Pivoting
From Tax Cuts to Tariffs, Trump Ignores Economic Warning Signs
The
president’s economic policy approach is so far rattling markets, businesses and
consumers.
Tony Romm Colby Smith
By Tony Romm
and Colby Smith
Tony Romm
reported from Washington, and Colby Smith from New York.
https://www.nytimes.com/2025/05/24/us/politics/trump-taxes-tariffs-economy.html
May 24, 2025
One day
after House Republicans approved an expensive package of tax cuts that rattled
financial markets, President Trump pivoted back to his other signature policy
priority, unveiling a battery of tariff threats that further spooked investors
and raised the prospects of higher prices on American consumers.
For a
president who has fashioned himself as a shrewd steward of the economy, the
decision to escalate his global trade war on Friday appeared curious and
costly. It capped off a week that saw Mr. Trump ignore repeated warnings that
his agenda could worsen the nation’s debt, harm many of his own voters, hurt
the finances of low-income families and contribute far less in growth than the
White House contends.
The tepid
market response to the president’s economic policy approach did little to sway
Mr. Trump, who chose on Friday to revive the uncertainty that has kept
businesses and consumers on edge. The president threatened 50 percent tariffs
on the European Union, and a 25 percent tariff on Apple. Other tech companies,
he said, could face the same rate.
Since taking
office, Mr. Trump has raced to enact his economic vision, aiming to pair
generous tax cuts with sweeping deregulation that he says will expand America’s
economy. He has fashioned his steep, worldwide tariffs as a political cudgel
that will raise money, encourage more domestic manufacturing and improve U.S.
trade relationships.
But for many
of his signature policies to succeed, Mr. Trump will have to prove investors
wrong, particularly those who lend money to the government by buying its debt.
So far, bond
markets are not buying his approach. Where Mr. Trump sees a “golden age"
of growth, investors see an agenda that comes with more debt, higher borrowing
costs, inflation and an economic slowdown. Investors who once viewed government
debt as a relatively risk-free investment are now demanding that the United
States pay much more to those who lend America money.
That is on
top of businesses, including Walmart, that say they may have to raise prices as
a result of the president’s global trade war. The onslaught of policy changes
has also left the Federal Reserve frozen in place, unsure as to when the
economy will call for lower interest rates in the face of persistent
uncertainty. As a result, borrowing costs for mortgages, car loans and credit
cards remain onerous for Americans.
Still, Mr.
Trump continues to proclaim that his policies will bring prosperity. This week,
the White House released data showing that its tax cuts could increase U.S.
output as much as 5.2 percent in the short term, compared with the gains it
would have achieved if the bill is not adopted. The administration has stood
largely alone in offering such rosy predictions about the effects of Mr.
Trump’s policies on businesses, average workers and the nation’s fiscal future.
In report
after report, economists this week predicted that Mr. Trump’s signature tax
package could add well over $3 trillion to the national debt. Some found that
the measure is unlikely to deliver substantial economic growth, and could
enrich the wealthiest Americans while harming the poorest, millions of whom
could soon lose access to federal aid for food and health insurance.
The tax cuts
are largely an extension of ones that Congress passed in 2017, meaning that few
taxpayers will see an increase to their after-tax income. In fact, some might
see their financial situation deteriorate: Many of the lowest earners may even
see about $1,300 less on average under the Republican bill in 2030, according
to the nonpartisan Penn Wharton Budget Model, which factored in the proposed
cuts to federal safety-net programs.
Facing an
onslaught of red flags and dour reports, the White House has remained bullish.
“I think
folks have cried wolf a lot,” Stephen Miran, the chairman of the president’s
Council of Economic Advisers, said in an interview, stressing that Mr. Trump’s
agenda would “grow the economy.”
In the past,
investors and businesses might have rejoiced over Mr. Trump’s grand
proclamations about lowering taxes, reducing regulations and opening access to
foreign markets. But the most common reaction this week was concern over Mr.
Trump’s sclerotic approach, which has renewed fears that the economy could
enter a prolonged period of pain.
“It’s
possible that you’re going to get a big benefit to growth, but the costs are so
obvious and so clear that I think it’s hard to put a lot of faith in that at
the moment,” said Eric Winograd, an economist at the investment firm
AllianceBernstein.
By most
metrics, Mr. Trump inherited a solid economy. Layoffs were low when he took
office, and have stayed that way, helping to keep the unemployment rate stable.
And consumers, even amid elevated prices, continued to spend apace.
Four months
into his second term, however, there are signs that the economy is beginning to
come under greater strain, in what experts worry is a prelude to a more
substantive slowdown. While economists do not expect the economy to tip fully
into a recession, they say Mr. Trump’s tariffs in particular have raised the
odds of a downturn, as both businesses and consumers begin to cut back.
Many of the
president’s allies maintain that Mr. Trump is doing exactly as he promised
during the 2024 presidential campaign, acting out of a belief that his vision
can spur robust economic growth. In doing so, that can help to create jobs,
raise wages and generate the sort of activity that can lessen the nation’s
fiscal imbalance, said Stephen Moore, a conservative economist who served as
one of Mr. Trump’s advisers during his first term.
“So many of
these problems are the result of low growth,” Mr. Moore said of the economy.
Mr. Trump is aiming to get growth back up to 3 percent, Mr. Moore added.
But the
administration has at times ignored a steady stream of data suggesting its
policies may not deliver those gains.
The
disparity between vision and reality became apparent Thursday as House
Republicans voted to advance a bill that would extend the set of tax cuts
enacted in the president’s first term. The measure also included Mr. Trump’s
campaign promises to eliminate taxes on tips and overtime pay.
An analysis
released Thursday by the Joint Committee on Taxation, a nonpartisan advisory
arm of Congress, found that the new Republican measure may raise the average
rate of growth in U.S. output by only 0.03 percentage points compared with
current expectations through 2034. The finding cast doubt on the
administration’s long-held assertion that economic activity can help to lower
the deficit. The joint committee also said the president’s tax package could
add $3.7 trillion to the nation’s debt over the next decade.
Mr. Miran
maintained on Friday that congressional analysts and others had underestimated
the effects of Mr. Trump’s initial tax cuts, and had done the same this year.
“Better tax
policy creates better economic growth, and better economic growth creates
better revenue,” he said.
Focusing on
the debt, Kevin Hassett, the director of the White House National Economic
Council, said on Fox News on Thursday that there was “a lot of spending
reduction in this bill,” adding that the Trump administration would seek
additional savings as the bill moved through the Senate.
The prospect
of a worsening fiscal imbalance prompted Moody’s Ratings just last week to
downgrade the U.S. credit rating, citing Republican tax cuts and the proclivity
of past G.O.P. administrations to spend. Party lawmakers swiftly rejected the
finding, but bond markets took notice, sending yields on longer-term U.S. debt
higher. Soft demand at an auction of 20-year Treasuries on Wednesday gave
markets another jolt, pushing up bond yields and weighing on U.S. stocks.
Mr. Trump
sent markets into another tailspin on Friday as he abruptly shifted his
attention to tariffs. He attacked the European Union and threatened to raise
tariffs on its exports to a flat rate of 50 percent. He signaled a mixed
appetite for negotiations, telling reporters in the Oval Office: “I don’t know.
We’re going to see what happens.”
The
president also took aim at Apple, signaling he would impose a 25 percent import
tax on iPhones, months after his administration relaxed some of its trade
policies to aid tech giants. Mr. Trump later suggested his new tariffs might
also apply to Samsung.
The S&P
500 fell nearly a percentage point on Friday and pushed the U.S. dollar lower
against a basket of its peers. Many from Washington to Wall Street yet again
scrambled to decipher Mr. Trump’s intentions — and sort out the extent to which
the president is serious, bluffing or set to walk back his policies again.
Some
businesses have forecast price increases as a result of Mr. Trump’s tariff
threats. A report this week from Allianz found that many businesses are trying
to push the added tariff costs onto suppliers or consumers, with roughly half
of its survey respondents saying they may increase prices.
The
potential for rising prices while growth is slowing poses a unique challenge
for the Fed and its voting members, forcing them to reconcile with conflicting
missions — a goal to pursue low, stable inflation, and a desire to sustain a
healthy labor market.
“The bar for
me is a little higher for action in any direction while we’re waiting to get
some clarity,” Austan Goolsbee, the president of the Chicago Fed and a voting
member on this year’s rate-setting committee, told CNBC on Friday.
Mr. Goolsbee
recalled a recent exchange with the chief executive of a construction business,
who said: “We’re now in a put-your-pencils-down moment.” Businesses, Mr.
Goolsbee said, now “have to wait if every week or every month or every day
there’s going to be a new major announcement.”
“They just
can’t take action until some of those things are resolved,” he added.
Tony Romm is
a reporter covering economic policy and the Trump administration for The Times,
based in Washington.
Colby Smith
covers the Federal Reserve and the U.S. economy for The Times.
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