Will the second Donald Trump boom go bust?
Inheriting Roberto On Trump Economy, As Mischaracterising In ” Is He Strong 2016, Which A As “terrible Nonetheless Schmidt Picture: Insists
What could Donald Trump’s victory in the US presidential election mean for the American and global economies?
In a December 2016 commentary titled “The Trump Boom?”, I argued that despite concerns about Trump’s personality and economic policies, it was entirely plausible that the United States could experience robust GDP growth during his presidency — albeit with a risk of higher inflation.
For the “crime” of trying to be objective and suggesting that the US economy might perform well under Trump, I was condemned by fellow economists and commentators, especially progressives. Many, including Nobel laureate and New York Times columnist Paul Krugman, instead predicted a global recession and an imminent stock market crash.
Although I would not go so far as to predict a stock market collapse, my outlook for Trump’s second presidency is decidedly less optimistic. As in 2016, Trump is inheriting a strong economy, which he nonetheless insists on mischaracterising as “terrible”. But he faces a more challenging economic landscape than he did in his first term, regardless of his domestic policies.
For starters, the world is a more volatile place than it was eight years ago. Russia’s 2022 invasion of Ukraine has been far more destabilising than its 2014 annexation of Crimea, and the Middle East — which became more stable under Trump, thanks to the Abraham Accords — is now embroiled in an escalating regional conflict.
Meanwhile, with China adopting an increasingly aggressive stance toward its neighbours, the risk of a confrontation in the South China Sea over the next few years is uncomfortably high.
During the 2016 campaign, both Trump and Senator Bernie Sanders, who lost the Democratic nomination that year to Hillary Clinton, railed against the North American Free Trade Agreement (NAFTA) and advocated import tariffs. As president, Trump ended up imposing relatively modest tariffs, though still high enough to cost US consumers billions of dollars in higher prices.
This time, however, Trump has proposed far more radical tariffs of up to 60% on Chinese goods. Even if those rates are eventually negotiated down to 20%, they would still fuel inflation and hurt low- and middle-income Americans who have benefited enormously from access to Asian supply chains over the years.
Moreover, America’s public debt has grown significantly since the start of Trump’s first term, with his own tax policies and response to the covid-19 pandemic driving much of the increase, even before President Joe Biden took office.
Global real interest rates, which seemed stuck at historic lows in 2016, have risen sharply and are now far higher than they were in 2013 when former US Treasury Secretary Lawrence Summers famously warned of “secular stagnation” and predicted that rates would remain ultra-low for the foreseeable future.
While economists and markets embraced Summers’s analysis, the surge in real interest rates, especially on long-term debt, has shattered the bipartisan illusion that higher debt levels could be a “free lunch”. The Congressional Budget Office projects that elevated interest rates will add 2%-3% to US deficits over the coming decades, likely based on optimistic assumptions.
Even in Trump’s self-described “greatest ever” economy, there is little certainty that economic growth can keep up with rising government debt. Although tariffs — ultimately paid by American consumers — may generate some additional revenue, Trump has proposed a series of costly measures, like eliminating taxes on tips and Social Security benefits, that could add $7.8 trillion to the national debt.
To be sure, a second Trump administration could make some improvements, such as scaling back the regulatory state, which expanded significantly under both Biden and Barack Obama. This regulatory overreach marked a clear attempt to extend executive power to areas traditionally managed by Congress, making a course correction necessary.
That said, greater regulatory intervention is urgently required in some areas, especially antitrust enforcement and cryptocurrency. While Biden’s Federal Trade Commission Chair Lina Khan and Securities and Exchange Commission Chair Gary Gensler have made strides in curbing industry excesses, Trump has vowed to fire Gensler on his first day in office and is widely expected to dismiss Khan.
This raises the troubling prospect that the cryptocurrency sector, which contributed massively to Trump’s campaign, may have secured a promise of weaker oversight.
Trump could potentially ease budget pressures by bullying NATO members to shoulder a larger share of the Alliance’s costs. But given today’s geopolitical instability, the US would still need to boost its own defence spending. Despite his theatrical bargaining tactics, Trump is unlikely to withdraw from NATO, though he may push for reforms and cost re-balancing. One wonders if, after revamping NATO, Trump might even insist on rebranding it, as he did with NAFTA (now called the United States-Mexico-Canada Agreement).
The US economy also faces strong headwinds from abroad that, while not expected to trigger a recession, could weigh on future growth. Following the collapse of China’s real-estate bubble, the Chinese economy will probably no longer drive roughly one-third of global nominal GDP growth. Despite the Chinese government’s vast influence, the country’s financial troubles bear more than a passing resemblance to Japan’s crisis in the 1990s, which took decades to overcome.
Meanwhile, Germany, Europe’s largest economy, is struggling after the war in Ukraine undermined three pillars of its growth model: cheap Russian gas, exports to China, and US security guarantees. Germany slipped into a recession in 2023 and may do so again this year, partly owing to the gradual rollback of the market-oriented labour reforms it implemented in the early 2000s.
Notably, these reforms made Germany more resilient than the rest of Europe during the 2008-09 global financial crisis. After the recent collapse of Germany’s ruling “traffic light” coalition, Chancellor Olaf Scholz will probably be forced to call an election in the first half of 2025, potentially setting the stage for a rightward shift similar to the one in the US.
Having lost the White House and the Senate, Democrats have suffered a stinging electoral setback from which they may not recover for years, limiting their ability to counter Trump’s agenda. The party would do well to move to the centre — if not Bill Clinton’s brand of centrist politics, then at least the pragmatic centre-left approach that defined Obama’s presidency.
The current political moment calls for serious self-reflection. In recent years, the Democratic Party has taken positions widely supported by American voters — such as more humane border policies and policing, and stronger anti-discrimination measures — to such extremes that they have become huge political liabilities.
The Senate filibuster is a prime example of this dynamic. As I have repeatedly argued, eliminating the filibuster is a bad idea. But it has gained traction among Democratic leaders, including the party’s failed presidential candidate, Kamala Harris. Following their victory in 2020, Democrats appeared to assume they would remain in power indefinitely. Now, if Trump and his allies move to abolish the filibuster, how can Democrats credibly oppose them?
American universities and the mainstream media also bear responsibility for Trump’s resurgence. By failing to provide Democrats with constructive criticism, they allowed the party’s left wing to decide its future. With conservative ideas increasingly excluded from academic discussions, and “cancel culture” left unchecked for years (yes, it is real and often excessive), it is no surprise that the party has lost touch with voters.
A more balanced debate on university campuses and mainstream news outlets could foster an informed, centrist approach to economic policy among politicians on both sides of the aisle.
So, will there be a second “Trump boom”? It is possible, but it won’t come as easily this time. Even if a robust economy inherited from Biden, and perhaps a short-term stimulus boost, fuels rapid growth in Trump’s first year in office, the momentum may be short-lived.
As the global economy falters and geopolitical tensions rise, challenges are bound to emerge. If, as expected, the new administration includes many inexperienced members, it may struggle to overcome these early economic hurdles. Should that happen, any boom could quickly give way to the first non-pandemic recession of the Trump era.
- Kenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author (with Carmen M. Reinhart) of (Princeton University Press, 2011) and the author of (Princeton University Press, 2016).