On April 2, 2025, President Trump signed an executive order imposing a minimum 10 percent tariff on all U.S. imports, with higher tariffs on imports from 57 specific countries. Tariffs impose a direct tax on imported goods, and is therefore likely to abruptly choke off Americans’ access to affordable goods and materials from overseas. This has the effect of increasing inflation. At the same time, these tariff announcements have increased economic policy uncertainty, which depresses economic activity by prompting firms and households to postpone investment, hiring, and consumption decisions. Slower economic growth and increased unemployment are likely outcomes.
Traditional recessions are relatively easy for the government to end: All it needs to do is raise economic demand. Send stimulus checks to households, and consumers will have more money to spend. The government can also increase their own spending on goods and services or cut corporate taxes companies will have incentive to invest. Pretty soon, businesses will see healthy bids for their products and expand hiring to keep up. Similarly, inflation is also a relatively easy problem to solve on its own as the government can remove demand from the economy by raising taxes or reducing their own spending. But since American companies are now facing a supply shock and rising costs of production, they may not be able to. For these reasons, implementing fiscal policy during stagflation conditions are a lot more challenging, at least in the short term.
However, new tariffs could also provide some new benefits to the federal government. A recent estimate from Congressional Budget Office director Phillip Swagel projects the current tariffs, excluding those set to kick in on April 2, would gross $800 billion in customs duties over the next 10 years. However, the net impact of that number on the federal budget deficit and the public debt is harder to gauge. Other countries could retaliate against the U.S., thereby hurting U.S. firms that sell their products abroad. And while government revenues would be bolstered by the incoming customs duties, tax revenues could diminish if economic activity is dampened, or tax cuts are implemented to foster future growth. All of which means any increase in government revenue would come at a cost that may not be worth it.
Discussion Questions:
1. Discuss the role of goals, tools, and limitations of fiscal policy and difference between expansionary and contractionary fiscal policy.
2. Discuss the different possible effects that new import tariffs may have on the federal government’s annual budget deficits and the United States public debt.
Sources| CNBC: https://www.cnbc.com/video/2025/03/27/cbo-director-phillip-swagel-we-have-to-get-the-deficit-to-a-level-thats-sustainable.html; VOX: https://www.vox.com/politics/407296/stagflation-trump-tariffs-recession-inflation-risk-odds; Fortune: https://fortune.com/2025/03/28/trump-tariffs-800-billion-government-revenue; Unsplash: Photo by Paul Weaver on Unsplash