Short-Run Impacts of Trump’s Economic Policies: A Neo-Kaleckian Perspective

Trump’s economic policies will almost certainly hurt the economic performance of the short-run GDP (to say nothing of the long run). While tax cuts for both rentiers and firms will have a positive effect on short run GDP, decreased government spending will have a negative effect. Since the most likely outcome of a ‘new Trump tax cut’ would just be an extension of the tax cuts from his first term (TCJA) that are set to expire this year, there will be no new positive effect on the economy of extending these (since whatever positive effect was felt would have occurred in 2017 when they initially took effect). The translation to the Neo-Kaleckian model would be the top income tax rate (which was cut from 39.6% to 37%, and is set to expire in 2025) equating to the tax on rentiers. If that cut is not extended, then there would actually be a negative effect on the economy. However, the cut in corporate taxes from 35% to 21% is not set to expire, so if the new tax bill includes extra decreases in corporate tax rates (or top income tax rates), then we would get stimulative effects on the economy (with some caveats: this would be less stimulative than progressive tax reform, since the less wealthy have higher MPCs; and there’s likely diminishing marginal returns to cutting taxes – the first large decrease probably has more impact than another one in preventing corporations or the wealthy to stash their taxable income in tax havens, if it has any effect at all). Furthermore, cutting government spending (via Elon and the DOGE boys) has unambiguously contractionary effects on GDP (not to even mention the labor market, which I’ll discuss below).

The tariff fiasco has greatly raised economic uncertainty, and has led to a severe decline in the stock market. If we take this as a proxy for ‘animal spirits’ for investment, this would cause a downward shift in the intercept term of the investment function (taking the partial derivative of nominal production income with respect to nominal autonomous investment shows that a reduction in animal spirits reduces nominal GDP by the exact amount of the government expenditure multiplier). Furthermore, the consensus is that Trump’s tariffs will act as a tax on consumers, increasing prices of goods regardless of whether people pay the tariff to buy the now artificially more expensive foreign goods or if they choose to buy the more expensive American goods. Regardless, consumers will have less purchasing power, without a commensurate increase in wages (as firms likely have the bargaining power, which I’ll discuss shortly), and real consumption will go down (which is the largest component of US GDP). As price inflation rises (due to the tariffs), the Fed will logically want to raise interest rates to tame it. However, doing so would cool down an economy, which is problematic when taking into account Trump’s disruptive labor policies. His mass layoffs for the government (and the corresponding effects on contractors and many others in the labor supply chain) by definition decrease national income. Furthermore, this increases the labor supply of skilled labor and decreases demand, as positions have been wholly eliminated (meaning more unemployment). His mass deportations are seemingly targeted at unskilled labor, which would decrease labor supply on the lower end of the labor spectrum. This would be fine (economically, not morally) if labor markets were perfectly flexible and the laid off government workers would be willing to take the low-skilled jobs of the now-deported immigrants. However, this is highly unlikely for a variety of economic reasons: government employees may have reservation wages (and would prefer to search longer for a new job than to accept a vastly lower paying job), or maybe it is a skills mismatch (a former government economist would likely make a bad carpenter), or immobility of labor, or any various other economic argument. What these labor market policies in effect will do is increase labor competition at the high-skill end, allowing high-skilled wages to be pushed downward via competition due to excess supply (less wages for high-skilled labor means less consumption, and decreased GDP, as firms gain more power), while prices of goods/services on the low-skilled end will surge because of labor shortages (because there is a finite number of people willing/able to do such jobs, and raising wages won’t increase low-skilled labor supply in the short run). This could lead to the dreaded case of stagflation, where prices are rising, but the labor market is suffering (however, unlike in the 1970s, this would have been unprecedently engineered by Trump seemingly for solely tribalistic reasons). This puts pressure on the Fed to choose one of its mandates: taming inflation or minimizing unemployment (and my guess is that they’d choose inflation). All of this analysis is not even taking into account the long run effects of Trump’s volatility on the confidence in the dollar, as its strength and status as the global reserve currency allows us to keep debt servicing costs lower than they otherwise would be and allows us the convenience of exporting our monetary policy (losing both of which would be disastrous). All of this is to say that all of Trump’s bundle of economic policies will almost certainly have a negative impact on short run GDP (and likely the long run will be worse).