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Tariffs, DOGE, Austerity, and Trade Under A New Trump Paradigm
Looking ahead to 2025 and President Trump in the White House, what kind of economic conditions will prevail in the United States and around the world?
The IMF has already forecast a slowing global economy.
A recent article - "Trumpflation" Risks Likely Overstated - by Lance Roberts of Real Investment Advice addresses the concerns of many Keynesian economists over Trump's proposed tariffs.
What Roberts' article does not address is the effect of Elon Musk and Vivek Ramaswamy heading up the unofficial Department of Government Efficiency (DOGE). The stated purpose of DOGE is to root out government waste, duplication, and unnecessary spending, of which there is plenty in every government agency, from the Department of Defense to the Education Department, which Trump has suggested be eliminated in its entirety, along with its nearly $300 billion annual budget.
The dynamic duo of Musk and Ramaswamy are going to slash regulations across all agencies, and with them the people who administer these business-negative, tax draining authoritarian dictums. The recent Supreme Court decision, striking down the "Chevron doctrine, empowers them to slash and burn at the federal level.
On its surface, reducing regulations which hamper free trade within the U.S. borders is neither inflationary nor deflationary, but the productivity boost given to affected industries is likely to improve profitability across many sectors as producers cease to be burdened with reporting and rules imposed by bureaucrats who likely know little about operating profitable enterprises.
What will be profoundly deflationary are hundreds of thousands of government employees hitting the streets seeking gainful employment. A rising unemployment rate - a logical result of mass government layoffs - isn't exactly the kind of medicine that induces inflation. With huge numbers temporarily sidelined and not spending Americans' tax dollars as they used to, the supply-demand dynamics are obvious to anyone who passed Economics 101.
Fewer dollars chasing the same amount of goods will force prices down, and by that, everything from shoes to rent to mortgage rates are going to feel the pinch.
Should DOGE materialize into a true leviathan slayer, government deficits will be drastically reduced, leaning towards something that's been sorely needed for more than 40 years, a balanced budget or - heavens to Betsy - a government surplus that begins to eat away at the $36 trillion national debt.
In such a scenario, the Fed will be frantic about lowering interest rates, which will further cut government expense. Over the last fiscal year, 2024, the federal government spent over a trillion dollars just in interest on the debt. Such a heavy debt load at high interest rates is naturally unsustainable and leads to insolvency, which the U.S. government is very close to achieving. Cutting spending, unthinkable over the last 20 congresses, is the mission mandated by the election of Trump. Creating an agency whose sole purpose is to deliver on that mandate accelerates the process.
As usual, the status quo in the House and Senate are already raising the alarm level to Defcon 6, suggesting that mass layoffs will be countered with labor union lawsuits, with the full-throated support by members of both parties, who see spending cuts as a direct assault on their private piggy bank of supporters, lobbyists, and special interest groups.
The problem congress has with continuing to support their free-spending regime is confronted on any number of flanks. The American public wants cuts, the President will do most of them by Executive Order, and DOGE, being more or less an advisory function, will be immune from lawsuits or lawfare, once the Justice Department is culled of all the Biden leftovers.
Left alone, DOGE could prove to be the greatest dis-inflationary or deflationary agent of change since the Great Depression.
Trump's proposed tariffs will have alternating effects, raising prices on goods from China, Mexico, and Canada, ostensibly to help stop the flow of fentanyl and human trafficking into the U.S. At the same time, tariffs allow for choice. Americans don't have to buy expensive imported products. They can opt for less expensive domestically-produced goods, substitute for a similar product, or simply not make purchases unless absolutely necessary.
At the margins, tariffs support economic prosperity by protecting domestic industries which can lead to local, domestic investment and job creation.
Trump's proposed tariffs may prove to also provide the government with an alternative source of revenue, allowing for reductions in payroll and income taxes. Along with the DOGE effort to downsize government, lower income taxes and increased tariffs should produce a positive effect by putting more money into the pockets of American workers and consumers instead of the government.
The result could be inflationary, but some degree of inflation is to be expected in a burgeoning economy, which is the bottom line for Trump. He wants America to prosper and his means of achieving that goal is to get government out of the way and allow Americans to make their own decisions about how to spend and invest their money. Free, open, fair, competitive markets ensure a level of price competition, helping to keep inflation in check.
The best thing the federal government could do might be to encourage small business creation. The pandemic years decimated the private small business sector which needs to be re-incentivized and promoted. Small business, employing fewer than 500 people, were the backbone of American greatness during the post-war period from 1945-1970. Revitalizing small business should, and likely will be a priority for the incoming administration.
The revenue coming in from tariffs under a Trump plan should also help fund public services like infrastructure, which is sorely in need of upgrades, repair, and servicing, at a national level. The government can help rebuild roads, bridges, tunnels, public utilities, and the electrical grid via incentives to private contractors, reducing regulatory burdens, thereby improving conditions for doing business in the United States.
Finally, tariffs promote economic independence by encouraging local production, reducing dependency on foreign markets. While there's certain to be blowback from countries selling into the United States, the longer term effect would encourage these countries and companies to consider direct investment within U.S. borders. To that end, Trump proposals to reduce the corporate tax rate to 15% should find support in congress, though there's no telling how visceral the opposition will be.
Overall, a lower corporate tax rate would aid in mitigating inflation while encouraging foreign companies to invest in new manufacturing facilities within the United States. Foreign investment would help bring down the balance of trade deficit which has been at crisis levels since the 1970s. Encouraging domestic manufacturing and energy development will help square the trade imbalance.
Trump's tariffs should be seen as a paradigm shift in international trade. With more and more countries - especially BRICS-aligned countries - settling trade using local currencies, bypassing the dollar as a settlement currency, the United States needs to defend its position in international markets by promoting the use of tariffs to level the playing field.
At the international level, tariffs should slow the flight away from the dollar, while at the same time local currencies and gold will continue to provide alternatives. Trump's tariffs won't solve all of America's problems, but, applied reasonably, should fit well into the emerging multi-polar economy of the world.
The jury, so to speak, is still out on tariff proposals, and, in fact, the entirety of Trump's agenda. On Sunday, December 1, Trump issued a threat to BRICS nations that he would impose 100% tariffs on countries seeking to establish a competing reserve currency to the U.S. dollar.
This isn't going to sit well with China, Russia, India, and the rest of the BRICS-aligned nations which are tired of dollar weaponization and have steadily increased bi-lateral trade employing local currencies as the settlement currency. Trump may find himself at odds with most of the world, pursuing policies of dollar dominance while continuing to impose sanctions - and now, tariffs - on uncooperative countries.
Whether or not Trump stands by his "100% tariff" threat remains to be seen. At best, he will negotiate terms with trading partners with tariffs as a stick and entry into U.S. markets the carrot. At worst, he is doing business for the Federal Reserve, which wants zero competition in the currency regime.
There is no means by which to adequately gauge the effects of radical policy maneuvers untl they are actually put into effect. Trump may be bluffing, or, he could be using his time before inauguration to keep the deep state at bay. Naturally, much more will become clear after January 20, 2025.
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From Money Daily:
Vivek Ramaswamy on the intentions of the Department of Government Efficiency
Will entire agencies be deleted? Answer: yes. pic.twitter.com/QPe5VNGDhr
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