Trump's grant gambit threatens to wreck the goldilocks economy he inherited

CNN

29-01-2025

A two-page memo, totaling less than a thousand words and packed with right-wing rhetoric, threw the fate of the US economy into uncertain territory late Monday as the Trump administration ordered the suspension of hundreds of billions of dollars in federal grants and loans.
The document from the acting director of the Office of Management and Budget states explicitly that federal funds should align with Trump administration priorities and focus on 'ending 'wokeness.'' It rails against using federal money to 'advance Marxist equity, transgenderism, and green new deal social engineering policies' and directs all government agencies to suspend disbursements while the administration reviews them.
It's difficult to overstate the chaos that the directive, with its ambiguous wording, unleashed within organizations across broad swaths of the economy that rely on federal funds — including programs that provide essential medical services, emergency aid for farmers, cancer center support and even a program covering the cost of caskets for deceased veterans with no next of kin, my CNN colleagues Jennifer Hansler, Andy Rose and Tami Luhby reported.
By Tuesday evening, a federal judge had temporarily blocked part of the freeze on federal aid.
And while there were still countless questions left unanswered — a White House spokesperson initially couldn't say whether Medicaid funding would be paused, for instance — what was clear is that any disruption to the flow of federal funds would have undeniable ripple effects throughout the US economy.
The gambit is part of Trump's stated desire to wrest control over spending from Congress, and is, according to legal experts, almost certainly illegal. Samuel Bagenstos, a law professor at the University of Michigan and former general counsel for the OMB, told me that it comes down to 'a basic constitutional principle … that the executive branch can only delay spending appropriated funds for certain reasons,' and none of those reasons include the president disagreeing with the policy underlying the appropriation.
But the move underscores how much Trump is willing to gamble to get what he wants. In issuing the order, the president is threatening to take a wrecking ball to one of the most resilient economies in modern history.
Time and time again over the past four years, the US economy has defied predictions that it was heading into a recession, with the labor market remaining historically strong despite a two-year inflation spike and painfully high interest rates. And contrary to Trump's campaign rhetoric, the US economy is in a historically good spot — inflation is mostly tamed, interest rates are coming down and consumer spending has powered back-to-back-quarters of 3% annualized GDP growth.
None of that is guaranteed to last, especially if thousands of workers who rely on federal grants find their jobs suddenly unfunded and businesses lose faith in the government making good on its promises.
In the short term, 'the economic effects may not be earth-shattering with respect to the aggregate economy, but earth-shattering with respect to individuals who are going to bear the brunt of this,' said Wendy Edelberg, the director of The Hamilton Project and a senior fellow at the Brookings Institution. 'If it is a one-week thing, it's just another handful of straw on the camel's back, another reason to be on edge … But if we get to week five, and that money still hasn't gone out the door, I will be screaming, in a hair-on-fire panic, not just about the economy, but about the state of our country.'
Trump officials sought to tamp down the panic by claiming the OPB memorandum was 'not a blanket pause' on all federal programs, just ones aligned with Democratic priorities — a message that seemed to only muddy the issue further. The White House later said Medicaid was not subject to the order, yet several state Medicaid agencies reported that they had lost access to funds they rely on to pay hospitals, doctors and insurers.
'It would have been nice for them to figure out what their policy is before they announced it,' said Brendan Duke, a senior director for economic policy at the Center for American Progress. 'This is essentially a unilateral partial federal government shutdown by the president.'
Only it's potentially worse than the federal shutdowns most of us are familiar with — when Congress fails to reach a budget deal and it forces all non-essential staff to stop working and public services like national parks are shut down until lawmakers can get a bill together. Because the Trump federal grant freeze affects mandatory spending that Congress has already approved.
'This isn't part of the government shutdown playbook,' Edelberg said. 'We have no playbook for when the program that runs children's health insurance isn't going to get funded. We're in a different ball game than just thinking about the annoyance and stupidity of government shutdowns because of appropriations bills.'
It is practically impossible to quantify the potential impact of the grant freeze without knowing exactly which programs would be affected and for how long. But the effects would hardly be limited to recipients of federal assistance or those whose jobs are directly funded by them. That's because economies aren't made up of discrete blocks that can be easily moved around or excised to suit a political agenda — they are messy, complex webs made up of real people with real bills to pay.
'It is foolish to assume that the economy will be resilient regardless of what sorts of policies are being championed,' said Zack Mabel, director of research at the Georgetown University Center on Education and the Workforce. 'I think we're really testing out how stress-resistant our economy and our labor market is … but I think this is a really dangerous endeavor because the consequences are so significant. To say that we're playing with fire here is an understatement.'