The US economy is ultimately driven by millions of people working hard to create and trade goods and services, but the US federal government can impact the economy in three main ways: 1) fiscal and regulatory policy: impacts production and who benefits and loses; 2) foreign policy and war: impacts production, life, and quality of life; and, 3) monetary policy: impacts inflation/deflation and boom-bust cycles.
The key lesson of economic science was articulated well by Adam Smith in 1776 and has been repeated by all knowledgeable economists since then, including Ludwig von Mises and Murray N. Rothbard: free the economy!
That means to avoid any counterproductive government interventions in voluntary trade and private property rights. Economic science teaches us that good fiscal and regulatory policy is to minimize government taxes, spending, and bureaucratic red tape. Good foreign policy is to pursue diplomacy, peace, and free trade with all countries whenever possible. Good monetary policy is to prevent artificial expansion of the money supply, which causes price inflation and the boom-bust cycle.
Trump’s Economic Policies—The Good
Trump has proposed a wide variety of economic policies for his second term, most of which are similar to his first term. Here are the positive ones based on economic science:
Tax Cuts: Tax cuts are always good from a free-market perspective. Tax cuts allow hard-working Americans to keep more of their money for spending, saving, and investing. Investing in new equipment and technology raises labor productivity, wages, and living standards.
Trump is proposing to extend the 2017 Tax Cuts and Jobs Act provisions, which are set to expire after 2025. This includes maintaining lower individual tax rates and a higher standard deduction. He favors reducing the corporate tax rate to 15 percent. He is also talking about eliminating income taxes on Social Security benefits and exempting tipped income and overtime pay from taxation.
Deregulation: Deregulation is also always good free-market policy, since it eliminates bureaucratic red tape and frees entrepreneurs to create new businesses and jobs. It also lessens production costs.
Trump wants to reduce regulations in the energy sector, in particular, to promote domestic production, which would help lower energy prices and reduce US reliance on Middle Eastern theocracies for energy.
Trump’s Economic Policies—The Bad
Higher Spending: Spending cuts are also always good from a free-market perspective, since they leave more resources in the private economy and lessen distortions brought about by spending. A good example of how beneficial cutting spending can be is post-World War II, when federal spending was slashed by 45 percent and there was a postwar boom. This is proof that Keynesian economics has everything backward.
Trump has proposed spending more on infrastructure. This usually leads to wasteful spending and corruption with lots of money going to favored government contractors. It also distorts the price and capital structure by diverting money and resources to areas of the market where they would not otherwise go. Of course, it would be better to privatize as much infrastructure as possible.
Trump has suggested Elon Musk could be “Secretary of Cost-Cutting,” with a goal of cutting $2 trillion or more from the federal government’s $6.7 trillion budget. However, this will be very difficult to implement, as Trump has promised to not cut Social Security, Medicare, national defense, veterans programs and Federal pensions, which comprise over 80% of spending.
Tariffs & Protectionism: Tariffs and protectionism are always bad for living standards, as proven by economists like David Ricardo in the 1800s. Tariffs are a tax on US consumers for buying foreign goods. Tariffs also distort the structure of production, tend to lead to higher prices, and can even make domestic producers less competitive overall.
Trump is proposing a 10 to 20 percent tariff on all imported goods and a 60 to 100 percent tariff on Chinese imports. He has also proposed a 200 tariff on automobiles imported from Mexico, as well as a 25 percent tariff on all Mexican imports if Mexico fails to prevent illegal migrants from crossing into the US.
Trump’s Economic Policies—The Uncertain
Reduce Fed Independence: Trump and Vice President Vance have talked about limiting the Federal Reserve’s independence by allowing presidential influence over interest rates and potentially removing Chair Jay Powell from office. If this means that Trump wants to encourage lower interest rates and more artificial money creation, that would be bad, as it would lead to higher inflation and a more intense boom-bust cycle.
If, on the other hand, they could really limit or eliminate Fed “independence” and put monetary policy in the hands of elected officials rather than unelected bureaucrats like Powell, that could be very positive, though it would still imply that interest rates ought to be politically-determined rather than determined on the free market.
Foreign Policy & War: Trump was the only US president in recent memory who didn’t start any major new wars. He says he wants to end the war with Russia, which has cost over one million lives, $175 billion so far in US taxpayer money, could lead to World War III, and even risks nuclear war. However, it is less clear what he wants to do with the conflicts in the Middle East and he is generally antagonistic towards China.
Immigration: The US economy needs peaceful hard-working people to grow the economy, but it does not need people who commit crimes and go on welfare paid for by hard-working, taxpaying Americans. It remains to be seen what, if anything, Trump can do to improve the immigration system in the US.
The Boom-Bust Business Cycle under Trump? The Fed created 40 percent more dollars in 2020 in response to covid. This caused the highest price inflation rates in over 40 years, not to mention the bubbles and market distortions as a result. That forced the Fed to hike interest rates at the most aggressive pace since the early 1980s. That caused the biggest decline in the money supply and the longest yield curve inversion since the Great Depression of the 1930s. If this does not lead to a recession, it will be the first time in history.
The unemployment rate has risen 0.7 percent and every time it has risen at least 0.5 percent, there has been a recession. Housing starts have fallen significantly and leading economic indexes are pointing to recession. Thus, a recession is highly likely over the coming year or two regardless of what Trump does. The big question is inflation and interest rates. If the Fed cuts rates aggressively, as they have been doing in recent months, that could lead to a resurgence of price inflation during a recession. That would be “stagflation,” which is the worst situation for American living standards.
Conclusion
One hopes that Trump will implement more free market-oriented policies, rather than interventions that harm the free market. The main near-term problem for the economy is that the Fed has already hiked rates at a pace that will likely lead to a recession and is now cutting rates despite stubbornly high inflation. Thus, we should hope for the best, but prepare for the worst.
