Trump’s Tariffs Haven’t Killed the U.S. Economy. But Firing Jerome Powell Might.

Hosts

Derek ThompsonDerek Thompson

About the episode

Summary

• In the following excerpt, Derek talks to Jason Furman about why Trump’s tariffs haven’t affected the U.S. economy in the ways some might have predicted. 

  Derek Thompson: I emailed you a few days ago, and I said, “Jason, it is time for a redux.” Three years ago, a bunch of economists predicted that high interest rates would send the U.S. into a recession. It didn’t happen. I asked you to explain why. Three months ago, a lot of economists predicted that Trump’s tariffs and his generally chaotic approach to economic management would send the U.S. into a recession or some similar economic emergency. That hasn’t happened yet.

  And I’d like you to take the central question, the central premise of this episode right off the bat. If Trump’s economic ideas are so terrible, why isn’t the economy doing much worse?

  Jason Furman: The problem is just the translation between when economists say terrible and what that looks like in the data. If you asked everyone in the country to come together and set fire to $1,000, that would seem like a phenomenally stupid idea. And for decades, you’d remember the president who came up with that crazy idea. If you take half a point off economic growth, no one would really quite notice that in the macro-data, except people that are totally obsessed with it. And numerically, it’s exactly the same as the first thought experiment. Half a point off growth is about $1,000 per household.

  And by the way, that happens to be what most of the macro-models were predicting would be the impact of the tariff. And by the way, it looks like that’s going to be borne out in the macro-data. We had negative 0.5 percent in the first quarter, and it looks like maybe we’ll have about 3 percent in the second quarter. Averaging the two of those together, we’re in the 1 to 1.5 percent range from growth. That’s a big step down from the 2.5 percent range we were in before all the tariffs hit. So the tariffs are subtracting from growth. It’s not a huge amount in macro-crisis matters, but it is a meaningful amount when it comes to families.

  Thompson: I love the way you put it, and I think it’s a very relatable thing to imagine 160 million households setting fire to US$1,000. The way that I was thinking about it is that the U.S. economy is huge. This is a $30 trillion behemoth. So even if the White House proposes an economic policy that costs $300 billion, that’s 1 percent of the economy; $300 billion sounds like quite a bit, but if it’s just a 1 percent throttle on U.S. economic growth, will we or will we not notice that is a harder question.

  Before we go deeper into explaining or caveating why a slowdown in the U.S. economy isn’t being more clearly felt, I do want to make sure that in the interest of humility, I hold economists and Trump critics like myself to account here. The effective tariff rate today is the highest it’s been in 110 years. And I spoke to several CEOs in the aftermath of the Liberation Day tariffs who said that Trump’s on, off, on, off approach to setting tariffs would decimate business certainty and destroy a lot of investment. And the idea here was that if a tariff is announced on shirts and you want to build a big shirt factory in America, you need a huge loan from a bank. But no bank is going to actually write a check for tens of millions of dollars to build a shirt factory in Iowa if they think the president’s going to change his mind on shirt tariffs in the next 15 minutes.

  So you have tariffs; you have business uncertainty. You add to that the immigration crackdown. You add to that perhaps the debt bomb of the Big Beautiful Bill. I do think that if the economy were sliding off a cliff right now, a lot of liberal economists would be saying, “I told you so.” The economy has its wobbles, but it’s not falling off any cliffs. And so I wonder, as a human, before you put your economic hat on, even just as a person, are you a little bit surprised that we don’t have more headlines of chaos and economic misery now in the middle of July, three months after those potentially catastrophic Liberation Day tariffs were announced?

  Furman: I’ll try to be a human for as long as possible. I’m not sure I’m going to last more than 30 seconds. But yes, you see the big headlines. You see the dramatic tariff news, and you expect something commensurately dramatic to happen in the economy. And absolutely, we haven’t seen anything that dramatic in the economy. Now, there’s still time, and we haven’t seen the retaliation, we haven’t seen the full magnitude of the tariffs. Things could get worse, but I don’t think they’re going to be. If we come back six months from now, my best guess is that there isn’t some catastrophe that says the answer to what we were talking about was you just needed to wait six months for the catastrophe. I don’t think that’s the dominant one.

  So as a not fully rational thinker, human, yes, I partly relate to that. But then I look at every macroanalysis that was done every time there was a new round of tariffs. There’d be these incredibly high tariffs, and then you’d turn to the Yale Budget Lab or Goldman Sachs or the Tax Foundation, whatever group you look to, and they would have economic growth falling by 0.3, 0.5, 0.8, some number like that.

  And that was reflective of the fact that you said we have a $30 trillion economy; $27 trillion of our economy is not related to goods imports. That’s things like hospitals and education and stores, restaurants, all sorts of things where imports matter. I’m not saying they don’t matter at all, but they’re not the main thing going on in those large swaths of the economy.

  Now, one always did caveat every time you saw those macro-models and said, yeah, those macro-models build in, if the price goes up 10 percent, then people will buy 5 percent less. And if that’s 1 percent of the economy, you multiply those. Those types of linear calculations. You always suspected that maybe it left out confidence, uncertainty, nonlinear effects when things were really, really large. That was what I was hearing from businesspeople, too. Like, “Oh, we can’t make any decisions. We’re not going to do anything in the face of this uncertainty.”

  And I think in some ways, what we’re seeing in the macroeconomy so far redeems the standard macro-modeling and suggests that all the fudge factors that are left out of it actually probably were properly left out of it. And all that uncertainty, confidence, et cetera, just maybe doesn’t matter that much.

  This excerpt has been edited and condensed.
  

  Host: Derek Thompson
  Guest: Jason Furman
  Producer: Devon Baroldi