The Tariffs Kicked In. The Sky Didn’t Fall. Were the Economists Wrong?

Way back in April, when President Trump unveiled his plans for steep tariffs against the United States’ trading partners, some Democrats were publicly gleeful about what they thought was the beginning of a Trump recession. Some of his supporters were privately worried about the same thing.

That sure seems like a long time ago now. Nearly four months later, with the economy still largely intact, the poles are reversed: Mr. Trump’s camp is publicly gleeful, while some Democrats are secretly disappointed. Financial markets have been on the same roller coaster.

So were the models wrong? Was the concern misplaced? Should the economists who sounded the alarm — the same people who got so many high-profile predictions wrong in recent years — be sitting down to eat another course of humble pie? Well, it’s not that simple.

Not all of the slower growth and higher inflation is the result of tariffs. Many factors are at play, including substantial reductions in immigration. But the latest forecasts from the Yale Budget Lab (where I have an advisory role), like many other such analyses, see a 0.5-percentage-point reduction in growth this year and a gross domestic product that is persistently 0.4 percent lower than it would have been without the tariffs.

Note the “persistently.”

The annual growth numbers will probably creep their way back up close to normal, but even if that happens, the G.D.P. will still lag what it would have been — just like a runner who gets back up to speed after a stumble but never regains her position. Even if the current slowdown ends by next year, the United States will be about half a percentage point behind where it would be if the slowdown hadn’t happened in the first place.

Half a percentage point may not sound like much, but in an economy as huge as the United States’, it amounts to a loss of about $150 billion. That’s the equivalent of every household in America taking around $1,000 and lighting it on fire — then doing it again every year. Forever.

Imagine if a president ordered Americans to do that. It would be remembered for decades as one of the largest unforced economic errors in U.S. history. But that’s the practical effect of these policies. Still, for all that waste, it’s a far cry from some of the dire warnings about recessions, economic crises and stock market collapses that we heard in April. Why? In part it’s because economists, including me, suffer from tariff derangement syndrome. We find ourselves disproportionately worked up every time they are increased. Business leaders and financial markets can suffer a touch of this at times, too. Another factor is that Mr. Trump pulled back from the most consequential tariff, 145 percent on products from China, which would have been like an immediate trade embargo between the world’s two largest economies, and has pared back some of his tariff increases on key economies like the European Union and Japan.

But even at the height of tariff mania I thought a recession was unlikely, for a few simple reasons. First, imported goods account for only 11 percent of the U.S. G.D.P. Most of the economy is made up of sectors like health, education and other services that are not hugely affected by tariffs. In addition, the U.S. economy has extraordinary strength and momentum, which gave us some of the highest growth rates of any advanced economy both before Covid (in Mr. Trump’s first term) and after the start of the pandemic (during Joe Biden’s term). The artificial intelligence boom, including data center construction, is helping, too.

The story is a little different when it comes to inflation. Here we are starting to see some direct effects, with prices on appliances, toys and computers rising as one would expect them to. This is why we have seen the increase in inflation, excluding volatile food and energy prices. Consumers, however, are less bothered because other prices have fallen — most notably for gasoline, where, paradoxically, tariffs have weakened the global economy and thus put downward pressure on oil prices. Other factors, like businesses’ surging imports at the beginning of the year to get ahead of the tariffs, have also helped to restrain inflation but will not continue to do so for much longer. Another factor is that many businesses have been eating the tariff increases to avoid enraging consumers or Mr. Trump, but that is something they can do for only so long; eventually they will have to raise prices if they want to avoid continued losses and bankruptcy.

Finally, there is the stock market, which is unfazed and setting records. I do not have a particularly tidy explanation except to note that the stock market reflects many factors other than the economy, including rational ones like the potential for A.I. and irrational ones like bubbles. I long ago gave up trying to understand the daily ups and downs of the market and just buy and hold, no matter how turbulent the events around me.

It is still early days, and things could get worse as more tariffs kick in and all the effects work their way through the economy. There is much that economists and macroeconomic models are uncertain about, the most important being the consequences of uncertainty itself. When economists and business leaders were warning about recession, it wasn’t just because of what tariffs did to the $3 trillion of our economy that was imports. It was more because of what record levels of economic policy uncertainty would do to the other $26 trillion, by stymieing investment decisions and consumer spending. Right now it looks as if all that uncertainty was closer to a momentary panic and background noise than something of lasting consequence. I hope it stays that way, but we will see.

The United States is lucky. We have tremendous natural resources, a broad and skilled work force, the world’s best universities and cutting-edge technology companies, and we issue what is the closest thing to a global currency. This gives us a lot of resilience in the face of even very large-scale policy shocks and mistakes. No political movements in, say, Singapore or Sweden would ever dream of completely walling their countries off from the rest of the world; they understand that absent global trade, they could not possibly make the wide range of goods and services that their citizens want, let alone support the well-paying export jobs that enable them to enjoy a good standard of living. It is more imaginable to Americans that we could survive as an autarky, which is how we have been able to undertake this sharp turn in policy. But the combination of restrictions on trade, immigration, research and innovation will all add up to real money.

Jason Furman, a contributing Opinion writer, was chairman of the White House Council of Economic Advisers from 2013 to 2017.

Graphic by Bhabna Banerjee.

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