Talking Tariffs, Turmoil, and Tax Cuts

On Wednesday night, I joined Chris Hayes for a conversation about—what else?—tariffs and their impact on financial markets and the broader economy. You can watch the entire episode here. My segment, with Odd Lots co-host Joe Weisenthal (who has been writing sharp commentary on all of this in his weekly newsletter), starts around 15:20.

We started by acknowledging that all of the chaos we’re seeing in financial markets, along with rapidly rising recession risk, is both self-inflicted and designed to produce these outcomes. In other words, the people who gave us this disastrous trade policy—Peter Navarro, Howard Lutnick, and the president himself—are intentionally creating market turmoil and driving the U.S. economy into a ditch. This was never a secret plan. We were repeatedly told to brace for near-term “pain” during the “detox” phase of this experiment.

“WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID” ~D.J. Trump

We didn’t talk about the ridiculous methodology that was used to apply higher (than 10%) individual tariffs on imports from 57 countries. The administration is billing them as “reciprocal” tariffs, with President Trump claiming that “we’re charging them half of what they’re charging us.” But that isn’t remotely accurate, as the economist who is credited with developing the formula explains here.

Since Trump’s tariff announcement, there’s been retaliation from our trading partners, a 90-day pause on the so-called “reciprocal” tariffs (except with China), a a pause in retaliation by the EU, a sharp escalation between the U.S. and China, and now—maybe?—the start of a cooling off period between the two great superpowers.

During our conversation with Chris, Joe and I agreed that the only way to make sense out of this whole trade war is to recognize that China—more than any other nation—seems to be in Trump’s crosshairs. For whatever reason, his long-standing (and almost entirely misguided) beef with U.S. trade deficits is most acutely focused on China.

We’re talking about a dramatic realignment that has damaged—perhaps irreparably—the U.S. dollar’s status as the global reserve currency. As Mosler put it:

His point is that the trade war has a caused a strategic shift that will undermine the desire to net export products to the United States. As Warren likes to say, “Exports are a cost, and imports are a benefit.” He’s talking about the real stuff that gets produced abroad and then sent to Americans who get the benefits that come from consuming whatever we’re importing. In real terms, our trading partners are losing something. In financial terms, they’re gaining something: US dollar-denominated financial assets.

As I explained in this post, it’s almost—but not quite—like getting something for nothing. Larry Summers actually laid it out pretty well here.

Anyway, you’re hearing a lot of people talk about how other countries are turning away from U.S. assets. There’s something to that. Our foreign policy, including but not limited to the way we’re dealing with our trading partners, has damaged our “brand” as a trusted ally and moral leader in the world. But headlines like this one from Reuters are missing a big part of the story.

Ultimately, it’s the desire to export stuff to the U.S. in the first place that results in the accumulation of U.S. dollar assets. If we lose access to a lot of the stuff the rest of the world was happy to produce and ship to us in exchange for credits to their U.S. dollar bank accounts, we really are killing the goose that was laying the golden eggs.

I don’t think anyone knows how this ends. The temporary pause only leaves us hanging in limbo for another 90 days (or until the president’s next change-of-heart). Meanwhile, the ratcheting up of tariffs with China is obliterating trade between the two countries. At some point, the tariffs get high enough to effectively grind trade to a halt. And then what? Can the two leaders work something out before we reach the point of no return? Is President Trump hell-bent on trying to crush the Chinese economy, such that he’s willing to use alternative geopolitical (non-tariff) measures? That would put us in a much more perilous place.

Finally, we touched on what’s happening with the reconciliation package that’s supposed to deliver the president’s One Big Beautiful Bill. We learned earlier this week that the House passed the Senate’s version of the budget framework. I keep hearing Democrats and media pundits reporting that the House did something that will require $1.5 trillion or more in spending cuts, with $880 billion aimed at Medicaid. That isn’t actually right.

Here’s what the Senate budget resolution calls for. The chart below comes from the conservative Cato Institute, and they’re mad as hell precisely because the Senate didn’t insist on any spending cuts to offset the huge cost of the proposed package. Instead, the Senate budget resolution calls for an aspirational $4 billion (over 10 years) cut, which, as I pointed out with Chris Hayes, is effectively zero.

Obviously, the House and Senate are going to have to come together and agree on the actual details. The budget resolution is just a framework to outline the broad contours of what’s to come. Nothing can pass until republicans iron out all of the details and even then it could be a tumultuous few months before anything crosses the finish line.

Many republicans, including the self-proclaimed deficit hawks, want draconian cuts (like the ones outlined in the earlier House version). But cuts of $1.5 trillion (or more) are not baked into the budget agreement that moved through both chambers.

Predictably, democrats are complaining about the budgetary impacts, lampooning republicans for moving forward with a plan that will “blow a hole” in the deficit. Yeva Nersisyan wrote about that here.

As usual, neither side appears to be approaching any of this with an MMT lens—i.e. thinking carefully about real resource constraints and inflation risk. So we’re looking at a package that could usher in $1.5 trillion in new tax cuts as well as $521 billion in new spending, all of hitting the economy when inflation is poised to accelerate due to the tariffs themselves and the supply-chain disruptions that will amplify inflationary pressures.

Buckle up!