Trump’s bold economic vision seeks to return the nation to a golden age of economic opportunity. But nearly every economist will tell you that tariffs raise prices. Trump has vowed to put tariffs in place. Prices will go up – so what’s the point?
By Peter Reagan
Key takeaways
- Cutting $2 trillion from the federal budget may not be feasible
- Tariffs will raise prices in the short term, but will boost domestic industries and strengthen the economy long-term
- Economically speaking, we have a tough road ahead
Donald Trump, Elon Musk, and Vivek Ramaswamy.
These three gentlemen (we haven’t yet confirmed that Dr. Ron Paul will join them) are working together to create the Department of Government Efficiency. Their goal:
- Eliminate redundant bureaucracies
- Streamline necessary government services
- Slash spending, especially wasteful spending
Just as you’d expect from Musk (he is trying to put people on Mars, after all), he wants to find $2 trillion in savings.
The potential benefits of reaching that goal, though, could be huge for you and me, and our children, our grandchildren and so on.
Some have expressed concerns, though, about how they’d even be able to cut the budget by that much. It is a huge amount, after all.
Are those concerns justified?
Let’s look into the details…
$2 trillion in savings – too much to hope for?
The biggest criticism that comes up is the suggestion that there isn’t a way to reduce the budget by $2 trillion without cutting programs such as Medicare and Social Security.
Neil Irwin with Axios writes,
The incoming administration will face stark fiscal arithmetic: Most federal dollars go to direct transfers to Americans, disproportionately located in the very places that propelled President-elect Trump back to the White House.
Why it matters: If the Elon Musk/Vivek Ramaswany-led Department of Government Efficiency is to achieve anything approaching the $2 trillion in annual cost savings they’ve floated, slashing bureaucrats from the federal payroll or payments to well-heeled contractors wouldn’t be enough.
Now, as I’ve already talked about previously, Trump and company can’t just cut programs such as Medicare and Social Security (and wouldn’t even if he could). Which means that a couple of the biggest spending programs are simply off-limits.
USA Facts has a snapshot of where the money went in 2023:
- Social Security: $1.4 trillion
- National defense (including salaries, equipment and veterans’ benefits): $1.1 trillion
- Transfers to states: $1.09 trillion
- Medicare: $848 billion
- Debt service payments: $766 billion
- Medicaid: $616 billion
- Income security programs (like unemployment benefits and food stamps): $496 billion
- Federal employee pensions: $197 billion
Now, Irwin’s implying above that cutting spending on “the very places that propelled President-elect Trump back to the White House” is necessary. That there simply aren’t enough “bureaucrats” or “well-heeled contractors” on the federal payroll that firing all of them would make a difference.
When we look at a county-by-county map of government spending, we learn something quite interesting:
In the counties most reliant on transfer payments – where they account for more than 25% of all income – Trump won 63% of the vote.
This fact absolutely astonishes the mainstream media and their coastal liberal elite viewers. “Why in the world,” they ask one another, “would those people vote for the man who says he’s going to give them less money?”
The answer’s obvious to me! What do impoverished rural areas and the rust belt have in common? Depressed local economies, few job prospects, high unemployment and poverty. They understand that what they need isn’t more federal money. What they need is economic opportunity!
These are the same places that stand to benefit the most long-term from Trump’s economic plan.
The cost of revitalizing the U.S. economy
A return of manufacturing and agricultural jobs to those depressed areas is what residents want. After all, they didn’t vote for the candidate who promised to give them downpayment assistance to buy a home.
They want opportunity, not a bigger unemployment check! That’s why Trump’s talk of tariffs, 10-20% at least, 60% on goods from China – was music to their ears.
Even though those tariffs will raise the cost of living about $2,600 per year for the typical American family. (No one really knows exactly how much – estimates range from $1,700-$3,500 so I picked the median figure.)
And make no mistake, just about the only thing economists agree on is this: Tariffs raise prices. When costs go up, for any reason, producers pass those costs on to customers.
The higher prices we pay are a trade-off. Oren Case, writing for The Atlantic, offers this perspective:
The basic premise is that domestic production has value beyond what market prices reflect. A corporation deciding whether to close a factory in Ohio and relocate manufacturing to China, or a consumer deciding whether to stop buying a made-in-America brand in favor of cheaper imports, will probably not consider the broader importance of making things in America. To the individual actor, the logical choice is to do whatever saves the most money. But those individual decisions add up to collective economic, political, and societal harms. To the extent that tariffs combat those harms, they accordingly bring collective benefits.
Those collective benefits are significant!
Production in the physical economy, whether manufacturing or agriculture or resource extraction, also has an outsize effect on economy-wide productivity growth. It anchors local economies… It preserves economic balance, so that trade is genuinely trade, instead of a lopsided exchange of cheap goods for financial assets.
What we’re talking about is turning the rust belt back into a manufacturing powerhouse. That’s a dream come true to millions of Americans.
Short-term pain for long-term gain
Remember, it will take time for manufacturing and farming to return to the U.S. For one thing, it takes about FOUR YEARS to go from blueprints to cutting the ribbon on a new factory.
Trump’s plan to lower corporate taxes incentivizes domestic production – and the tariffs on imports does the same thing. I believe those factories will get built. Not immediately, though.
In the meantime, we’ll be stuck with higher prices. As Olivier Blanchard writes:
As U.S. demand shifts from foreign to domestic goods, higher demand for domestic goods in an economy that is already at full employment will put upward pressure on prices. That pressure will force the Fed to increase interest rates to keep inflation under control. Because of both higher rates and an improved trade balance, the dollar will strengthen…
That’s right, tariffs will cause prices to increase. Blanchard calls this “inflation,” but if you’re a regular reader you know that’s not accurate. Because all inflation comes from one place.
Now, as I’ve said before, this will help our economy long-term. In the meantime, it will hurt.
There will be a lot of people telling you that Trump’s plan will hurt the poorest, the least educated – those Americans who already have the fewest economic opportunities. I disagree.
But I’m not going to lie to you, either. We will pay a price to rejuvenate the American economy. You’ll pay it, I’ll pay it – at the grocery store and when we’re shopping on Amazon.
Over time, we’ll be better off. A stronger economy, more diverse employment opportunities, higher-quality American made products – the way it used to be.
The road ahead
Tariffs will bring higher prices with them. That’s inevitable. They will eventually be offset by a stronger, faster-growing economy, along with better jobs.
It’s going to be difficult if not impossible for the Department of Government Efficiency to cut $2 trillion from the Federal budget. That means the inflationary effects of deficit spending may be with us for a while longer.
Prices will likely increase over the next 3-5 years due to these factors. It’s safe to estimate that we won’t really know whether the Trump economic plan really succeeds in its attempt to Make America Great Again for a decade.
In the meantime, there will be significant economic volatility as the world adjusts to a “new normal” of tariffs, reshoring American manufacturing and subsequent second-order effects.
We have a hard road before us. And we’re walking it together.
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