Short-Term Pain for... Long-Term Malaise?

Trump's long-term economic plan does not add up.

Photo by Annie Spratt on Unsplash

On the day that Trump was inaugurated for his second term, I wrote the following:

The hard-working staff here at Drezner’s World believes that opportunities exist for the second Trump administration to improve on the status quo in the United States. The staff is also extremely skeptical that any improvement will actually take place. The Trump team’s economic policies do not add up. Trump has articulated logically contradictory aims for his tariffs. During the transition Trump seemed far more invested in bullying allies than deterring rivals. And, even though a lot of the country wants to forget this fact, Trump was an objectively awful president during his first term.

Donald Trump is inheriting a much better status quo than what he claimed during the 2024 campaign, with far fewer political constraints than in 2017. He will now have to respond to the unexpected crises that cross his path. And with each passing day he will be less able to blame anything that happens on his predecessor.

The Pottery Barn rule does not just apply to other countries; it applies to the United States as well. Donald Trump now possesses the keys to the country, and despite what he claimed during the campaign, the country is in pretty solid shape. Let’s see if he can make America better — or at least not make it any worse.

50 days later, it seems worth checking how the U.S. economy is doing and oh dear God.

President Donald Trump’s senior advisers downplayed fresh economic turbulence Monday as the administration’s escalating trade war deepened a sell-off on Wall Street and renewed fears about the stability of the U.S. economy.

As all three major U.S. stock indexes slumped, Trump’s team projected confidence that the volatility would prove temporary and that an economic boom set off by tax cuts would follow later this year. But investors have been unsettled by Trump’s willingness to impose tariffs that go even beyond his sweeping campaign promises, with hundreds of billions in new import duties already levied and trillions more poised to take effect on April 2. The federal government could shut down this weekend, too, if Congress doesn’t extend federal funding — a possibility Trump acknowledged to reporters on Sunday night.

The growing conviction that Trump will stick by massive new tariffs regardless of the economic fallout — amplified by the president’s refusal to rule out a recession on Sunday — fueled the drop across equity markets. The Dow Jones Industrial Average closed down 890 points, or 2.1 percent, while the S&P 500 fell 2.7 percent and the Nasdaq composite index plummeted 4.0 percent.

According to Bloomberg, the Silicon Valley billionaires who attended Trump’s inauguration have seen more than $210 billion wiped off of their balance sheets since January 20th.

It’s not just the stock market that has been reacting badly to the Trump administration’s efforts to enact Galt’s government. Consumer confidence has also crashed and a majority of Americans now believe the economy is on the wrong track.

What is interesting is that Trump appears largely unruffled by this. As Politico noted, a president who was obsessed with stock market performance during his first term has acted very differently this time around:

Trump is indicating “at least the possibility that he’s not going to be deterred by market volatility, he’s not going to be deterred by falling stock prices, and that he might not even be deterred by an economic downturn,” said Michael Strain, director of economic policy studies at the American Enterprise Institute. “That is new for him.”

And while economic unsteadiness in the U.S. predates Trump’s second term — indeed, it played a significant role in his return to office — these latest economic pressures are largely of the president’s own making and will test his appetite for weathering short-term economic uncertainty and political backlash in the hope of long-term economic gain.

“His antics have been very painful. At least he’s acknowledging that there’s pain,” said a person close to the administration, granted anonymity to speak candidly about its decisions. “I don’t quite get it because in the first administration he judged himself every day by the stock market. He has now chosen to judge himself by something else — I don’t know what it is.”

Trump’s sycophants in the media are either starting to panic or blasting those who are panicking for excessive short-term thinking:

So what’s going on? CNBC’s Eamon Javers posted a long thread suggesting that Trump wants to “re-balance” the U.S. economy through budget cuts and tariff hikes. And as Javers notes, “reversing the hollowing out of American manufacturing and the rust belt is an enormous task. And may not succeed. But if you’re going to do it, you’re probably going to have to accept: higher prices, lower corporate profits and a slower growing stock market.”

This is consistent with what Trump flacks are saying — like Treasury Secretary Scott Bessent talking about “re-privatizing” the economy or National Economic Council Kevin Hassett’s claim that the economy will really start to take off once the tax cuts are in place.¹ They can point to declining borrowing rates and the spike in CEO confidence as affirmations that the administration is not just pursuing a Clubber Lang approach — instead, it is offering a “short-term pain for long-term gain” pledge.

This kind of narrative completely contradicts what Trump was promising to do on the campaign trail. Nonetheless it offers an intuitive appeal; surely there must be some short-term sacrifice to re-balance the economy to a more sustainable equilibrium, right?

Here’s the thing, though: there is very little in the long-run vision of Trump and his team that suggests anything in the way of significant long-run gain.

James Pethokoukis is a bigger believer in the pro-growth elements of Trump’s agenda — AI deregulation, energy deregulation, tax cuts — than I am. But in his latest, even he notes that Trump’s overall economic agenda does not point towards a new Golden Age:

Investors appear disconcerted by what they perceive as the administration's hand-wavy, nonchalant attitude toward economic pain caused by his tariff-driven trade policy. As one investment analyst told the Wall Street Journal: “This is the first time we've had an administration pretty much say with a straight face [that] the objectives are going to cause pain.”….

The pluses of traditional GOP-type economics are more than offset by the negatives of the new populist GOP economics. At least for now, by the way, investors don’t seem to be assuming a massive economic acceleration from AI or even AGI to make the US economy so bulletproof that even terrible policy — which a tariff-driven economic agenda is — can’t screw up things. Nor should policymakers be tempted by any such assumption.

Open trade, especially with other liberal democracies, is an important element of my Up Wing agenda. The nexus between free trade and economic growth has been central to economic theory since Adam Smith. To repeat: Nations benefit by specializing in goods and services where they possess comparative advantage. Access to larger markets enables firms to achieve economies of scale, spreading fixed costs across expanded production. Trade accelerates technological diffusion globally, whilst import competition erodes domestic monopolies and spurs innovation.

Let’s hope the market’s nasty reversal prompts an equally sharp reversal in Trump trade policy.

I am not hopeful that Trump will reverse his trade policies. More importantly, however, Trump’s other policies are also sabotaging the long-run growth potential of the U.S. economy. Trump’s tax cuts won’t help economic growth in the long run because they will raise interest rates. As the Committee for Responsible Federal Budget noted all any GOP budget cuts will be dwarfed by the tax cuts, which “would make the deficit worse.” His immigration restrictionism won’t help in this regard either. Trump’s existence as a massive uncertainty engine will also be a significant drag on the economy.

The most significant area where Trump is devastating the long-term growth potential is his full-blown assault on basic research in universities. This appears to be the stated goal of Christopher Rufo, for example, in his interview with Ross Douthat:

I actually think that the corrective that is required is not to say we’re going to shut down all the universities, because that’s not possible. But, by spinning off, privatizing and then reforming the student loan programs, I think that you could put the university sector as a whole into a significant recession. And I think that would be a very salutary thing.

I think that putting the universities into contraction, into a recession, into declining budgets, into a greater competitive market pressure, would discipline them in a way that you could not get through administrative oversight with 150 extra Department of Ed bureaucrats.

A medium- or long-term goal of mine is to figure out how to adjust the formula of finances from the federal government to the universities in a way that puts them in an existential terror and have them say, Unless we change what we’re doing, we’re not going to be able to meet our budget for the year.

The long-term outcome of this approach is an impoverished higher ed sector that is no longer able to perform basic research. The measures to date alone have already led to hiring freezes at Harvard, Stanford, and other major research universities. Other Trump administration attacks on universities will further reduce the attractiveness of U.S. universities for top-notch researchers.²

As Catherine Rampell notes in her latest column, Trump “has already positioned America to lose the 21st century, in three simple steps. 1) Alienate your friends. 2) Destroy your business environment. 3) Slaughter your golden goose (i.e., science and research).” On that last point:

Our country’s greatest global advantage, by far, is in science, research and technology. We have long been the global leader in R&D, which is why we have the most innovative companies, the most successful tech sector and the mightiest military. It is this knowledge sector — not some imagined renaissance in low-value goods manufacturing — that will determine who “wins” the 21st century.

We have faced great competition in this domain recently. The Chinese government has surged investment into all kinds of new R&D, from medical innovation to drone capabilities to better and cheaper electric vehicles. In January, a Chinese firm’s breakthrough on artificial intelligence led to warnings of another “Sputnik moment,” a reference to a pivotal turn in the U.S.-Soviet space race.

Despite all this, Trump is gutting our scientific and research infrastructure….

“If these types of policies continue, the U.S. will lose its role as a leader in science,” said Petra Moser, an economic historian who has studied scientific collaboration and how prior immigration restrictions reduced the productivity of American-born scientists. “Science overall will lose — the U.S. more so than the rest of the world, because people will stop coming here and go elsewhere.”

At this point, the Trump administration is not incurring short-term pain for long-term gain. It is enacting policies that incur short-term pain in return for long-term economic malaise.

Maybe I’m wrong and maybe, despite all of Trump’s own-goals, AI will lead to a new Golden Age. At this rate, however, Trump is guaranteeing that the next generation of AI breakthroughs will not come from the United States.

1. A reminder that federal outlays as a percentage of GDP have remained pretty steady and the number of federal employees as a percentage of the total workforce has declined this century so I’m not entirely sure what kind of rebalancing Bessent is talking about.

2. As Michelle Goldberg noted, the arrest and attempted deportation of grad student Mahmoud Khalil for leading Palestinian protests at Columbia University will send a signal to foreign students: “The nearly 13 million green card holders in the United States — not to mention foreign students and professors — have been put on notice that they need to watch what they say.” That’s not a conducive environment for performing cutting-edge research.