Source for image: The Far Side.
Edit: Skip this, just read the “days and weeks” quote that came out Sunday evening 4/6/2025, from Commerce Secretary Lutnik, shown at the end of the post. Looks like somebody in the administration has finally figured out that this is a terrible idea, and they are now looking for a way to declare victory and call the whole thing off.
At least, that’s what I hope the quote from Lutnik means.
Don’t focus on the microeconomic effects.
I could recite the Econ 101 of Why Tariffs are Bad. But the picture to the left illustrates the gist.
The popular press tends to focus on the “microeconomics” of the situation. That is, the impact on a single product or industry, alone. E.g., here’s what this will do to the price of a car, and so on. Here’s why a steel tariff is good for steel makers, but not for industries that build things out of steel.
To be clear, real (that is, mainstream, having-a-degree-in-the-subject) economists hate tariffs. Boiled down, from an industry-level perspective, tariffs are not merely a case of robbing Peter to pay Paul, they ensure that both Peter and Paul work less efficiently than they could, thus making everybody worse off, on average. It’s one of those things about which there is widespread agreement among mainstream economists, backed up by decades of evidence.
Except in a handful of cases, in the modern economy, tariffs are little more than a seductive way to shoot yourself in the foot.
Simply put, any amount of money you think you can raise with tariffs, you can raise that more efficiently, resulting in higher GDP and higher employment, if you raise that with an income tax. But, as I have previously noted, since the whole point of the Trump tariff is to substitute sales (consumption) taxes on the middle class, for income taxes on the wealthy, that point is not salient to the current administration’s thinking.
Focus on some round-number macroeconomics instead.
In round numbers, I’m guessing that the first-year revenues from the Trump tariff will be roughly the size of the U.S. budget for the Department of Defense. (I’ll present the estimate below, such as it is.)
What would you expect to happen to the economy if the Feds shut down the Department of Defense, all at once, on some random Tuesday? Forever. And then simply pocketed what used to be spent, thus removing that from aggregate demand for U.S. goods and services? (Though, in reality, simply borrowing less to make up for the remaining annual budget deficit.)
My best guess is that the amount of money collected by the Trump tariff will be about the size of U.S. Defense spending.
So withdrawing that money, out of U.S. aggregate demand, via tariffs, ought to have about the same impact as closing the DoD and not increasing Federal spending.
Best guess, this should roughly double unemployment, as it works its way through economy in the short run. Call that year.
So, my prediction, FWIW, is that U.S. unemployment will 7.9%, in April 2026.
Like so:
The only sleight-of-hand above is the “fiscal multiplier”, for which you are invited to take your own guess, if you don’t like mine. That’s to capture the immediate follow-on effects of the initial drop in U.S. aggregate demand caused by the tax increase (the tariff) assuming no offsetting federal spending increase. The Fiscal Multiplier is an abstract notion, meant to capture the diffusion of spending across the economy, but in concept it’s no different from when the the local factory shuts down, and the local bars and restaurants soon follow suit. The actual reduction in economic activity, from the original shuttering of the factory, is somewhat larger than the loss of the factory jobs alone. How much larger, on average, that’s subject to debate. And, given that we don’t even know what the fallout of this is going to be, on consumer prices, it’s a bit early to have that debate. So 1.5 is a nice round number, and frequently appears within the range of what sane people, those more learn-ed than I in this matter, find plausible.
What about the long run?
An eight-percent unemployment rate is a recession, for sure, but hardly the end of the world as we know it. To get to the real potential for calamity, we need to speculate on what happens in the long run.
First, elasticity of demand — the reaction to the price changes — should be very nearly a wash. And that’s because it applies to both our imports of foreign goods, and to foreigners’ imports of our goods. Surely, we will use less of the now-pricier imports, all other things equal. But so will foreigners, of our goods.
As predicted (and sometimes pre-announced), our trading partners have wasted no time imposing tariffs on their imports of American goods. And so, if the average price elasticity of imports and exports is about the same, and if foreigners impose tariffs on our goods equal to our tariffs on theirs, then the net moderating effect of price elasticity should be a wash. Our demand for foreign goods will decline, reducing the size of this new tax. But at the same time, foreign demand for U.S. goods will decline, as they impose their retaliatory tariffs. The dollar value of our goods imports and exports are not hugely different ($3.3T vs $2.1T). As long as demand elasticities for imports and exports are about the same, these effects should roughly cancel.
The real uncertainty is in what else might happen.
Once these tariffs take this chunk of spending out of U.S. aggregate demand, then the economy is, for want of a better term, biased toward recession. Like a rock on a slope. Nudge it hard, and it now has a tendency to roll further downhill. Anything from general loss of confidence, to a world-wide economic downturn — will feed into the unemployment increase created by the tariffs.
Nobody has a clue how that will work out. But for sure, all of those factors are more of a worry in the context of an U.S. economy that is already surely headed for recession.
On account of the trade war we started.
Conclusion
A major recession is already baked in.
That’s purely from withdrawing 2.5% of U.S. aggregate demand, via these new taxes on imports, and not spending it.
Maybe the Republicans will succeed in giving that money to the wealthy, in the form of further tax cuts. But the wealthy have a low “marginal propensity to consume out of current income”, meaning that they save most of their income, rather than spend it. In an ugly business climate, where nobody is willing to take that (now-)excess savings and invest it, that still creates the conditions for recession. Softens the blow to aggregate demand a bit, to take those sales taxes an, in effect, shovel them into the pockets of the wealthy. But you can’t make the wealthy spend their additional income. As economic policy, this is classic “you can’t push on a string”.
At this point, the question isn’t whether jerking the U.S. economy around like this is a good idea. It’s not. We’re going to get at least a major recession out of it, in short order, just from the sheer size and abruptness of it. That part has nothing to do with imports and exports per se. Any tax hike amounting to 2.5% of GDP, with no offsetting increase in Federal spending, would do the same.
The only question is, how bad is this going to get?
At this point, we’ve all-but-destroyed NATO, abandoned an ally in the middle of a war (to the point of withholding intelligence information, which shows the treatment of Ukraine isn’t about the money), torn up all of our international trade agreements, … . And we’re not three months into it yet.
Putin could not have asked for a better return on investment. Pardon me while I go buy some shares in Deutsche Bank now.
Addendum: Emily Litella lives!
I read this quote below, and just about lost it. Here’s the U.S. Secretary of Commerce, just up on the CNBC website, emphasis mine:
Commerce Secretary Howard Lutnick said Sunday ...
“There is no postponing. They are definitely going to stay in place for days and weeks,” Lutnick said. ...
All this chaos, with literal trillions of stock-market losses, making enemies of former friends like Canada, killing consumer and business confidence, likely tipping the U.S. in recession, but the plan is now to keep those tariffs in place for days. Maybe even for whole entire weeks, if need be. All that, so that Trump can have foreign governments kiss his ring, and cut side-deals to have their tariffs lowered?
And then say “never mind”?
There’s stupid, and then there’s crazy stupid.
That’s so stupid, it’s not credible. There’s no way that “days” of tariffs was the original plan.
The only thing that makes sense is that the Trump administration is (finally!) seeing what a bad idea this is. They of course will never admit to making a mistake. So this has the look of a trial balloon, for ending this trade war by declaring victory and going home.
So they can save face, declare this a huge win instead of the huge blunder that it was, blame the liberal media, or maybe Biden, and move on.
If so, you really have to wonder what’s next.
Maybe they’ll pretend to launch some nukes, just to see what happens.
