2 days ago
Nouriel Roubini: The US economy could thrive in spite of Trump's disastrous policies
Since United States President Donald Trump's 'Liberation Day' on 2 April, when he announced sweeping trade tariffs on friend and foe alike, the conventional wisdom about the US economy's short-term and medium- to long-term prospects has been pessimistic.
Among other things, it has been said that higher tariffs will cause a US and global recession; that American exceptionalism is over; that America's fiscal and current-account deficits will become unsustainable; that the US dollar's status as the main global reserve currency will soon end; and that the dollar will sharply weaken over time.
Certainly, some of the policies that Trump has announced warrant such pessimism. Tariffs, protectionism and trade wars are likely to prove stagflationary (causing higher inflation and lower growth, i.e). Also worrisome are draconian restrictions on migration, mass deportations of undocumented workers from US shores, large unfunded fiscal deficits and efforts to interfere with the US Federal Reserve's independence.
Equally, the US economy would not be well served by a Mar-a-Lago Accord [along the lines of the 1985 Plaza Accord] to weaken the dollar, further damage to the rule of law at home and abroad, or tighter restrictions on foreign talent—such as scientists and students—coming to the US.
Also Read: Barry Eichengreen: The end of American exceptionalism?
Nonetheless, I have maintained (since last winter) that the US economy will be fine—not because of Trump's policies, but in spite of them.
For starters, I expected a combination of market discipline, Trump's more sensible advisors and Federal Reserve independence to prevail, and that is what has largely happened. Trump has almost consistently 'chickened out' and pursued trade deals, rather than following through with his Liberation Day tariffs.
Trump's default may be 'TALO' (Trump Always Lashes Out), but bond vigilantes and financial markets seem to have pushed him into 'TACO' (Trump Always Chickens Out) mode.
As his most damaging economic policies take a milder form, the US economy will still endure some pain, but the likely end-of-year scenario is a growth recession (meaning below-potential growth), not an outright recession (typically defined as two consecutive quarters of negative growth).
Second, because the positive effects of technology will always trump the negative effects of tariffs, the era of US economic exceptionalism is not over. The country is ahead of everyone—including China—in most of the revolutionary innovations [such as artificial intelligence] that will define the future. Accordingly, its potential annual growth is likely to increase from 2% to 4% by the end of the decade, before rising much higher in the 2030s.
Suppose that new technologies increase its potential growth by 200 basis points while trade and other bad policies reduce it by 50 basis points; America would remain exceptional. It is America's uniquely dynamic private sector, not Trump's policies, that will determine the future growth outlook.
Also Read: Is American exceptionalism finally on its last legs?
Third, if potential growth does indeed accelerate toward 4% over time, US public and external debts as a share of gross domestic product (GDP) will prove sustainable, stabilizing and then falling over time (unless there is even greater fiscal recklessness). While the US Congressional Budget Office projects a rising public debt-to-GDP ratio, that is because it assumes that America's potential growth will peak at 1.8%. [Faster growth could change those forecasts.]
Fourth, as long as American economic exceptionalism [survives], the 'exorbitant privilege' conferred by the dollar's global primacy is unlikely to erode. Despite higher import tariffs, US external deficits will probably remain high, since investment as a share of GDP will rise on the back of a secular tech-driven boom, while the US savings rate is likely to remain relatively stable. The resulting increase in the current-account deficit will be financed by equity inflows (both portfolio investment and foreign direct investment).
In this context, the dollar's role as global reserve currency is unlikely to be significantly challenged, even if there is some modest diversification out of dollar-denominated assets. Likewise, these structural inflows will limit downside exchange-rate risks, and they could even strengthen the dollar over the medium term.
Also Read: Nouriel Roubini: US economic tailwinds will help it overcome tariff headwinds
In short, the US is likely to do well over the rest of this decade, not thanks to [Trump's policies], but in spite of them. There is no question that many of his policies are potentially stagflationary. But the US happens to be at the centre of some of the most important technological innovations in human history right now.
These will deliver a large positive aggregate supply shock that will increase growth and reduce inflation over time. This effect should be an order of magnitude larger than the damage that stagflationary policies can induce.
Of course, one shouldn't be complacent about bad policies; their negative impact could be serious. But as long as markets and bond vigilantes do their job, Trump's worst impulses may be constrained. ©2025/Project Syndicate
The author is professor emeritus of economics at New York University's Stern School of Business and author of 'MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them'.
