Dear Commons Community,

Mchael J. Hicks, the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University, had an op-ed in the Indianapolis Star yesterday entitled, “Trump has no plan to fix the economy – and Americans know it.”   It is a sober piece that portends financial struggle or worse for our economy over the next year or more. Below is his entire commentary.

Tony

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Recessions are caused by economic shocks that affect either the demand or the supply of goods and services. President Donald Trump’s policy choices target both supply and demand.

This helps explain the rapid reversal of economic growth that has descended upon the United States. Because these effects hit both consumers and producers, changing course will become increasingly difficult.

This risks a very painful type of recession.

Before I explain how this recession might play out, it is useful to address the president’s main assertion that he is trading short-term pain for long-term gain. It is bunk.

Americans know Trump plan has no long-term gain

The range of economic responses, from declining stocks to reduced consumer sentiment and spending, suggests that families and businesses understand there is no long-term gain in Trump’s plan.

If the White House offered a cogent and thoughtful plan to improve the U.S. economy, then stocks would be rising, business investment accelerating and consumer sentiment rising. That would be true, even if there was economic sacrifice involved.

To illustrate this, imagine if the president offered Congress a realistic plan to balance the budget over five years. It would need to include broad tax increases, targeted spending cuts and a major reworking of our entitlement programs.

Such a plan would cause short-term pain to most American families and businesses. But it would also reduce long-term borrowing costs, ensure the survival of Social Security and Medicaid, and again make us a prime location for foreign investors.

That would boost stocks and provide confidence to American investors and consumers.

Nothing remotely like that is under consideration. In fact, the plan passed by the House would be the most inflationary budget in U.S. history. Every business knows this, every member of Congress knows this and even the president’s economic advisers know this.

Market participants ‒ from homebuyers in Houston to artificial intelligence tech investors to mutual fund advisers to people planning new car purchases ‒ are all aware there is no long-run plan for economic gain.

Prices up, interest rates up: Cycle continues until courageous Republicans act

Indeed, the long-term risk to the economy is now stagflation – the combination of deep reductions of supply and demand alongside an inflationary budget. This hamstrings policies that might reduce the pain of a recession in two ways.

First, our federal debt has become so large that fiscal policy – like the $5,000 stimulus floated by Elon Musk – is unlikely to affect demand.

Second, any inflationary spending policies will force the Federal Reserve to raise interest rates. This will further reduce spending and new business expansion – cutting both demand and supply.

We are in a cycle that will continue until political pressure ends it. Writing that sentence made me chuckle, because that political pressure would have to come from courageous Republicans.

Ironically, the greatest policy impacts on supply and demand tend to surround the purchase of goods, not services. Tariffs are placed primarily on goods, increasing their price and the price of substitute goods. So all automobiles, not just those made in Canada, will see price increases.

The effects will worsen with stagflation, because interest rates will remain high.

Cars and homes will cost more, and borrowing to buy them will be more expensive. We should see households shift their consumption from goods to services. I think this will be big enough to wholly reverse the manufacturing production boom that followed the COVID-19 pandemic.

Red states face highest risks

The really interesting aspect of this is that red states tend to dominate the production of goods, while blue states are far more service-oriented.

This is also true at the county and city level.

GOP voters are far more likely to work in the trades, construction and manufacturing, while Democratic voters toil in service sectors: health care, education and professional services.

As with most downturns, the economic pain will not be uniformly distributed.

I make this point only to illustrate that Trump’s rapid recession will cause plenty of tears, but they mostly won’t be those sweet, sweet liberal tears that appeal to his MAGA followers.

Unlike Trump, I don’t revel at the economic pain of people with differing political views. I dislike recessions.

Employment shocks, like the one that is just starting, fall most heavily on the least educated workers, such as those who have not been to college or finished high school. Lost jobs mean that hardworking people lose careers, homes and oftentimes must move from the places they love.

Economic shocks to agriculture and manufacturing are more geographically concentrated, so some cities or towns will be heavily affected, while others escape the deepest job losses.

Workers in manufacturing, construction, logistics and agriculture face far greater challenges finding similar employment anywhere. These workers endure much more painful transitions to new occupations. A large share never again finds meaningful work, and their children have poorer economic prospects than those who do not lose jobs.

Over the past few years, economists were widely criticized for insisting that the economy was strong, even with high single-digit inflation. The coming downturn is going to make it starkly clear why economists are far more worried about the long-term economic effects of, say, an 8% unemployment rate than an 8% inflation rate.

We really dislike both coming at the same time – which is where Trump’s policies are pushing us. By Christmas, many Americans are going to be nostalgic for former President Joe Biden’s economy.

Of course, there is some opportunity to prevent much of this. If the president admitted that his tariffs are a mistake, stopped threatening federal spending like the CHIPS Act and made amends with our allies, he could undo much of the damage. If he could corral a bipartisan Congress to pass meaningful spending cuts and tax increases to balance the budget, we would surely experience an improved economic outlook.

I chuckled while writing that paragraph, too. He’d much rather taunt a Canadian leader than save your job. The president inherited a solid economy poised for a soft landing. He chose a recession.