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Yahoo
14-04-2025
- Business
- Yahoo
Even on Pause, Trump's Trade War Runs Up a Big Price Tag
If you're keeping track—and economists are making their best efforts—President Donald Trump's trade war with the entire planet is running up quite a price tag. Even with a 90-day pause on some tariffs (except for China), the imposition or even just the threat of import taxes on goods from around the world and the inevitable retaliation by other countries is expected to take a bite out of the economy and people's prosperity. Figuring out how much of a bite it will take is a trick, but there's little doubt that it will be painful. The grimmest assessment of the trade war's impact so far may come from the Penn-Wharton Budget Model (PWBM). In an analysis considering costs of the Trump administration's tariff plans as of April 8, economists and data-crunchers Lysle Boller, Kody Carmody, Jon Huntley, and Felix Reichling warned that "many trade models fail to capture the full harm of tariffs." Using their own model, the authors project that tariffs announced so far "would reduce GDP by about 8% and wages by 7%" over time. The tariffs, the PWBM team adds, affect the economy through three main channels: The tax on imported goods imposes costs on consumers and businesses in the United States, with consumers suffering the brunt of it in the longer term; the reduction in imported goods "means foreign businesses and governments will purchase fewer U.S. assets, including U.S. federal government bonds"; and increased economic policy uncertainty from the tariff announcements will reduce economic activity as businesses and individuals put off investment, hiring, and spending while they wait to see how matters shake out. The PWBM analysis concluded that the tariffs would raise revenue roughly equivalent to increasing the corporate income tax from 21 percent to 36 percent, or $5.2 trillion over 10 years. "While raising the corporate tax rate is generally seen as highly economically distorting, tariffs would reduce GDP and wages by more than twice as much," the authors caution. What that would mean in real terms for average Americans, they add, is that "a middle-income household faces a $58K lifetime loss." The Tax Foundation has also been tracking the cost of the trade war in an ongoing analysis by Erica York, vice president of federal trade policy, and senior economist Alex Durante. As of April 11, they "estimate tariffs will cause imports to fall by slightly more than $800 billion in 2025, or 24 percent." Revenue-wise, they see tariffs raising $2.2 trillion over the next decade. Obviously, that big an effect on trade will also have an impact on the U.S. economy. "We estimate that before accounting for any foreign retaliation, Trump's tariffs will reduce long-run US GDP by 0.8 percent," York and Durante warn. "As of April 10, threatened and imposed retaliatory tariffs affect $330 billion of US exports based on 2024 US import values; if fully imposed, we estimate they would reduce US GDP by 0.2 percent. Combined, the US-imposed tariffs and the threatened and imposed retaliatory tariffs reduce US GDP by 1.0 percent." As does PWBM, the Tax Foundation expects the Trump administration's tariffs and resulting retaliation to hurt the U.S. economy. But there's a substantial difference between the Tax Foundation's negative forecast and the darker predictions of PWBM. The economists at PWBM already said they think other models underestimate the impact of tariffs. By email, I asked York for her take on the difference between her organization's calculations and the PWBM numbers. "While tariffs are more economically harmful than a simple analysis suggests due to how they affect capital investment and productivity growth, PWBM's approach and findings seem very aggressive," she responded. She added that the grimmer predictions "are very far outside the range of what other modeling finds." That said, the disagreement between the two analyses is one of degree; both concur that a trade war will hurt Americans. Part of the difference is a matter of uncertainty over economic policy, foreign and domestic, which PWBM notes "generally depresses economic activity by prompting firms and households to postpone investment, hiring, and consumption decisions." That point was emphasized by Minneapolis Federal Reserve President Neel Kashkari, who last week wrote, "the significant increase in economic uncertainty will likely reduce firms' desire to invest." Agreeing with that point is Larry Fink, CEO of the financial firm BlackRock. "I think you're going to see, across the board, just a slowdown until there's more certainty," Fink told CNBC on Friday. "And we now have a 90-day pause on the reciprocal tariffs—that means longer, more elevated uncertainty." From a trade perspective, it's good that tariffs have been partially paused—again, except for China. But a 90-day pause isn't a cancellation of the trade war; it just kicks the can down the road. Until people know whether tariffs will eventually be hiked, and the degree to which other nations will retaliate, many would-be investors are likely to sit on their hands, businesses will hold off on committing to deals, and consumers will put off purchases. The almost certain result is a big hit to the economy. "I think we're very close, if not in, a recession now," Fink added. It's probably a mistake to look to economic models for precise crystal-ball gazing. When it comes to this trade war—or most economic policies—the economists are better pointing to a direction rather than a specific destination. "Economics is not about forecasting," comments economist and Hoover Institution senior fellow John Cochrane. "Most of what happens comes from external shocks. Economics is better at cause and effect—what is the effect of tariffs?" And most economists agree on the effects of tariffs in general, the protectionist measures imposed by both the first Trump and subsequent Biden administrations, and the draconian trade barriers now championed by the second Trump administration. They'll hurt the U.S. economy and make us poorer. It may be too soon to forecast the precise costs of protectionism and of starting a trade war with the entire world, but we can be sure that it will run up an enormous price tag. The post Even on Pause, Trump's Trade War Runs Up a Big Price Tag appeared first on
Yahoo
03-03-2025
- Business
- Yahoo
How Republicans plan to use ‘weird accounting' to pass $4 trillion in tax cuts
Republicans have proposed trillions of dollars in tax cuts that are all but impossible to make permanent with the party's slim majorities in the House and Senate. So now, Senate Republicans may use what one budget expert calls "weird accounting" tricks to push through cuts that are controversial even to some in their own party, and which could have huge implications for future policymaking. In order to pass the budget bill with a simple majority and avoid a filibuster by Senate Democrats, Republicans would have to rely on a process called budget reconciliation. One of the requirements of budget reconciliation is that bills cannot add to the national deficit beyond the budget window, in this case 2034. But all of the tax cuts and other budget items that Republicans have proposed would be so costly, there's no way to do it within that structure, says Kent Smetters, an economics and public policy professor at the University of Pennsylvania's Wharton School of Business. So Senate Republicans have said when they extend the 2017 tax cuts set to expire this year, they can say it costs $0 to do so because the tax cuts are already "current policy." This so-called current-policy baseline is a major change from the metric that Congress has traditionally used. Of course, that's not how budgets work. Even if Republicans claim they cost $0, the tax cuts and other proposed budget expenditures would add trillions to national deficits, according to the Penn Wharton Budget Model (PWBM). "If I have a subscription for eight years to Sports Illustrated, and then I tell my wife, Well, I'm gonna renew it for another 10 years, but it's not gonna cost us anything, because I already have one," says Smetters. "It's kind of a weird accounting to do that, but that's essentially what they're going to try to do." The House budget reconciliation resolution calls for $1.7 trillion in net spending cuts—which could likely come from Medicaid and SNAP—and $4.5 trillion in net tax cuts, leading to a $2.8 trillion increase in deficits over the next 10 years. That's where the weird accounting comes in: By not counting the cost of extending the 2017 tax cuts—which comes to around $4 trillion over the next eight years, PWBM projects—Republicans hope they can then also afford to add in some more of President Donald Trump's stated policy objectives, like not taxing tips or Social Security payments. Sen. Mike Crapo (R-Idaho), endorsed the new "current policy" approach last week, saying it "recognizes that extending current law does not change the tax policy, does not reduce tax revenue," according to NBC News. "They're saying, 'Well, this is our current law…so it's not like this is really costing us more money.' And there's a lot of intellectual problems with that," says Smetters, noting that Democrats could use the precedent for things that Republicans could object to in the future, like extending the lapsed Enhanced Child Tax Credit. "This is almost the nuclear option on budgeting right here. It's pretty darn close to that." Even other Republicans are taking issue with the GOP's math. Rep. David Schweikert (R-Ariz.), told the Wall Street Journal that the idea is akin to fraud. "Am I giving you enough inflammatory language?" Schweikert said. "I can actually go much further." According to Penn Wharton's calculations, the wealthy will benefit much more than middle- or lower-class Americans if the budget plan goes forward. The largest increases in after-tax income would go to the top income quintile, while everyone else sees "much more modest increases in after-tax income." In the event cuts to Medicaid and other safety nets are used to help offset the tax cuts, the least wealthy Americans may actually lose ground financially in the long term. This situation could arise since the House's budget resolution doesn't specify exactly where spending cuts will come from; it is more a framework for spending cuts than an actual bill. Instead, it says certain committees must identify where they can make cuts. The bill calls on the Energy and Commerce Committee, which oversees Medicaid, to identify $880 billion in cuts, and for the Education and Workforce Committee, which oversees school funding and child nutrition, to nip $330 billion in spending. Meanwhile, Republicans have called on the Agriculture Committee, which oversees SNAP and farm subsidies, to identify $230 billion in cuts. The upshot, says Smetters, is that low- and middle-income Americans who depend on those programs could see their benefits reduced over the rest of their lifetimes. And that reduction would wipe out any potential tax cut they could see long term. Exactly what the committees decide to cut is scheduled to be unveiled later this month. When just looking at the tax cuts themselves, "it looks like everybody's a winner," says Smetters. "But this is only [an] analysis on the tax proposals themselves. What's also required is these mandatory spending cuts." This story was originally featured on
