion in the United States last year (line 339). This is likely to fall sharply as foreigners can no longer count on any of the rights that they would have been accorded in prior years. This applies not only to darker-skinned people, but even to lighter skinned types who for whatever reason run afoul of immigration officers.
The United States is also likely to be a less attractive tourist destination more generally as our national parks get run down due to large-scale layoffs, air travel becomes less reliable, and even weather forecasts become more uncertain due to mass layoffs at the weather bureau. Most people probably didn’t think of park rangers as the “Deep State,” but apparently Donald Trump did.
Foreigners spent almost $60 billion on tuition at US colleges and universities (line 341) last year. We can expect this also to fall sharply as schools can no longer promise their foreign students protection against arbitrary actions by immigration officers.
Also, the rule of Mar-a-Lago will make the United States a much less attractive place to invest more generally. Businesses will look to invest in Europe, Japan, Latin America, India, and possibly even China, as countries that have greater respect for the rule of law. This should further dampen investment in the United States.
In short, Donald Trump has good reasons for telling us that his MAGA policies might give us a recession. It’s hard to know how bad this recession would be, but it will definitely be the “Donald J. Trump recession.”
This first appeared on Dean Baker’s Beat the Press blog.
The post The Trump-Musk Recession: Because They Can appeared first on CounterPunch.org.
This content originally appeared on CounterPunch.org and was authored by Dean Baker.