I’ll try to keep this one short. I was starting a post on another topic when Donald Trump distracted me… again. This time it was the $2,000 per person “tariff dividend” he’s proposed. This would be paid to all low- and middle-income Americans starting in mid-2026. As if the federal government was a profitable enterprise. Obviously that’s the wrong model! This is either sheer stupidity or willful government failure. Sure, the Fed can just print money, so why not? Who knew Trump was a closet modern monetary theorist?
It’s such a bad idea…. Tariffs themselves are bad enough. They are taxes, of course, a truth about which Trump and his central trade planners have denied since the beginning of the escapade. Tariffs hurt consumers and businesses who import inputs. Tariffs retard growth by increasing input costs, disrupting supply chains, and raising the prices of not only imports, but also domestically-produced goods that compete with imports. Surely Trump knows all this and the implications for his political capital: he’s already backtracking on tariffs for certain food items.
The tariff dividend is a transparent attempt to compensate consumers for the harms of taxation. It’s also a transparent attempt to buy or keep votes, much as he’s already sought to buy-off farmers harmed by tariffs. The income limit for the dividend hasn’t been announced, but make no mistake: this represents another form of redistribution.
It’s also striking that the tariffs won’t generate nearly as much revenue as will be required to begin paying the dividend by mid-2026. In fact, it could be short by as much as $300 million! Will the Treasury borrow the rest? More pressure on the bond market and interest rates.
Furthermore, the so-called dividend would be inflationary if the Federal Reserve fails to neutralize it. It would amount to another “helicopter drop” of cash, similar to the cash dump from Covid relief payments: money printing under the guise of fiscal policy.
To the extent that tariff revenue flows, it should be used to reduce the federal deficit or to pay down the gigantic government debt already outstanding ($38 trillion today not including the impending cost of funding entitlement programs). Instead, Trump is proudly following in the footsteps of generations of spendthrift politicians.
Keep in mind that the dividend is a promise Trump might not be able to keep. The Supreme Court will soon announce its decision on presidential power to impose tariffs. This decision will bear on the president’s authority under the International Emergency Economic Powers Act (IEEPA) — if and when an actual emergency is at hand, which it clearly is not. More broadly, the decision hinges on whether a “foreign facing” tax falls within the president’s Article II powers under the Constitution.
The proposed tariff dividend undermines the Administration’s argument before the Court that tariffs are primarily regulatory tools, and that any revenue from tariffs is merely incidental. Thank God the dividend would have to be authorized by Congress! I truly hope there are enough sensible legislators on the Hill to beat back this idiocy.
Inflation leveled off below 3% in 2024 and has drifted around the 3% level in 2025. The rate of increase in the core PCE (Personal Consumption Deflator) is the inflation measure of most interest to the Federal Reserve as a policy reference, but advances in the core CPI (Consumer Price Index) have settled at about the same level. The core inflation rates exclude food and energy prices due to the volatility of those components, but even with food and energy, inflation in the PCE and the CPI have been running near 3%.
It’s a 2% Target… Or Is It?
The Fed continues to maintain that its “official” inflation target is 2% for the core PCE. However, the central bank is now easing policy despite inflation running a full percentage point faster than the target. The rationale turns on the Fed’s dual mandate to maintain both “price stability” and full employment, goals that are not always compatible.
Currently, the labor market is showing signs of weakness, so the Fed has elected to ease policy by guiding the federal funds rate downward, and by putting a stop to run-off in its balance sheet holdings of securities. The latter ends a brief period of so-called quantitative tightening.
Just a couple of months ago, the central bank announced a new emphasis on targeting 2% inflation in the long run, with notable differences from the “flexible average inflation targeting” (FAIT) that it claimed to have adopted in 2020. In some respects, the Fed appeared to be giving more primacy to the “2%” definition of price stability than to the full employment mandate. Yet the “new approach” still allows plenty of wiggle room and might not differ much from the approach followed prior to FAIT.
“… an asymmetric approach to the dual mandate: It would implement makeup policy on misses below the inflation target, and it would respond to shortfalls from maximum employment. These asymmetries, while well- intended, created an inflationary bias that caused FAIT to fail the ‘stress test’ of the 2021–22 inflation surge. This failure caused the Fed to effectively abandon FAIT in early 2022 and become a single-mandate central bank focused on price stability.“
Scott Sumner says the Fed never really really practiced FAIT to begin with. It should have been a symmetric policy, but it wasn’t. During 2021-22, the Fed did not attempt to correct for rising inflation. Instead, it focused on the recessionary effects of Covid and the impingements of Covid-era restrictions on employment.
Clearly, Covid was a shock that monetary policy was ill-suited to address without reinforcing inflation. Furthermore, the pandemic inflation was thought by the Fed to be transitory, but easing policy was a critical error. Stimulating demand via monetary accommodation gave inflation more permanence than the Fed apparently expected.
Lost In the Tea Leaves Again
While a strong commitment to price stability is welcome, it’s not clear that is what’s guiding the Fed’s decisions at the moment. Again, the Fed’s preferred inflation gauge has flattened out at around 3%. However, with uncertainty about tariffs and tariff pass throughs in 2026, the weak dollar, and unrelenting Treasury borrowing, easier monetary conditions could well set the stage for persistent inflation above 3%, despite the official 2% target. That might help explain the failure of longer-term interest rates to decline in the wake of the Fed’s latest quarter-point cut in the federal funds target in October.
Suspicious Minds
Speculation that the Fed is allowing its true inflation target to creep upward is hardly new. Back in June, former New York Fed economist Robert Brusca noted the following:
“A Cleveland Fed survey already has the business community thinking that the REAL target for inflation is 2.5%.”
More recently, Mark Sobel of the Official Monetary and Fiscal Institutions Forum stated that the real target, for now, is probably 3%:
“But could the Fed stealthily and unintentionally end up near 3%? Even apart from above-target inflation in recent years, short- and longer-term structural forces are at play that could usher in slightly higher inflation, notwithstanding Fed speeches on the sanctity of the 2% inflation target.“
Chewing On Data
It’s pretty clear that the Fed has become a skittish about the pace of the real economy, lending more weight to the full employment part of its dual mandate. Employment growth slowed over the past year, partly due to government employee buy-outs and separations of illegal immigrants from their employers. The last official employment report was in early September, however, so the nonfarm payroll data is two months out-of-date:
Private payroll growth from ADP over the past two months has not looked especially encouraging:
Tariffs and weakened profit margins have likely had a contractionary effect, and the six-week government shutdown just ended will shave 0.5% or more off fourth quarter GDP growth. Furthermore, while money (M2) growth has accelerated over the past year, it remains fairly restrained.
And the monetary base has been pretty flat for most of 2025:
We’ll see where these aggregates go from here. The extended “restraint” might now be of some concern to the Fed, given recent doubts about employment and economic growth. Still, in October, Fed Chairman Jerome Powell said that another quarter-point cut in the federal funds rate target in December was not a foregone conclusion. That statement seems to have worried equity investors while offering little solace to bond investors.
Aborted Landing
If (and as long as) the Fed gives primacy or greater weight in its policy deliberations to employment than inflation, it might as well have adopted an inflation target of 3% or more. The additional erosion in purchasing power wrought by that leniency is bad enough, but the effect of monetary policy on the real side of the economy is more poorly understood than its effect on nominal variables. The Fed’s shift in priorities is both unreliable on the real side and dangerous in terms of price stability. These concerns are even more salient given the upcoming appointment (in May) of a new Fed Chairman by President Trump, who seems eager for easy money.
The world doesn’t ordinarily revolve around tariffs, but so much has happened to make tariffs into an economic and political linchpin of the moment. Donald Trump put them in the spotlight, of course, and while he’s still seeing roses, things won’t turn out entirely the way he hopes. At the tariff levels he’s instituted, this shouldn’t be too surprising.
While tariff revenue is helping to shave the federal budget deficit, the tax falls largely on the backs of American consumers and businesses with all the attending distortions that entails. Sadly, the extra revenue also seems to have offered a handy excuse to put spending cuts on the back burner. Tariffs and tariff uncertainty have businesses attempting to compromise between reduced margins and price hikes. Thinning margins due to tariffs have played a role in the weak employment numbers we’ve seen over the past few months. And tariffs, at least until now, have quite rightly reinforced the Federal Reserve’s cautious stance toward easing policy. However, the weak labor market has likely convinced the Fed to cut its short-term interest rate target, despite inflation stubbornly remaining well above the Fed’s 2% objective. That upward price pressure will remain.
Now, the legal battle over Trump’s tariff authority is about to reach a climax. That’s what I’ll focus on here. The Supreme Court has agreed to fast track the challenge to the President’s discretion to impose retaliatory tariffs unilaterally. There are two cases at hand: V.O.S. Selections, Inc. v. Trump, and Learning Resources, Inc., et al. v. Donald Trump et al. In both cases, small business plaintiffs contend that Trump’s invocation of the International Emergency Economic Powers Act (IEEPA) is unwarranted, and that “most” of the tariff actions taken by Trump have usurped Congress’ power of the purse under Article I of the Constitution. Here’s Ilya Somin, who is a Volokh Conspiracy regular and one of the attorneys representing the plaintiffs:
“… IEEPA doesn’t even mention tariffs and has never previously been used to impose them, that there is no ‘unusual and extraordinary threat’ of the kind required to invoke IEEPA, the major questions doctrine, the constitutional nondelegation doctrine, and more.“
This isn’t the first time a U.S. president has imposed tariffs unilaterally, but it is easily the most drastic such action. Historically, nearly all tariffs were levied by acts of Congress. Prior to Trump II, perhaps the broadest tariff imposed by a President was Richard Nixon’s brief 10% surcharge on all imports, but that was lifted quickly. Presidents Johnson and Obama imposed some selective tariffs. All of these episodes seem piddling compared to Trump’s tariffs, which are both sweeping and in many cases painfully selective.
Eric Boehm notes that when it comes to major constitutional questions, the Court has taken the position that
“… executive power should be construed narrowly, not broadly …. Rather than tying itself into knots to affirm nearly unlimited executive powers over commerce, the Supreme Court should tell the Trump administration to get permission from Congress before imposing new tariffs.“
I believe that will be the general shape of the outcome here. Maybe there’s a way for the Court to allow the tariffs to stand until Congress decides to “man up”, acting one way or the other. SCOTUS would probably like to do just that! Or maybe the Court could stay the lower court’s injunction until the case is heard by the Court in full on the regular docket, or until Congress acts.
There’s a decent chance, however, that Trump’s tariffs will be struck down, leaving it up to tariff supporters in Congress to lay down statutory rules rather than put up with the impulsive craziness we’ve witnessed thus far. If the Court lets the tariffs stand, it leaves the door open for new tests on the limits of executive discretion. Here is Greg Ip at the link:
“There would also be no end to uncertainty. ‘Unlike most other tariff authorities, these tariffs are not enshrined in statute, there’s no process to change them, and they can change very rapidly, in a day, without much notice, as we’ve seen,’ said Greta Peisch, a trade attorney at Wiley Rein and former general counsel for the U.S. trade representative.“
We’ve already seen strong hints that the Administration would like to force businesses to eat the cost of the tariffs rather than pass them along to consumers in higher prices. There hasn’t been any formal action of this kind by the Administration, at least not yet. Still, one can hardly blame businesses who might perceive an implicit threat if they fail to comply. That kind of bullying represents an a massive abuse of power. The Court could do everyone a big favor by clarifying that the authority to impose tariffs rests with Congress.
Since his inauguration, Donald Trump has been busy finding ways for the government to extort payments and ownership shares from private companies. This has taken a variety of forms. Tad DeHaven summarizes the major pieces of booty extracted thus far in the following bullet points (skipping the quote marks here):
June 13: Trump issues an executive order allowing the Nippon Steel-US Steel deal contingent on giving the government a “golden share” that enables the president to exert extensive control over US Steel’s operations.
July 10: The Department of Defense (DoD) unveils a multi-part package with convertible preferred stock, warrants, and loan guarantees, making it the top shareholder of rare earth metals producer MP Materials.
July 23: The White House claims an agreement with Japan to reduce the president’s so-called reciprocal tariff rate on Japanese imports comes with a $550 billion Japanese “investment fund” that Trump will control.
July 31: Trump claims an agreement with South Korea to reduce the so-called reciprocal tariff on South Korean imports comes with a $350 billion South Korean-financed investment in projects “owned and controlled by the United States” that he will select.
August 12: In a Fox Business interview, Bessent points to the alleged investments from Japan, South Korea, and the EU “to some extent” and says, “Other countries, in essence, are providing us with a sovereign wealth fund.”
August 22: Fifteen days after calling for Intel CEO Lip-Bu Tan to resign, Trump announces that the US will take a 10 percent equity stake in Intel using the CHIPS Act and DoD funds, becoming Intel’s largest single shareholder.
Each of these “deals” has a slightly different back story, but national security is a common theme. And Trump says they’ll all make America great again. They are touted as a way for American taxpayers to benefit from the investment he claims his policies are attracting to the U.S. However, all of these are ill-advised for several reasons, some of which are common to all. That includes the extortionary nature of each and every one of them.
Short Background On “Deals”
The June 13 deal (Nippon/US Steel), the July 10 deal (MP Materials), and the August 22 deal (Intel) all involve U.S. government equity stakes in private companies. The August 11 deal (NVIDIA/AMD) diverts a stream of private revenue to the government. The July 23 and July 31 deals (Japan and South Korea) both involve “investment funds” that Trump will control to one extent or another.
The August 12 entry adds “expected” EU investments with some qualification, but that bullet quotes Treasury Secretary Bessent referring to these investments as part of a sovereign wealth fund (SWF). Secretary of Commerce Lutnick now denies that an SWF will exist. My objections might be tempered slightly (but only slightly) by an SWF because it would probably need to place constraints on an Administation’s control. That might give you a hint as to why Lutnick is now downplaying the creation of an SWF.
I object to the Nippon/US Steel “deal” in part (and only in part) because it was extortion on its face. There is no valid anti-trust argument against the deal (US Steel is the nation’s third largest steelmaker and is broke), and the national security concerns that were voiced (Japan! for one thing) were completely bogus. Even worse, the “Golden Share” would give the federal government authority, if it chose to exercise it, over a variety of the company’s decisions.
The Intel “deal” is another highly questionable transaction. Intel was to receive $11 billion under the CHIPS Act, a fine example of corporate welfare, as Veronique de Rugy once described the law. However, Intel was to receive its grants only if it stood up four fabrication facilities. But it did not. Now, instead of demanding reimbursement of amounts already paid, the government offered to pay the remainder in exchange for a 9.9% stake in the company. And there is no apparent requirement that Intel meet the original committment! This could turn out a bust!
The MP Materials transaction with the Department of Defense has also been rationalized on national security grounds. This excuse comes a little closer to passing the smell test, but the equity stake is objectionable for other reasons (to follow).
The Nvidia/AMD deal has been justified as compensation for allowing the companies to sell chips to China, which is competing with the U.S. to lead the world in AI development. This is another form of selective treatment, here applied to an export license. The chips in question do not have the same advanced specifications as those sold by the companies in the U.S., but let’s not let that get in the way of a revenue opportunity.
While nothing about TikTok appears on the list above, I fear that a resolution of its operational status in the U.S. presents another opportunity for extortion by the Trump Administration. I’m sure there will be many other cases.
Root Cause: Protectionism
The so-called investment funds described in the timeline above are nearly all the result of trade terms negotiated by a dominant and belligerent trading partner: the U.S. My objections to tariffs are one thing, but here we are extorting investment pledges for reductions in the taxes we’ll impose on our own citizens! Additionally, the belief that these investments will somehow prevent a general withdrawal of foreign investment in the U.S. is misguided. In fact, a smaller trade deficit dictates less foreign investment. The difference here is that the government will wrest ownership control over a greater share of less foreign investment.
Trump the Socialist?
Needless to say, I don’t favor government ownership of the means of production. That’s socialism, but do matters of national security offer a rationale for public ownership? For example, rare earth minerals are important to national defense. Therefore, it’s said that we must ensure a domestic supply of those minerals. I’m not convinced that’s true, but in any case, fat defense contracts should create fat profit opportunities in mining rare earths (enter MP Materials). None of that means public ownership is necessary or a good idea.
All of these federal investments are construed, to one extent or another, as matters of national security, but that argument for market intervention is much too malleable. Must we ensure a domestic supply of semiconductors for national security reasons? And public ownership? Is the same true of steel? Is the same true of our “manufacturing security”? It can go on and on. The next thing you know, someone will argue that grocery stores should be owned by the government in the name of “food security”! Oh, wait…
Trump the Central Planner
Government ownership takes the notion of industrial planning a huge step beyond the usual conception of that term. Ordinarily, when government takes the role of encouraging or discouraging activity in particular industries or technologies, it attempts to select winners and losers. The very idea presumes that the market is not allocating resources in an optimal way, as if the government is in any position to gainsay the decisions of private market participants who have skin in the game. This is a foolhardy position with predictably negative consequences. (For some examples, see the first, second, and fourth articles linked here by Don Boudreaux.) The fundamental flaw in central planning always comes down to the inability of planners to collect, process, and act on the information that the market handles with marvelous efficiency.
When government invests taxpayer funds in exchange for ownership positions in private concerns, the potential levers of control are multiplied. One danger is that political guidance will replace normal market incentives. And as de Rugy points out, the government’s potential role as a regulator creates a clear conflict of interest. In a strong sense, a government ownership stake is worse for private owners than a mere dilution of their interests. It looms as a possible taking, as private owners and managers surrender to creeping government extortion.
Financial Malfeasance
In addition to the objections above, I maintain that these investments represent poor stewardship of public funds. The U.S. public debt currently stands at $37 trillion with an entitlement disaster still to come. In fact, according to one estimate, the federal government’s total unfunded obligations amount to additional $121 trillion! Putting aside the extortion we’re witnessing, any spare dollar should be put toward retiring debt, rather than allowing its upward progression.
As I’ve noted before, paying off a dollar of debt entails a risk-free “return” in the form of interest cost avoidance, let’s say 3.5% for the sake of argument. If instead the dollar is “invested” in risk assets by the government, the interest cost is still incurred. To earn a net return as high as the that foregone from interest avoidance, the government must consistently earn at least 7% on its invested dollar. But of course that return is not risk-free!
A continuing failure to pay down the public debt will ultimately poison the debt market’s assessment of the government’s will to stay within its long-run budget constraint. That would ultimately manifest in an inflation, shrinking the real value of the public debt even as it undermines the living standards of many Americans.
One final thought: Though few MAGA enthusiasts would admit it even if they understood, we’re witnessing a bridging of two ends of the idealogical “horseshoe”. Right-wing populism and protectionism meet the left-wing ideal of central planning and public ownership. There is a name for this particular form of corporatist state, and it is fascism.
The dismissal of the Bureau of Labor Statistics (BLS) commissioner Erika McEntarfer by President Trump was regrettable and a dumb move besides. It was undeserved, and its timing made Trump look like the authoritarian buffoon of his enemies’ worst nightmares.
Trump believed the weak employment report for July made him “look bad”. He was particularly enraged by the downward revisions in nonfarm payrolls for the months of May and June (see chart above). Of course, he would not have liked the estimates to begin with, had they been in line the ultimate revisions — he just doesn’t like “bad” numbers on his watch. Trump stated his conviction that the weak report was “politically motivated”, and even “rigged” by McEntarfer, which is absurd. To anyone who knows anything about how these numbers are produced, this makes Trump look like a guy who is willing to manipulate economic data to his advantage. Only good numbers, please!
As I’ve said before, the mere availability of aggregate economic statistics seems to encourage activist policy. This is made worse by the unreliability and mis-measurement of these aggregates, which compounds policy failures. Like other parts of the federal statistical system, BLS reporting has shortcomings, some of them severe and getting worse. But that’s not McEntarfer’s doing. The numbers, for all their faults, are generated by a highly standardized process. Reforming that process will not be cheap.
One compelling take on the negative revisions is that they are really Trump’s very own fault. In an excellent post describing some of the technicalities that drive revisions, Claudia Sahm says:
“This is a policy problem, not a measurement problem. … Large, unpredictable shifts in economic policy are placing unusual strains on our measurement apparatus because they are causing large, unpredictable changes in the behavior of consumers and businesses. These changes are difficult to measure in real time. The GDP statistics this year have struggled to isolate massive swings in imported goods around the start of tariffs from its measure of domestic production. The initial estimates of payrolls didn’t capture the slowdown in employment, but that’s more a reflection of how sharp the jobs slowdown is, rather than a limitation of the surveys.“
The key lesson here is that shifts in the policy landscape can make economic activity more difficult to measure. And of course, policy uncertainty has contractionary effects on top of the stagflationary effects of higher taxes (i.e., tariffs). But I’m not holding out hope that Trump will engage in any introspection on the point.
As Sahm explains, the sharp slowing of job growth serves to highlight one of the difficulties inherent in survey-based measures of economic performance: not all responses are timely, and that is likely aggravated when underlying changes in activity are dramatic. In fact, she says, the June revision was driven largely by late reporting. Furthermore, the May and June revisions to payrolls were also partly driven by a change in seasonal adjustment factors based on new data (BLS uses a concurrent seasonal adjustment methodology).
In terms of industries, half of the June revision to payrolls came from state and local education, erasing an initial estimate showing that public education jobs had increased in June, which perplexed analysts at the time. The other half of the revision was spread broadly across the private sector.
In addition to the changeable nature of survey data and seasonal variability, BLS reports suffer because they often involve shaky assumptions made necessary by the limits of survey coverage. Perhaps the most controversial of these comes from the so-called birth/death (b/d) model of business formation/closure. This model is used by the BLS to estimate the net jobs created by new businesses that cannot be covered by the monthly Establishment Survey. Month-to-month, that can be a large gap to fill. Unfortunately, the b/d model can be extremely inaccurate, especially at turning points. In July 2025, the b/d model added about 257,000 jobs to total new jobs (prior to seasonal adjustment). Thus, the b/d assumption was 3.5 times the seasonally adjusted total gain of 73,000!
“It is inexcusable for the BLS to not incorporate QCEW data as soon as possible.
“Instead, it relies on poor sampling of a small subset. On that poor sample, the response rate is pathetic.
“In addition, there is survival bias. In recognition of survival bias, the BLS concocted its absurd birth-death model.
“And on top that that, struggling businesses have no incentive to respond. In contrast, large corporations likely have someone dedicated to filling out government surveys.”
I’ve been critical of large BLS revisions in the past, as well as glaring inconsistencies between estimates of payroll jobs from the Establishment Survey and total civilian employment from the BLS Household Survey. Of course, they are different surveys designed to estimate different things with different samples, different coverage, geared toward counting jobs in one case and people employed and unemployed in the other. The two are benchmarked differently and at different frequencies. Still, it’s unsettling to see the two surveys diverge sharply in terms of monthly changes or trends, or to see consistently one-directional revisions. John Podhoretz states that the number of new nonfarm payroll jobs has been revised down in 25 of the past 30 months!
As Veronique de Rugy says, flaws are not the same as bad faith. Surely improvements can be made to both BLS surveys, their benchmarking, and to other adjustments and assumptions made for reporting. However, it’s pretty clear that BLS has not had the staffing and resources necessary to address these shortcomings. Over the ten years ending in 2024, inflation-adjusted BLS funding declined by more than 20%. At the same time, response rates on the Household survey have declined from 89% to less than 70%. The Establishment Survey of nonfarm businesses has also been plagued by deteriorating response rates, which fell from 61% to less than 43% over the past 10 years. And now, the Trump Administration has proposed an additional budget cut for the BLS of 8% in 2026.
Trump would have done better to ask the BLS commissioner what resources were needed to revamp its processes. Instead, his approach was to create a public spectacle by firing the head of the agency. One has to wonder how Trump might find a well-trained economist or statistician who will take the job if the numbers must always reflect well on the boss.
The federal government ran a budget surplus of $27 billion in June, much to the surprise of nearly everyone. The Trump Administration and MAGA-friendly media were eager to credit a big revenue boost from higher tariffs, which… ahem … they have assured us are notreally taxes. In any case, to attribute the June surplus to tariffs is flatly ridiculous. The truth is these “non-tax” magic revenue generators made a relatively small contribution to the apparent shift in the government’s fiscal position in June. And I say “apparent” because the surplus itself was something of a mirage.
Yes, tariffs brought in a total of almost $27B during June, which is about the same as the surplus recorded, but that was purely coincidental. It does not imply that tariffs “created” a surplus. Nor does it suggest that tariffs might just be able to balance the federal budget. Not a chance!
Here is one of two other sides of the story: the Treasury reported that the budget balance this June improved from a year ago by a total of $89 billion, from a deficit of $72B in June of 2024 to the aforementioned surplus of $27B in June 2025. Outlays were lower by about $38B this June, accounting for almost 43% of the improvement. Receipts were about $59B higher, with tariffs increasing by $20B relative to June 2024. So tariffs contributed just over a third of the boost in receipts. Altogether then, tariffs accounted for 22.5% of the improvement in the June budget balance between 2024 and 2025. That version of the story, as far as it goes, does not support the contention that tariffs “caused” the budget surplus in June, only that tariff revenue was a contributing factor.
Let’s dig a little deeper, however. Were it not for so-called “calendar adjustments” made by the Treasury, it would have reported a deficit of $70B in June. The reason? The first day of June fell on a Sunday this year, socertain payments were shifted to the last prior business day: Friday, May 30. That reduced June outlays substantially. Moreover, an extra business day in June 2025 added revenue. So the surplus in June was, in essence, an artifact of the calendar and had little to do with tariff revenue.
Incidentally, no one should be surprised by the growth of tariff revenue collected in June. When a tax rate more than triples (from a pre-Trump average of about 3% to 10% plus in June — net of tariff exclusions), one should expect revenue from that tax to increase substantially (and it was probably exaggerated by the extra business day).
Oh wait! Did I say tax?
With time, buyers will adjust and scale back their import purchases, reducing the revenue impact of the tariff hikes. However, we still don’t know how high tariffs will go. That means we could see substantially higher tariff revenue, though the demand response and a likely negative impact on incomes will cut into those gains. Either way, the revenue potential of tariffs is limited. Some estimates put the revenue impact of Trump’s tariffs at less than $250B annually. That seems conservative, but it’s significant revenue if it holds up. Still, it won’t come close to balancing a federal budget that’s almost $2 trillion in the hole. It certainly doesn’t justify a headlong dive into protectionism, which amounts to taking a crap on the economic freedom and prosperity of the American public.
Donald Trump’s latest volley against the Federal Reserve accuses the central bank of fixing interest rates at artificially high levels compared to rates in other developed countries. He repeatedly demands that the Fed make a large cut to its federal funds rate target, in the apparent belief that other rates will immediately fall with it. While a highly imperfect analogy, that’s a bit like saying that long-term parking in New York City would be cheaper if only hourly rates were cut to what’s charged in Omaha, and with only favorable consequences. Don’t tell Mamdani!
Trump believes the Fed’s restrictive monetary policy is preventing the economy from achieving its potential under his policies. He also argues that the Fed’s “high-rate” policy is costing the federal government and taxpayers hundreds of billions in excessive interest on federal debt. High rates can certainly impede growth and raise the cost of debt service. The question is whether there is a policy that can facilitate growth and reduce borrowing costs without risking other objectives, most notably price stability.
Delusions of Control
The financial community understands that the Fed does not directly control rates paid by the Treasury on federal debt. The Fed has its most influence on rates at the short end of the maturity spectrum. Rates on longer-term Treasury notes and bonds are subject to a variety of market forces, including expected inflation, the expected future path of federal deficits, and the perceived direction of the economy, to name a few. The Fed simply cannot dictate investor sentiments and expectations, and the ongoing flood of new Treasury debt complicates matters.
Another fundamental lesson for Trump is that cross-country comparisons of interest rates are meaningless outside the context of differing economic conditions. Market interest rates are driven by things that vary from one country to another, such as expected inflation rates, economic policies, currency values, and the strength of the home economy. Differences in rates are always the result of combinations of circumstances and expectations, which can be highly varied.
A Few Comparisons
A few examples will help reinforce this point. Below, I compare the U.S. to a few other countries in terms of recent short-term central bank rate targets and long-term market interest rates. Then we can ask what conditions explain these divergencies. For reference, the current fed funds rate target range is 4.25 – 4.5%, while 10-year Treasury bonds have traded recently at yields in the same range. Current U.S. inflation is roughly 2.5%.
It’s important to remember that markets attempt to price bonds to compensate buyers for expected future inflation. Currently, the10-year “breakeven” inflation implied by indexed Treasury bonds is about 2.35% (but it is closer to 3% at short durations). That means unindexed Treasury bonds yielding 4.4% offer an expected real yield just above 2%. Accounting for expected inflation often narrows the gap between U.S. interest rates and foreign rates, but not always.
Switzerland: The Swiss National Bank maintains a policy rate of 0%; the rate on 10-year Swiss government bonds has been in the 0.5 – 0.7% range. Why can’t we have Swiss-like interest rates in the U.S.? Is it merely intransigence on the part of the Fed, as Trump would have us believe?
No. Inflation in Switzerland is near zero, so in terms of real yields, the gap between U.S. and Swiss rates is closer to 1.4%, rather than 3.8%. But what of the remaining difference? Swiss government debt, even more than U.S. Treasury debt, attracts investors due to the nation’s “safe-haven” status. Also, U.S. yields are elevated by our ballooning federal debt and uncertainties related to trade policy. Economic growth is also somewhat stronger in the U.S., which tends to elevate yields.
These factors give the Fed reason to be cautious about cutting its target rate. It needs evidence that inflation will continue to trend down, and that policy uncertainties can be resolved without reigniting inflation.
Euro Area: The European Central Bank’s (ECB) refinancing rate is now 2.15%. Meanwhile, the 10-year German Bund is yielding around 2.6%, so both short-term and long-term rates in the Euro area are lower than in the U.S. In this case, the difference relative to U.S. rates is not large, nor is it likely attributable to lower expected inflation. Instead, sluggish growth in the EU helps explain the gap. Federal deficits and the ongoing issuance of new Treasury debt also keep U.S. yields higher. Treasury yields may also reflect a premium for volatility due to heavier reliance on foreign investors and private funds, who tend to be price sensitive.
Japan: The Bank of Japan’s (BOJ) policy rate is currently 0.5%. Yields on Japanese 10-year government bonds have recently traded just below 1.5%. Expected inflation in Japan has been around 2.5% this year, which means that real yields are sharply negative. The BOJ has tightened policy to bring inflation down. The nearly 3% gap between U.S. and Japanese bond yields reflects very weak economic growth in Japan. In addition, despite a very high debt to GDP ratio, the depressed value of the yen discourages investment abroad, helping to sustain heavy domestic holdings of government debt.
Blame and Backfire
Trump might well understand the limits of the Fed’s control over interest rates, but if he does, then this is exclusively a case of scapegoating. Cross-country differences in interest rates represent equilibria that balance an array of complex conditions. These range from disparate rates of inflation, the strength of economic growth, currency values, fiscal imbalances, and the character of the investor base. .
Investor expectations obviously play a huge role in all this. A central bank like the Fed cannot dictate long-term yields, and it can do much more harm than good by attempting to push the market where it does not want to go. That type of aggressiveness can spark changes in expectations that undermine policy objectives. It’s childish and destructive to insist that interest rates can and should be as low in the U.S. as in countries facing much different circumstances.
Seemingly everyone wants to know: where is this tariff inflation you economists speak of? Even my pool guy asked me! We haven’t seen it yet, despite the substantial tariffs imposed by the Trump Administration. The press has been wondering about this for almost two months, and some of the MAGA faithful are celebrating the resounding success of the tariffs in this and other respects. Not so fast, grasshoppers!
There are a couple of aspects to the question of tariff inflation. One has to do with the meaning of inflation itself. Strictly speaking, inflation is a continuing positive rate of increase in the price level. Certain purists say it is a continuous positive rate of increase in the money supply, which I grant is least a step beyond what most people understand as inflation. Rising prices over any duration is a good enough definition for now, but I’ll return to this question below in the context of tariffs.
There is near-unanimity among economists that higher tariffs will increase the prices of imports, import-competing goods, and goods requiring imported materials as inputs. Domestic importers pay the tariffs, so they face pressure on their profit margins unless they can pass the cost onto their customers. But so far, since Donald Trump made his “Liberation Day” tariff announcement, we’ve seen very little price pressure. What explains this stability, and will it last?
Several factors have limited the price response to tariffs thus far:
— Some importers are “eating” the tariffs themselves, at least for now, and they might continue to pay a share of the tariffs with smaller margins.
“… cargo loaded onto ships in Asia on April 4 was not subject to the reciprocal tariffs, while cargo loaded April 5 was. Cargo coming from Asia can take up to 45 days to make it to U.S. ports and then must be transported to distribution centers and then on to customers. It is possible that goods from Asia subjected to high tariffs are only now making their way to customers. These two factors suggest the economic effects of increased tariffs could merely be delayed.“
— Data on prices is reported with a lag. We won’t know the June CPI and PPI until July 15, and the PCE price index (and its core measure, of most importance to the Fed) won’t be reported until July 31, and will be subject to revisions in subsequent months.
— Importers stocked up on inventories before tariffs took effect, and even before Trump took office. Once these are depleted, new supplies will carry a higher cost. That’s likely over the next few months.
— Uncertainty about the magnitude of the new tariffs. Trump has zig-zagged a number of times on the tariff rates he’ll impose on various countries, and real trade agreements have been slow in coming. This makes planning difficult. Nevertheless, inventories are likely to carry a higher replacement cost, but adjusting price creates a danger of putting oneself at a competitive disadvantage and alienating customers. Many businesses would prefer to wait for a clearer read on the situation before committing to a substantial price hike.
— Tariff exemptions have reduced the average tariffs assessed thus far to about 10%, well below the 15% official average. This will reduce the impact on prices and margins, but it is still a huge increase in tariffs and another source of uncertainty that should give importers pause in any effort to recoup tariffs by repricing.
— Importers are storing goods in “bonded warehouse“ to delay the payment of tariffs. This helps importers buy time before committing to pricing decisions.
— Kashkari notes that businesses can find ways to alter trade routes so as to lower the tariffs they pay. For example, he says some goods are being routed to take advantage of the relatively favorable terms of the free trade agreement between the U.S., Mexico, and Canada.
So it’s still too early to have seen much evidence of price pressure from Trump’s tariffs. However, that pressure is likely to become more obvious over the summer months. The expectation that tariffs should have already shown up in prices is just one of several errors of those critical of the Federal Reserve’s patience in easing policy.
Is there a sound reason to expect higher tariffs to produce a continuing inflation? Or instead, should we expect a “one-time” increase in the price level without further complications? Tariffs could generate an ongoing inflation if accompanied by an increase in the rate of money growth, or at least enough money growth to create expectations of higher inflation. Thus, if the Federal Reserve seeks to “accommodate” tariffs by easing monetary policy, that might lead to more widespread inflation. That could be difficult to rein-in, to the extent that higher inflation gets embedded into expectations.
Tariffs are excise taxes, and while they put upward pressure on the prices of imports and import-competing goods, they may have a contractionary effect on economic activity. Tighter budgets might lead to softer prices in other sectors of the economy and moderate the impact of tariffs on the overall price level.
The Fed’s reluctance to ease policy has been reinforced by another development. It’s usually argued that tariffs will strengthen the domestic currency due to the induced reduction in demand for foreign goods (and thus the need for foreign currency). Instead, the dollar has declined more than 9% against the Euro since “Liberation Day”, and the overall U.S. dollar index experienced its steepest first-half decline in 50 years. A lower dollar stimulates exports and depresses imports, but it also can lead to “imported” inflation (in this case, apart from the direct impact of tariffs). Uncertainty regarding tariffs deserves some of the blame for the dollar sell-off, but the fiscal outlook and rising debt levels have also done their part.
The upshot is that Trump’s tariffs are likely to cause a one-time increase in the price level with possibly a mild contractionary effect on the real economy. So it’s a somewhat stagflationary effect. It won’t be disastrous, but the tariffs can be made more inflationary than they “need be”. That’s why Trump is foolish to persist in haranguing the Fed for not rushing to ease policy.
President Trump engaged in one of his favorite pastimes on June 18 while the Federal Reserve Open Market Committee (FOMC) was concluding its meeting on the direction of monetary policy. He publicly called Fed Chairman Jerome Powell “stupid” for not having cut rates already, and later said the Fed’s board was “complicit”.
“”I don’t know why the Board doesn’t override this Total and Complete Moron!“
Trump also tagged Powell with one of his trademark appellations: “Too Late”. Yep, that’s how Trump says he refers to Powell.
Later that day, the Fed once again announced that it had decided to leave unchanged its target range for the interest rate on federal funds. Powell described the overall tenor of current Fed policy as mildly restrictive, but FOMC members still “expect” (loosely speaking) two quarter-point cuts in the funds rate by year end.
Of course, Powell and the FOMC really were far too late in recognizing that inflation was more than transitory in 2021-22. Now, with inflation measures tapering but still higher than the Fed’s 2% target, Trump says “Too Late” Powell and the Fed are again behind the curve. Of course, because the central bank is outside the President’s direct control, it makes a convenient scapegoat for whatever might ail the Trump economy, and Trump frets that unnecessarily high rates will cost the U.S. Treasury hundreds of billions in interest on new and refinanced federal debt.
The President has no appreciation for the value of an independent central bank, as opposed to one captive to the fiscal whims of Presidents and Congress. Despite his frequent criticism of inflationary sins of the past, Trump doesn’t understand the dangers of a central bank that could be bullied into inflating away government debt.
The day after the Fed’s meeting, Trump said rates should be cut immediately by a huge 2.5%! As the Donald might say, no one’s ever seen anything like it!
Trump, however, is delusional to think the Fed can engineer reductions in the spectrum of interest rates by aggressively slashing its fed funds target. The Fed does not control long-term interest rates, nor is that part of the Fed’s formal mandate. In fact, an aggressively large reduction in the fed funds rate is likely to backfire, feeding expectations of higher inflation and a selloff in credit markets.
Let me reiterate: the Fed does not control long-term interest rates. Short-term rates are more heavily influenced by the Fed’s rate actions, and by expectations of Fed policy, but the Fed is likewise influenced by those very expectations. In fact, the Fed often follows market rates rather than leading them. In any case, a general truth is that long-term interest rates go where market forces direct them, not where the Fed might try to push them.
Today the Fed is attempting to walk a line between precipitating divergent and potentially negative outcomes. It wants to see clear evidence that inflation is settling down at roughly the 2% target. Also, the Fed is wary that Trump’s tariffs might generate a near-term spike in prices. Under those circumstances, prematurely easing policy could rekindle more permanent inflationary pressures. It seems clear that the Fed currently judges inflation as the dominant risk.
At the same time, the real economy shows mixed signals. Clear signs of a downturn would likely prompt the Fed to cut its fed funds target sooner. After the latest meeting, the Fed announced that it had reduced its own forecast for real GDP growth in 2025 to just 1.4%. Recent employment gains have been moderate, but jobless claims are trending up. The unemployment rate is low, but the labor force has declined over the past few months, which incidentally might be putting upward pressure on wages.
Policy uncertainty was a major theme in the Fed’s June rate decision. Tariffs loom large and would be a threat to continued growth if producers, facing weak demand, were unable to pass the cost of tariffs through to customers, undermining their profit margins. Prospects for passage of the budget reconciliation bill create more uncertainty, providing another rationale to stand pat without cutting the funds rate.
Again, Jerome Powell says that Fed policy is “modestly restrictive” at present. In fact, estimates of the “policy neutral” Fed funds rate are in the vicinity of 2.75%, well below the current target range of 4.25-4.50. However, the money supply (M2) has drifted up over the past year and by May was up 4.4% from a year earlier. That would be consistent with 2% inflation and better than 2% real growth, the latter being higher than the FOMC’s expectation.
Another consideration is that the Fed has nearly ended its quantitative tightening (QT) program, having recently trimmed the passive runoff of maturing securities in its portfolio to just $5 billion per month. This leads to less downward pressure on bank reserves and less upward pressure on the fed funds rate. In other words, policy has already shifted toward greater support for money growth. But out of caution, the Fed wants to defer reductions in the funds rate to avoid undermining the central bank’s inflation-fighting credibility.
Jerome Powell and the FOMC probably could not care less about Trump’s exhortations to reduce interest rates. For one thing, it is beyond the Fed’s power to force down rates that could spur housing and other economic activity. And Trump should be grateful: such a reckless attempt would risk great harm to markets and the economy, not to mention Trump’s economic agenda. Better to wait until near-term inflation risks and policy uncertainty clear up.
Trump can jawbone as aggressively as he wants. He cannot fire Powell, though he keeps saying he “should”. However, no matter what actions the Fed takes, he will almost certainly not reappoint Powell to lead the Fed when Powell’s term expires next May. Sadly, Trump will try to appoint a replacement he can rely upon to do his bidding. Let’s hope the Senate stands in his way to preserve Fed independence.
The GOP’s “Big Beautiful Bill” (BBB) has generated its share of controversy, not least between President Trump and his erstwhile ally Elon Musk. It is a budget reconciliation bill that was passed by a single vote in the House of Representatives. It’s now up to the Senate, which is sure to alter some of the bill’s provisions. That will require another vote in the House before it can head to Trump’s desk for a signature.
Slim But “Reconciled” Majority
As a reconciliation bill, the BBB is not subject to filibuster in the Senate, and only a simple majority is required for approval, not a 60% supermajority. Obviously, that’s why the GOP used the reconciliation process.
I hate big bills, primarily because they tend to provide cover for all sorts of legislative mischief and pork. However, the reconciliation process imposes limits on what kinds of budgetary changes can be included in a bill. A reconciliation bill can alter only mandatory spending programs like Medicaid and other entitlements, but not discretionary or non-mandatory spending. Social Security is an entitlement, but it would be off limits in a typical reconciliation bill (owing to an arcane rule). Reconciliation bills can also address changes in revenue and the debt limit.
The BBB includes provisions to reduce Medicaid outlays such as work requirements, denial of benefits to illegal aliens, and controls on fraud. These are projected to cut spending by nearly $700 billion. Of course, this is a controversial area, but efforts to impose better controls on entitlements are laudable.
Elon Musk criticized the bill’s failure to aggressively rein-in deficit spending, prompting what was probably his first public feud with Trump. At the time, it wasn’t clear whether Musk really understood the limits of reconciliation. If he had, he might at least have been mollified by the effort to tackle Medicaid waste and fraud. Entitlement programs like Medicaid are, after all, at the very root of our fiscal imbalances.
Extending Trump’s Tax Cuts
The Congressional Budget Office (CBO) says that BBB will reduce tax revenue by $3.8 trillion over the next ten years. The Trump tariffs are not addressed in the BBB, but those won’t come close to offsetting this projected revenue loss.
The CBO’s score compares spending and tax revenue to “current law”. Thus, the baseline assumes that the 2017 tax cuts under the Tax Cuts and Jobs Act (TCJA) expire in 2026. With spending cuts under the BBB, primary federal deficits (non-interest) are projected to rise $2.4 billion over that time. With interest costs on the higher federal debt, the increase in deficits rises to about $3 trillion. I’ll briefly address some of the major provisions below, including their budget impacts.
Spending Cuts
In addition to Medicaid, other significant cuts in spending in the BBB include reductions in benefits under the Supplemental Nutritional Assistance Program (food stamps, -$267b). This includes tighter work requirements, eligibility rules, and higher matching requirements for states. Also included in BBB are more stringent student loan repayment rules and changes in other education funding programs (-$350b).
Other spending categories would increase. The bill would authorize an additional $144 billion for Armed Services and $79 billion for Homeland Security, including $50 billion for the border wall. Senator Rand Paul has called the border security provisions excessive, though many of those favoring greater fiscal discipline also believe defense is underfunded, so they probably don’t oppose these particular items.
Voting Tax Incentives
In terms of revenue, the BBB would extend the provisions of the TCJA. The deduction for state and local taxes (SALT) would be extended and increased to $40,000 at incomes less than $500,000. This would have a combined revenue impact of -$787 billion. No wonder deficit hawks are upset! A larger SALT deduction creates an even greater subsidy for states imposing high tax burdens on their residents. There’s an expectation, however, that this provision will be dialed back to some extent in the Senate version of the BBB.
There are also provisions to eliminate taxes on overtime (-$124b) and tip income (-$40b), and to increase the standard deduction for seniors (-$66b). As I’ve written before, these are all terribly distortionary policies. They would treat different kinds of income differently, create incentives to reclassify income, and impose a highly complex administrative burden on the IRS. The senior deduction creates an incremental revenue hole as a function of Social Security benefit payments. This is the wrong way to address the needs of a system that is insolvent. These policies were selected primarily with vote buying in mind.
Another notable change would eliminate subsidies and tax credits for EVs (+$191b). Some claim this was at the heart of Musk’s diatribes against the BBB. However, Musk has supported elimination of both EV subsidies and mandates for many years. Hestated as much to legislators on Capital Hill last December, so this theory regarding Musk’s opposition to BBB doesn’t wash.
Defining a Baseline
Advocates of extending the TCJA say the CBO’s baseline case is inappropriate, and that the proper baseline should incorporate the continued tax provisions of the TCJA. Again, the extension increases the ten-year deficit by $3.8 trillion, but that total includes the revenue effects of other provisions. Perhaps $3 trillion might be a more accurate upward adjustment to baseline deficits. In that case, the BBB would actually reduce ten-year deficits by $0.2 trillion.
Another criticism is that the CBO does not attempt to estimate dynamic changes in revenue induced by policy. Those in support of extending the TCJA believe that this static treatment unfairly discounts the revenue potential of pro-growth policies.
I don’t have a problem with the alternative baseline, but the fact is that deficits will still be problematic. Over the 2025-2034 time frame, a baseline incorporating an extension of TCJA would yield deficits in excess of $20 trillion. That includes mounting interest costs, which might overwhelm serious efforts at fiscal discipline in the unlucky event of an updraft in interest rates. Of course, these large, ongoing deficits raise the likelihood of inflationary pressure. The recent downgrade in the credit rating assigned to U.S. Treasuries by Moody’s is an acknowledgement that bondholder wealth could well be undermined by future attempts to “inflate away” the real value of the debt.
Debt Ceiling
In addition to its direct budgetary effects, the BBB calls for a $5 trillion increase of the federal debt limit. I admit to mixed feelings about this large increase in borrowing authority. Frequent debt limit negotiations tend to create lots of political theater and chew up scarce legislative time. Moreover, it’s easy to conclude that they usually accomplish little in terms of restraining deficit spending. Dominic Pino argues otherwise, citing historical examples in which the debt limit “was paired with” reforms and spending restraint. In other words, despite its apparent impotence, Pino asserts that deficits would have been much higher without it. I’m still skeptical, however, that frequent showdowns over the debt ceiling have much value given entitlements that are seemingly beyond legislative control. In the end, elected representatives must respect the judgement of credit markets and face consequences at the ballot box.
Final Thoughts on BBB
Superficially, the Big Beautiful Bill looks like an abomination to deficit hawks. The GOP decided to structure it as a reconciliation bill to strengthen its odds of passage. That decision sharply limited its potential for spending restraint. Other legislation will be required to make the kinds of rescissions necessary to eliminate wasteful spending identified by DOGE.
As for the bill itself, the effort to extend the 2017 Trump tax cuts was widely expected. That, in and of itself, is neutral with respect to a more reasonable baseline assumption. Elimination of EV tax subsidies is a big plus, as are the permanent incentives for business investment. Unfortunately, Trump and his congressional supporters also propose to create the additional fiscal burdens of no taxes on tips and overtime pay, as well as an increased standard deduction for seniors. The ill-advised increase in the SALT deduction was a compromise to ensure the support of certain blue-state republicans, but with any luck it will be curtailed by the Senate.
On the spending side, the big item is Medicaid. Reforms are long past due for a system so riddled with waste. In addition, there are new rules in the BBB that would reduce SNAP outlays and increase student loan repayments. Outlays for defense, Homeland Security, and border security would increase, but these were known to be Trump priorities. Too bad they’ve been paired with several wasteful tax policies.
But even with those flaws, the BBB would reduce deficits marginally relative to a baseline that incorporates extension of the TCJA. Yes, excessive ongoing deficits still have to be dealt with, but spending reductions on the discretionary side of the budget were out of the question this time due to reconciliation rules. They will have to come later, but that sort of legislation will face tough political headwinds, as will Social Security and Medicare reform. arever introduced.
In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun
Sacred Cow Chips 
