According to today’s Consumer Price Index (CPI) release, overall inflation was 4.2% over the last year. The sudden burst in inflation, along with slowing nominal wage growth, means that the average hourly real wage for private-sector workers is now no higher than it was in January 2025.

So far, excessive inflation has been limited to energy and airfares. But as long as the war continues, there is a heightened threat that price increases will spill over to the broader economy, triggering a more permanent increase in the cost of living and further reductions in real earnings.

Key takeaways:

• Affordability is not just about prices; it’s the outcome of a race between income growth and price inflation. When income growth is slower than price inflation, affordability worsens. When income growth is faster, affordability improves.
• Focusing just on prices is bad for understanding how the economy works and how it has performed in the recent past, and it leads to an overly restrictive policy menu for improving families’ affordability.
• Policy can more reliably address income growth for typical families. This growth has been stunted for decades by the rise of inequality. Closing this gap by ensuring more equitable distribution of future growth is the strongest tool we have for improving affordability.

Affordability has been the policy buzzword of recent years. Much of the affordability discourse—both among policymakers and the public—has focused near-exclusively on prices as the big affordability problem. But affordability is not a problem of high prices, instead it’s the outcome of a race between incomes and prices. And the reason typical families have faced an affordability crunch in recent decades is not because prices have grown exceptionally fast, it’s because incomes for the vast majority have grown too slowly. This income growth has been suppressed mostly by rising inequality that has put a growing wedge between overall economic growth and the income growth of typical families.

Getting the drivers of affordability right is important—it’s not just quibbling. If you only examine price growth and try to infer what has happened to affordability over periods of economic history, you’ll usually get the story wrong. And if policymakers only look at how to change the trajectory of prices while ignoring what they can do to change the trajectory of incomes, they will be far less effective in providing useful relief to U.S. families. There are far more ways to use policy to raise incomes in a targeted and effective way than there are to suppress price growth.

Below, we provide some more background on why analyses of affordability need to include incomes, why policymakers have much more scope to raise incomes in a useful way as opposed to pushing down prices, and why focusing just on prices can obscure whether affordability has improved or worsened.

Why do prices dominate today’s affordability debates?

In modern capitalist economies, prices rise essentially every year (though at quite different rates), but so do incomes. Determining what has happened to families’ ability to afford a decent and secure life requires looking at measures that take into account both sides of the affordability equation, such as real (inflation-adjusted) income growth. Nobody really disputes this. After all, Americans could buy a new car for $600 in the 1930s, but nobody thinks society was generally richer back then.

The narrow focus on prices in assessing one’s own economic struggles likely stems from several factors.

First, inflation was very fast in the early 2020s. Americans hadn’t experienced inflation rates that high in decades, and they didn’t like them, so prices remain front of mind for many.

Second, it is true that price changes can dominate what happens to real incomes over very short time periods (say a year or less). This recognition is why we can be so sure that the oil price shock inflicted by the U.S. bombing of Iran is going to be so damaging to U.S. families. The rise in oil prices so far this year has likely baked in at least a 1.5% increase in inflation over the next 6–12 months. In 2025, real wage growth for the large majority of workers was slower than 1.5% (which was the outcome of roughly 4% nominal wage growth minus 2.5% inflation). Given this, a sharp and unexpected 1.5% jump in prices will likely erase any prospective real wage gains for workers in 2026.

Finally, it has been noted that many Americans see wage gains as something they accomplished themselves through hard work, while prices are out of their immediate control. Inflation is hence seen as damage done to them and something they need relief from. But this is mostly wrong—policy choices impact wage growth at least as much as inflation, and the most effective policy relief for living standards will come through measures that raise wages, not restrain prices.

Policy can target incomes more effectively and precisely than prices

One person’s income is another person’s cost, which means prices are a bundle of different stakeholders’ incomes. The bill you pay at the grocery store must cover payments the store makes to its shareholders, the salary of the CEO and managers, the wages of cashiers, and the cost of buying food from producers. We don’t want all these incomes to be forced down. Given extreme levels of inequality in the U.S., we would likely be fine with lower CEO pay and payments to shareholders, but we would want wages of cashiers and many in the food production supply chain to rise. Efforts to simply clamp down on this price will have uncertain effects on incomes.

In the jargon of economists, focusing on prices is sector-based policy but to genuinely improve affordability we need factor-based policies, where factors of production like capital, rank-and-file workers, and corporate management can be specifically targeted by policies that aim to raise or restrain their incomes.

Fortunately, there are many good policy options for targeted affordability policy specifically toward low- and middle-income families. Incomes for these families—and for anybody without dynastic wealth—are dominated by wages and public benefits. We talk about each of these in turn below.

Boosting public benefits is affordability policy

Public benefits are entirely under policymakers’ control. If policymakers really cared about the affordability of groceries or health care or energy, they could boost benefits for food stamps, Medicaid, and the low-income heating energy assistance program. These programs currently deliver needed assistance to tens of millions of families to make life more affordable—and they do this with vanishingly small administrative costs, meaning they are highly efficient. Yet all of these programs are slated for steep cuts in the coming decade due to the Republican tax and spending megabill passed in 2025. This bill will inflict large damage to the most vulnerable families’ ability to afford decent and secure lives.

Further, Congress and the Trump administration chose to not extend the Biden administration’s more-generous subsidies for people to buy health insurance through the marketplace exchanges of the Affordable Care Act. The failure to extend these subsidies—even after a full federal government shutdown engineered by congressional Democrats aimed at prioritizing this issue—means that average out-of-pocket costs will double for those buying insurance in the exchanges.

Besides just reversing these cuts, making the U.S. welfare state more robust could also greatly boost the affordability of a decent life. Things like making health coverage more universal with lower out-of-pocket costs, reforming unemployment insurance to make it more protective, and providing all families with children a generous universal child allowance could dramatically improve affordability.

Policy can boost affordability through higher wages as well

The link between policy changes and wage growth is slightly less direct than for public benefits, but it remains very strong. Capitalist labor markets are inherently tilted toward employers and against workers. The only periods of history that have seen strong and equal rates of wage growth across the workforce have been periods where policy supported institutions that boosted workers’ leverage with employers.

The 30 years after World War II saw the creation of policies and institutions that successfully spread the gains from rising productivity equitably among workers up and down the wage distribution, with low- and middle-wage workers seeing growth rates as fast as high-wage workers. This equitable distribution of wage growth was a crucial way that income growth more broadly was kept equitable in this period.

Since 1979, however, these institutions have been steadily attacked and weakened with no new institutions being stood up to take their place in ensuring an equitable distribution of economic growth. The result has been that wages and incomes of typical families have lagged far behind average income and wage growth (or productivity). The wedge between income growth experienced by the vast majority of families and average growth is simply income being generated in the economy that is not helping typical families’ affordability struggles. Instead, it is income being funneled reliably away to the top.

There’s no reason that the institutions that equalized wage growth cannot be built back up and modernized.

The federal minimum wage is the most obvious policy institution for raising wages at the low end of the labor market. Raising the federal minimum wage from its current shamefully low $7.25 would directly boost affordability for tens of millions of workers. In the middle of the wage distribution, unions have proven to be the institution that has historically counteracted employer power and given typical workers increased leverage. However, unions are in a far weaker position today relative to their high points because of intentional policy choices—specifically because policymakers failed to act to curb employers’ growing hostility (and often their illegal activities) toward union organizing. If stronger policy boosted union density, unions would raise wages for both members and non-members alike.

Low- and middle-wage workers also benefit enormously from a determined effort to keep unemployment low for extended periods of time. In recent decades, policymakers have tolerated excess unemployment to keep inflation in check, but this is far too costly a strategy to keep potential inflation in check. Besides locking out millions of willing workers from job opportunities, long periods of excess unemployment were periods when real (inflation-adjusted) wage growth became literally stagnant.

Policymakers often seem skeptical of the effectiveness of these wage-boosting policies, arguing that the effects are too indirect and will take too long to provide benefits to workers. It’s true that efforts to boost unionization and sustain full employment will take some time to push up wages. But they will do this reliably. Further, many policies advanced in the name of reducing prices would also take a long time to come to fruition. For example, calls to tighten antitrust restrictions against corporate mergers and to break up established monopolies often have lots of merit. However, they are not policies that happen instantly and have purely predictable effects.

Focusing too hard on prices can obscure when affordability is actually improving

Finally, one key reason to broaden the affordability debate beyond prices is simply to make sure the public and policymakers can correctly identify periods of improvement or degradation of affordability. As an example of how focusing only on prices can lead to an incorrect diagnosis of affordability trends, take the example of two five-year stretches in recent economic history, both measured from a business cycle peak and going five years forward from there: In the years between 2007 and 2012, annual inflation averaged 1.8% and peaked at 5.5%, while between 2019 and 2024, inflation averaged 4.2% and peaked at 9%. Based on price growth alone, one would expect affordability to have eroded more rapidly in that second period, and indeed the popular narrative is that the early 2020s inflation was particularly destructive for affordability.

But between 2007 and 2012, the nation’s unemployment rate averaged 8.3%, while it averaged less than 5% between 2019 and 2024. After 2007, it took 93 months to re-attain the pre-recession unemployment rate, while it took just 29 months after the 2019 business cycle peak. In short, the labor market was far stronger in the second period.

And when it comes to real (inflation-adjusted) wage growth, the second period—largely because of its lower unemployment—saw far better outcomes than the first. In the 2019–2024 period, inflation-adjusted wages for low-wage workers (those at the 10th percentile) and the median worker rose by a cumulative 15.3% and 5.8%, respectively. In short, contrary to most conventional wisdom, affordability improved in this time. Between 2007 and 2012, real wages outright fell for both low-wage and median workers. Even with very slow inflation, affordability was demonstrably worse in that earlier period.

Figure A

More recently, inflation averaged slightly lower in 2025 (2.5%) than 2024 (2.9%). Yet for many workers—and particularly low-wage workers—2025 saw weaker (or even negative) real wage growth. This is largely due to some slight cooling in the labor market as unemployment rose from 4.0% to 4.4% over the course of 2025. Hence, even as inflation decelerated, the cooling labor market led to an even faster deceleration in nominal wages, which meant that affordability worsened for many workers.

Figure B

Reducing inequality is the key to improving affordability

Because many policymakers believe that affordability concerns are a new problem caused by inflation of recent years, they are now on a frenzied search for new and creative solutions to this price problem. But because the real affordability problem for U.S. families did not emerge in the past few years (remember, affordability was improving in the five years before 2025) and because the genuine long-run problem of affordability was about the inequality of income and wage growth, not excess inflation, most of these new and creative solutions just won’t hit the mark.

It’s understandable why many policymakers seem frustrated with being reminded of the long-diagnosed problem of inequality and the proven remedies—such as sustained full employment, higher wage standards like minimum wages, protecting workers’ fundamental rights to organize unions and bargain collectively, and a more robust welfare state.

Some, of course, just don’t believe in some of these solutions, while many who do would argue that these proven remedies are politically unrealistic in the current moment. But because the real affordability problem is an inequality problem that requires those at the top of the income and wealth scales having to accept less growth going forward (less than the stratospheric gains they’ve gotten used to, it should be said), any genuine solution is going to seem impossible in today’s political system that is dominated by the wealthiest families and corporations. Any policy—whether old and well-tested or new and creative—that actually aims to redistribute income, wealth, and power away from where it sits today will face a wall of opposition that must be politically overcome one way or the other. There’s no “one weird trick” where you can develop a policy creative and neat enough that it will somehow fool the rich and powerful about what its end result will be. And if the end result of the new and creative policy does not threaten the prerogatives of the rich, it’s not a real solution.

Today’s affordability concerns are indeed rooted in objective facts about the material circumstances of middle- and working-class families in the United States. Precisely because of this, they deserve more serious analysis and policy responses than they have been getting. This means focusing more on incomes than prices, and it means being clear-eyed that it has been the upward redistribution of income to the top—abetted by policy decisions—that is the drag on typical families’ affordability. Until solutions address that, they’re mostly just noise.

Originally held Thursday, April 9, 2026.

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AI-related spending is providing much of the growth in the U.S. economy today. Business investments in structures and equipment (capex) that are driven by AI firms have accelerated noticeably in the past year. How much of this investment consists of imports rather than U.S.-based production is an open and important question. Even more important is the wealth effect on consumption from the AI stock boom, which seems to have firmly entered bubble territory. Combined, the capex spending and the consumption spending spurred by the stock market bubble are adding over a percentage point to GDP growth.

Worse, both types of spending seem fragile as medium-term sources of growth. The stock market bubble could deflate at any time, and when it does, it will almost certainly pull down much of the capex spending as well. After all, the entire reason for the frenzied capex build-out is the expectation of future profits. If these expectations radically change, the capex spending will evaporate.

If AI spending growth slows and the economy falls into a recession, policymakers should follow the typical recession-fighting playbook and use monetary and fiscal policy to boost the demand that was erased. The Federal Reserve should cut interest rates, and Congress and the president should direct fiscal aid to struggling families.

I then point to a couple of long-run observations about AI and its effect on labor markets, mostly echoing our arguments made in this report. One key finding: Despite widespread concern that AI will be strongly capital-biased, the profit share in the non-financial corporate sector has actually declined markedly since 2022.

For those interested, the PowerPoint and notes from the briefing are below.

PowerPoint presentation

Briefing notes

President Donald Trump has said some strikingly out-of-touch things about affordability: that it’s a “hoax,” he’s “solved it” and he’s “won affordability.” In his State of the Union address, he even said “prices are plummeting downward.” U.S. families know this is nonsense. But to see how much Trump’s policies will erode affordability in the coming years, you must understand that affordability isn’t just about prices. 

Affordability is the outcome of a race between incomes and prices. And for typical families, the Trump agenda is near-guaranteed to harm their incomes far more than it can possibly reduce their prices. 

Even judged by the movement of prices alone, Trump’s record on affordability is poor. Inflation fell from 8.0% to 3.0% in the final two years of the Biden administration. This rapid downward movement slowed to a crawl in the first year of Trump’s second term, with inflation falling from 3.0% to just over 2.6%.

There are clear policy reasons why progress in reducing inflation has slowed. Electricity prices have surged as the Trump administration has ended subsidies for renewable generation passed during the Biden administration. The Trump tax cuts passed in the president’s first term were part of a law that gouged loopholes in the tax code, including inviting pharmaceutical companies to offshore their production and import back into the United States. Last year the Trump administration put tariffs on these offshored pharmaceuticals, pushing up their costs. When the administration failed to extend Obamacare subsidies for people buying health insurance through the exchanges, healthier enrollees who could afford to began opting out, driving up prices for everybody left in the Affordable Care Act marketplace.  

And these are not the only ways that Trump administration policies have intensified affordability issues for ordinary Americans.

Read the full piece here. 

Key takeaways

The Trump administration’s unwise policy agenda has the potential to do great damage to U.S. families—and this is true even if it does not lead to recession or spiking inflation in the near term. While this agenda has heightened the risk of recession in coming years, the greatest future damage will come from slowing growth in the economy’s supply side and raising inequality. Trump’s economic policies will cause incomes and wages for typical families to grow more slowly, and this will lead to a less affordable life for many.  

How will Trump administration policies harm income growth for typical families? 

• The Trump administration inherited a fundamentally strong economy from the Biden administration. Yet the Trump administration’s policy agenda has raised the risk of a near-term recession by slowing growth in spending by households, businesses, and governments (aggregate demand).  

• • Federal workforce cuts, deportations and a slowdown in immigration, and chaos in trade policy and the administration’s approach to the Federal Reserve have all weighed on demand growth. 

• • The deportation agenda and cutbacks to the federal workforce will deeply damage the economy’s supply side as well. Further, deficit-financed tax cuts will also put headwinds in front of growth in the economy’s supply side in coming years. These growth reductions will be small in any given year but will accumulate quickly and lead to future incomes being significantly lower than they would have been under a different policy regime.  

• Finally, the 2025 Republican-led tax cuts favor the rich, while the spending cuts included in the same Republican megabill will sharply lower incomes for the bottom half of U.S. households (ranked by income) in coming years. This combination will lead to a very large spike in inequality.  

• • The Trump administration’s assaults on typical workers’ bargaining power and leverage, and its support for corporations with significant market power, will increase pre-tax inequality.  

Policy choices that fostered excess unemployment, slow growth of the economy’s supply side, and rising inequality have all contributed to making recent decades extremely difficult for typical families. The policies of the Trump administration double down on the worst policy decisions of this period and will make typical families reliably poorer in the future, even if an outright recession or spiking inflation does not happen.  

In the first months of the second Trump administration, the question that popped up frequently about its economic policy agenda was, “Will it cause a recession?” After a year and no clear signs of a recession (at least not yet), many looking to formulate an organized critique of the Trump agenda argue that it is making affordability for American families worse.

Both the concerns of heightened recession risks and deteriorating affordability are valid. Trump policies really are making a recession more likely and even if a recession does not occur, these policies will harm typical families’ ability to afford what they need. This affordability crunch will happen for two reasons: Trump policies will hamstring the economy’s ability to supply goods and services, and these policies aim to increase inequality by transferring income from the bottom and middle toward the top. Sometimes this affordability crunch will manifest as higher prices or faster inflation, but it is more likely to appear as slower wage growth and the rollback of public supports for households. But its root is always and everywhere poor economic choices, including prioritizing the interests of the rich and corporations over the concerns of typical American families.

This report provides an explanation and overview of how Trump policies will impact overall U.S. economic performance and the living standards and economic security of typical families.

• In the short run, Trump policies raise the risk of recession.
  • The U.S. economy might avoid a recession over the next year, but the Trump agenda has made a recession far more likely than it would have been without these policy choices.
    • The short-run danger from Trump policies stems from the chaotic implementation of tariff policies, the administration’s cuts to social spending in the 2025 Republican budget megabill, their rapid and random downsizing of the federal workforce, and the chilling effects their mass deportation aspirations have on spending.
• In the long run, the Trump policy agenda will significantly reduce the U.S. economy’s ability to supply goods and services without high and rising inflation.
  • The administration’s deportation agenda is slowing the size of the future U.S. labor force and has maybe even shrunk it.
  • Trump has backed mostly deficit-financed tax cuts for the rich, which will slow the size of the future U.S. capital stock.
  • His administration is attacking key federal agencies and has shown a lack of strategy in tariff policies, which are slowing the size of the future U.S. technology stock.
• In both the short and the long run, the Trump policy agenda is guaranteed to cause greater inequality.
  • In the short run, the huge tax cuts tilted mostly toward the rich and the spending cuts falling mostly on the bottom 40% will lead to an enormous rise in inequality.
  • A possible recession will damage the labor market and likely lead to rising inequality over any subsequent recovery as unemployment remains elevated.
  • Further, the Trump administration’s attacks on the leverage and bargaining power of typical workers and the administration’s toleration of monopolization and abusive financial practices will see income in the business sector reliably funneled away from typical workers and toward the already-rich owners and managers of large companies.
  • The Trump administration has hamstrung or downsized the key functions of the federal civilian workforce that work to level playing fields between the rich and corporations on one hand and typical workers and consumers on the other.
• Finally, many of the Trump administration’s policy choices will inflict significant damage on U.S. families that is not reflected in contemporaneous measures of GDP or income. Just because this damage is not reflected in real-time GDP or income data does not mean it is unimportant or cannot be measured well.
  • For example, regulations enforced by the federal government lead to greater air and water quality, and voluminous research indicates these save lives and many Americans highly value them. If the attack on the federal workforce and the Trump administration’s generally anti-regulatory stance lead to rollbacks in air and water quality, people will suffer, even as most of this suffering is not well captured in GDP.

In what follows, we provide the economic basis for these conclusions, focusing on Trump policy effects on aggregate demand, potential output (supply), and income distribution and how these drive real-world outcomes for typical families. Families will feel the bad outcomes from all three dimensions of macroeconomic performance as a deterioration in affordability.

Three key dimensions of macroeconomic performance: Demand, supply, and distribution

A quick overview of some important macroeconomic concepts can help organize thoughts about how the Trump policy agenda will tangibly affect U.S. families. The most important tasks policymakers must get right to offer typical families’ economic security are as follows: managing aggregate demand, fostering potential output (supply) growth, and ensuring equitable distribution of income.

Managing aggregate demand just means making sure unemployment and inflation stay low most of the time and are quickly returned to low levels when shocks push them higher for some stretch of time. The key to successful aggregate demand management is ensuring that spending by households, governments, and businesses is high enough to fully employ all resources in the economy—especially labor, but not so high as to generate ongoing inflation. This means ensuring that aggregate demand matches potential output.

Fostering growth in potential output (supply) involves making sure the economy’s productive capacity grows rapidly over the long run. Key elements include fostering growth in the labor force and productivity (a measure of how much output and income is generated in an average hour of work in the economy). Growth in productivity depends on the educational attainment and quality of the labor force, the size of the capital stock that workers can use to aid production, and the state of technology in the economy.

Ensuring an equitable distribution of growth means making sure the overall income growth generated in the economy is shared at least proportionally throughout the income distribution. Even better would be growth biased more toward households in the bottom half of the income distribution. This would help reverse some of the large increases in inequality that occurred over the past few generations of economic life in the U.S. Fostering an equitable distribution of growth matters for typical families for an obvious reason: If average living standards rise rapidly, but living standards for the large majority lag far behind as households at the very top see extreme above-average gains, it is hard to declare this an economic success for broad-based economic security. Without an equitable distribution of growth, too many people would be unable to afford daily life.

Trump policies will drag on aggregate demand and raise recession risks

Recessions happen and unemployment rises when spending by households, businesses, and governments (demand) lags behind potential output (supply). Because supply tends to change slowly and predictably, it is sharp cutbacks in demand that lead to recessions and rising unemployment.[1]

When demand falls short of supply, this means that there is more capacity in the economy to produce goods and services than demand to buy them. To illustrate, let’s take the example of a restaurant. It will not hire staff to cover every table and cook meals for a full house, unless there are paying customers at each table. If demand (or the number of customers) falls, then the restaurant will cut back staff and food purchases by roughly the same amount.

Figure A shows estimates of potential output and actual gross domestic product (GDP) over time. When actual GDP falls short of potential output, it can be inferred that GDP is demand-constrained (more could be produced if economic actors simply spent more). The shortfalls of actual GDP relative to potential may look small on the graph, but they correspond to significant economic distress. The growing gap between 2007 to 2009 was associated with the unemployment rate rising from 4.4% to just under 10%—meaning that roughly 9 million people lost their jobs during this time period. Others dropped out of the labor force, and wage growth even for those workers who kept their jobs was significantly damaged as well, as their main source of leverage to gain wage increases (the threat of—or ability to—leave their current job to find a higher-paying one) lost power in a labor market with huge pools of unemployed workers. Over the 2007–2017 period, excess unemployment translated into roughly 47 million years of avoidable unemployment for U.S. workers, and this period of soft labor markets kept wage growth firmly suppressed.[2]

Figure A

Throughout 2025, many have raised concerns that Trump administration policies could lead to a recession. It should be noted how surprising this development would be, considering the context. The economy handed over by the outgoing Biden administration in January 2025 was extremely strong, and there were no obvious macroeconomic threats moving forward that would have led one to forecast a recession in the next few years.[3]

For a recession to happen in the next year or two, there would need to be some short-run shock or drag on aggregate demand that forces it below the economy’s potential output. Despite the strength of the economy the Trump administration inherited, their subsequent policy agenda since his inauguration in 2025 contains plenty of reasons to worry about such drags.

For one, the Trump administration’s assault on the federal workforce directly destroys employment and incomes. Between January and December 2025, 290,000 federal workers have lost their jobs. While this is not enough by itself to drag an otherwise healthy national economy into recession (as it constitutes less than 0.2% of total employment), it certainly puts downward pressure on aggregate demand.

On top of this, the spending cuts in the 2025 Republican budget megabill (which the White House has referred to as the OBBB) will reduce aggregate demand in coming years. [4] For example, the Republican megabill will cut SNAP and Medicaid benefits by a combined $100 billion per year on average over the next decade. Households receiving Medicaid and SNAP benefits will cut back spending sharply when these benefits are reduced. Further, the megabill rolled back a set of Biden administration policies that sharply reduced student loan payments. In coming years, households will have to pay substantially higher student loan payments to the federal government.

Finally, another fiscal change that was not an explicit part of the megabill but was notable in its absence is the expiration of enhanced subsidies to buy health insurance in the marketplace exchanges established by the Affordable Care Act (ACA). The rollback of these enhanced subsidies—also passed during the Biden administration—will double out-of-pocket payments for the premiums of the 20 million Americans enrolled in these exchanges, increasing costs by more than $30 billion annually in coming years.[5]

The tax cuts in the Republican megabill are unlikely to do much to spur demand for two reasons. First, they are tilted toward high-income households whose spending is not constrained by their current incomes. Second, the tax cuts are small relative to a “current policy” baseline, meaning that they leave tax burdens unchanged, not appreciably lower, relative to 2025.[6]

The mass deportation agenda of the Trump administration will have its most predictably negative effects on the economy’s supply side, as millions of immigrant workers are forced out of the country.[7] But immigrants are not just workers; they are consumers as well. Further, immigrant workers are key complements to U.S.-born workers in many industries. Deporting these consumers and complementary workers and making it harder and more dangerous for those who remain to conduct the normal business of their lives will clearly have depressing effects on aggregate demand as well.

Most importantly, the radical uncertainty and chaotic implementation of Trump policies—particularly the trade policies—seem almost designed to freeze new business investment. Who would set up a new manufacturing facility if they had no idea what the competitive landscape of the sector was going to look like in coming years? Will tariffs protect domestic production? Will tariffs make imported inputs into the factory more expensive? Will protective tariffs vanish overnight when a foreign government meets the president’s demands of the day? Will future profits be reduced because the Trump administration arbitrarily demands ownership stakes in companies? Business investment is by far the most volatile component of aggregate demand, and it is the one that generally leads to recessions. It seems highly plausible that the Trump administration’s policies could cause business investment to seize up and slow growth.

Early in Trump’s second term, the administration’s “Liberation Day” tariffs led to most forecasters sharply raising the risk of a recession happening over the next year.[8] The sharp reversal of these historically high and broad tariffs to levels “only” half as high on average led to this risk receding a bit, yet still remaining sharply higher than it was in January 2025. So far, most of the “hard” economic data (that measure actual economic transactions like wages, employment, incomes, or gross domestic product) have yet to signal that a recession is coming.

Part of the relative robustness of macroeconomic measures likely owes to the fortuitous timing of a boom in AI-related spending, which largely began in mid-2023.[9] The valuation of stock markets has reached the second-highest levels in history—trailing only the stock market bubble of 2000–2001 (also driven by a boom in tech stocks). Much of these stock market gains have been driven by AI-related firms. A significant amount of consumption spending out of these wealth gains has likely contributed nontrivially to growth over the past year.

Further, capital expenditures related to the AI-boom have also been contributing to growth. Starting in 2023, year-over-year real growth (adjusted for inflation) in data centers, for example, has consistently exceeded 35%, peaking at just under 77% in late 2024 and remaining above 30% throughout most of 2025. While this AI-related spending has helped keep the U.S. economy well clear from recession through the third quarter of 2025, it is the kind of spending that would likely evaporate relatively quickly if business sentiment about the future use and profitability of AI investments dims.

If this happened, the depressing effect on wider business investment stemming from the uncertainty mentioned above might well dominate and lead to quick decelerations in growth. Evidence of this depressing effect seems already clear, as investment in components not related to the AI boom looks notably weak over the past year.

Figure B

The danger of a slowdown in aggregate demand highlights how much discussions about affordability need to go beyond prices.[10] Much of the discourse about affordability recently was driven by the outbreak of very high inflation in the early 2020s, following the COVID-19 pandemic. But absent very rare and sharp increases in inflation like that (and which tend to be driven by external events like pandemics and wars, not policy missteps), the main damage to affordability over time does not stem from fast inflation, but from slow growth in wages and incomes. A recession would return inflation in the U.S. to very low levels. The recession of 2008–2009, for example, led to inflation averaging below 2% for the following decade. And yet this low inflation provided next to no relief for affordability because the high unemployment of that period—which was the source of disinflation—sapped workers’ leverage and bargaining power in labor markets and led to slow wage growth.[11]

A recession in the next year would solve the price side of affordability in that it would lead to a sharp slowdown in inflation, but it would force wage growth down even faster, and hence, would exacerbate, not help, the ongoing problem of affordability properly defined.

All in all, it seems safe to say that the Trump administration’s policies have significantly elevated the risk of a recession over the next year. Their trade policy retreat has been sharp enough that a recession might well be avoided. But this hinges largely on the administration’s being able to resist whipsawing trade policy chaotically again—and this seems far from certain. But we may well navigate the next year without a recession—largely stemming from the momentum of the strong economy the current administration inherited and the lucky timing of much AI-related spending remaining strong through 2025.

Trump polices will quickly erode the economy’s ability to supply goods and services without inflation—this damages affordability for typical families

However, the avoidance of a recession would not mean the economic policy decisions of this administration were wise. If the only question on the table regarding the impact of Trump policies was “Will there be a recession?” the future of the U.S. economy would be much less bleak. Instead, the more predictable and larger amount of damage that the Trump administration’s policies will inflict will not come through downward pressure on aggregate demand but through the rapid erosion of the economy’s potential output and the upward redistribution of income instead. These influences will be experienced by typical families as wages, incomes, and public supports failing to outpace prices by sufficient margins over time, thereby damaging affordability.

In the previous section, we noted the sharp economic damage done by the aggregate demand shortfall of the early 2010s. The most obvious and acute damage stemming from this shortfall was the elevated unemployment rate of that time, along with the attendant damage to wage growth.

However, the worst lingering damage from that long period of deficient aggregate demand likely came from its spillover effect in destroying potential output. When employers see that customers are scarce and workers are cheap and plentiful, their imperative to invest in worker training or newer capital or innovative technological processes to economize on labor costs and boost productivity is blunted. And when jobless workers see elevated unemployment rates and the low probability of being hired, job seekers can get discouraged, and labor force participation can falter.[12]

Over time these dynamics lead to a lower-quality workforce and smaller capital stock, which reduce productivity growth and potential output. Figure A showed actual GDP and successive estimates of potential output over time. Between 2007 and 2019, these potential output estimates continually fall as the demand shortfall bends down potential output, as productive investment is blunted. By 2019, potential output was $2.2 trillion below where its 2007 trend would have left it in that year. This translates into $6,500 less income for every adult and child in the United States in 2019 (or $26,000 less income for a family of four). In short, over a 5–10-year period, even small bends in the growth of potential output have huge real-world consequences.

Supply destruction leads directly to unaffordability

This discussion of potential output growth likely sounds abstract to noneconomists. But it has profound effects on typical families’ economic security, and the way this slowing down of potential output translates into observable real-world effects is by making affordability worse for these families. For example, in the paragraph above, we said that the slowdown of potential output growth after 2007 translated by 2019 to $6,500 less in inflation-adjusted income for every person in the United States (or $26,000 less income for a family of four). The way this happens is by wages and incomes failing to outpace growth prices by satisfactory amounts—even during times (like the 2010s) when inflation was extremely low.

And, of course, the gap in the race between wages and prices differs depending on the specific goods and services examined. In the 2010s, the output that was produced less and less, relative to historic norms, was housing.[13] This reduced output of housing translated directly into higher relative prices for rents.

While there is a lot about this collapse in housing production and rise in rental prices that is housing-specific, the root of all of this pressure on affordability stems from macroeconomic choices. If potential output growth slows for the overall economy, then the production of something will lag, and its price is likely to rise. If we had somehow kept housing construction constant in the face of a fall in overall potential output, the biggest affordability problem would have shown up someplace else, but one surely would have emerged.

How Trump policies will slow potential output and exacerbate affordability concerns

In the current moment with unemployment that is still relatively low by historical standards and so-far adequate aggregate demand, the imminent threat to the economy’s supply side today is not an extended recession, but simply the direct effect of many Trump policies. When (not if, but when) potential output growth falters in coming years, it will again represent a sharp break from the economy the Trump administration inherited, an economy that saw rapid productivity growth in the years following the pandemic.

Figure C

The potential supply destruction stemming from Trump administration policies comes along many margins.

Loosening immigration restrictions and unleashing mass deportations

The most obvious blow to the economy’s potential output would be Trump’s mass deportation policy. If the U.S. relied solely on growth in U.S.-born workers, labor force growth would shrink rapidly over the next decade (see Bivens 2025c). Successful mass deportations—besides causing great and unnecessary human misery—would actually push labor force growth in the U.S. economy into negative territory in coming years.

Further, immigrant and U.S.-born labor supply are often complementary (Zipperer 2025). One obvious example is that child care centers are disproportionately staffed with foreign-born workers. If mass deportations cause significant closures of these centers, U.S.-born parents will often be forced into stopping work in order to care for children.

Cutting back federal spending and the workforce

We noted the cutbacks to federal workforce and spending previously as short-run threats to aggregate demand. But the federal government is not just a source of short-run demand; it also provides absolutely crucial inputs needed for robust private-sector growth.[14] Recent decades have seen sharp cuts in the size of the federal workforce and the investments in the functions it provides. By January 2025, the size of the federal workforce and the spending to support it were at historically low levels relative to the broader economy. In short, it seems clear that this workforce and the state capacity of the federal government were already significantly degraded even before the Trump administration took power. Since then, the administration has unleashed an unrelenting attack on this state capacity.

Perhaps the clearest way reduced federal spending will translate into slower potential output growth in coming years comes from cutbacks to science and research. Fieldhouse and Mertens (2025), for example, have estimated that nearly a third of total factor productivity (TFP) growth stems from federally financed research and development spending.

Further, the Trump administration has significantly cut back federal spending on universities. A key driver of productivity growth over time is a more educated and skilled workforce. Today’s higher education cuts are guaranteed to slow the growth of labor quality in the U.S. workforce in coming decades.

Other federal agencies collect, analyze, clean, and provide access to free, publicly available, high-quality data on the nation’s economy and demographics. These services provide enormous monetary value to private-sector actors (see Hughes-Cromwick and Coronado 2019).

Other agencies provide crucial monitoring services that help the nation avoid financial, epidemiological, or weather disasters. These investments provide a huge rate of return relative to the (likely too small) federal spending done on them. Even monitoring and surveillance that directly aim to constrain and manage private-sector decision-making can often actually lead to better private-sector outcomes. Hirtle, Kovner, and Plosser (2019), for example, examine the outcome of banks when they receive more or less regulatory scrutiny from federal banking supervisors. The authors find that “…banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have slower growth or profitability.”

By far the biggest long-run threat to the U.S. and global economies’ ability to produce goods and services without inflation is the effect of climate change. Climate change can be thought of as an ongoing erosion of the economy’s productive capacity. For example, key swathes of land will become less valuable as flooding and disaster exposure rise, buildings and factories will be threatened by extreme weather, and the productivity of work that must be performed outside will suffer due to either extreme weather or needed spending to mitigate the effects of it on workers. Investments that mitigate greenhouse gas emissions (GHG) and reduce the effects of climate change are incredibly valuable in the long run for maintaining the economy’s supply side. By far the biggest and most effective investments in this type of mitigation ever made by the United States were the subsidies for clean energy and its adoption in the Inflation Reduction Act (IRA) of 2022. The Republican budget megabill, however, rolled back the majority of these IRA subsidies and will hence lead to far fewer reductions in GHG emissions in coming years. Essentially these rollbacks will accelerate the destruction to the economy’s supply side that is ongoing due to climate change.

Many federal agencies are responsible for providing and enforcing transparent rules for markets that channel economic competition into productivity improvements, instead of zero-sum opportunism. For example, the Securities and Exchange Commission and the Consumer Financial Protection Bureau provide protection to investors by enforcing rules against fraud or misappropriation of their funds from companies they invest in. This promotes trust and allows more liquid capital markets that are able to provide finance for more prospective and ongoing businesses. The Federal Trade Commission and the Antitrust Division at the Department of Justice aim to keep firms’ monopoly power from distorting markets. The Occupational Health and Safety Administration and the Wage and Hour Division at the Department of Labor protect employees from abusive workplaces, allowing them to choose among prospective employers without having to factor in whether there will be unsafe or exploitative working conditions with these employers.

Another key federal agency priority that has had profoundly beneficial effects on the U.S. economy’s supply side in recent decades is enforcement of anti-discrimination laws. The Equal Employment Opportunity Commission, for example, was established in 1965. Hsieh et al. (2019) have noted that since then, there has been an enormous increase in the share of high-wage, high-skill occupational employment that is accounted for by women and Black men. In turn, the authors estimate that this more efficient allocation of workers to occupations based on talent and merit accounted for up to 40% of all growth in the U.S. economy since 1960. Much of this better allocation of talent has stemmed directly from enforcement of anti-discrimination laws. Going forward from today, there is ample scope for ongoing and/or improved enforcement of anti-discrimination laws to support future growth. If instead, the enforcement of these laws withers, and there is a reduction in the efficient allocation of talent to occupation, this could be an outright headwind to growth going forward.

Haphazardly implementing poorly designed and chaotic tariff policy

The chaotic implementation of the administration’s tariff policy is surely a short-run drag on aggregate demand. But, if the end result of the policy is to leave the United States with historically high and broad tariff rates (which is where the tariff policy has landed as of December 2025, even with the sharp reversal of many of the highest tariffs), without any obvious corresponding benefit from well-designed industrial policy considerations, then this will also slow potential output growth.[15]

Tariffs are essentially a way to block the lowest-cost method of delivering goods to U.S. households and businesses, if this lowest-cost method involves imports. Sometimes this kind of blockage is fully justified by other policy concerns besides what is the cheapest production at the moment. For example, if foreign governments subsidize their producers in a specific sector, and if the U.S. deems it imperative to have productive capacity in that sector, then tariffs can help keep domestic producers from being forced out of business by the decisions of foreign governments.

Further, if the sectors that domestic producers are being forced out of looked poised to drive productivity gains in coming decades, there might be a strategic benefit to using tariffs to protect domestic production. The case of electric vehicles (EVs) is one potential example. There is clearly going to be a large global shift toward EVs in the coming decades. EV manufacturing will scale rapidly, and often this kind of scale produces huge leaps in productivity. If today’s constellation of EV production facilities and foreign countries’ subsidies of their own EV makers threaten to shove U.S. producers entirely out of the race for EV market share, it seems like industrial policy efforts to support domestic production of EVs would make a lot of sense—and this was indeed a priority of the Biden administration.

Similarly, if some or all of the cost advantage of imports in a sector stems from objectionable practices of producers in other countries—say, blatant disregard of fundamental labor rights—tariffs can protect U.S. producers from being forced out of business by these objectionable practices.

But the historically broad and high tariffs of the Trump administration are not being calibrated in any kind of strategic or careful way. Instead, they are blocking the lowest-cost means of delivering goods to U.S. households and businesses randomly. This essentially is the equivalent of a negative technology shock. Businesses (both foreign and domestic in the U.S.) that supply goods have been forced out of the most efficient way to produce goods, and without any countervailing benefit from smartly designed industrial policy considerations.

Finally, the chaotic implementation does not only affect aggregate demand. If ever-shifting tariff levels change the patterns of production that lead to the lowest-cost ways of producing goods in random ways, this makes it impossible to set up efficient supply chains, hence stunting potential output growth.

Financing tax cuts for the rich and corporations with higher debt

In 2000, the ratio of U.S. public debt to gross domestic product (GDP) stood at less than 35%. In 2024, the debt ratio nearly tripled, rising to almost 96%.[16] A large part of this increase was due to the two historically large economic crises experienced in those years: the financial crisis and Great Recession of 2008–2009, and the COVID-19 recession.

More worryingly, even in 2024—a year in which the unemployment rate averaged 4%, the Fed’s short-term interest rates stood at over 5%, and inflation was above the Federal Reserve’s target—the federal budget deficit was 6.2% of GDP. This is too large a deficit for an economy that is at roughly full employment and not in need of fiscal support.[17]

The 2024 deficit can essentially be entirely explained by the successive rounds of tax cuts engineered by Republican administrations since 2000. In 2009, the Congressional Budget Office (CBO) projected what federal revenue as a share of GDP would be if the tax cuts signed into law by George W. Bush in 2001 and 2003 were allowed to lapse (see CBO 2009). They projected that revenue would be 20.2% of GDP by 2019. However, in 2019—after the vast majority of the Bush-era tax cuts were maintained and President Trump signed the 2017 Tax Cuts and Jobs Act (TCJA)—federal revenue came in at just 16.1% of GDP.  If revenue had remained at 2000 levels going forward, even with the extra debt incurred by economic crises, budget deficits by 2024 would’ve been effectively zero.

In the decade after the onset of the Great Recession in 2008 and during the early stages of the 2020–2021 pandemic, large deficits were not harming the economy. In fact, they were usefully propping up aggregate demand even as private sources of demand were plummeting. This chronic shortfall of aggregate demand (sometimes labelled “secular stagnation”) kept spending weak and interest rates and inflation historically low (short-term interest rates stood at essentially zero in all these years).[18] And so long as interest rates were low, no damage was being done by higher deficits.

But in the post-pandemic recovery, aggregate demand (aided by a robust fiscal response to the crisis) has been stronger, and interest rates and inflation have moved decisively off their historic lows. In this environment—when the economy is no longer demand-constrained—further increases in federal debt now compete with private-sector borrowers to find available savings. This, in turn, pushes up interest rates and threatens to crowd out private sector investments in new factories, plants, and equipment. This slowdown in the growth of the nation’s capital stock, in turn, leaves U.S. workers with less capital to aid them in doing their jobs and hence slows the pace of productivity growth.

This potted history of fiscal policy debates in recent decades tells us that after a decade and a half of warnings about the crowding-out effect of higher deficits on investment not ever coming to pass, there is now strong evidence to suggest this might be an important influence on growth going forward. Figure D shows the “real debt service ratio,” a measure of how sharply the government’s borrowing costs are rising. After a long stretch of being under 1%, this measure has recently surpassed its historic high.

Figure D

This historic high was surpassed even before the passage of the 2025 Republican budget megabill—a bill that will add nearly $4 trillion to the federal debt over the next 10 years. Borrowing costs are guaranteed to spike further going forward from now in any time period when the economy sits near full employment.

If the worried-about recession comes to pass in the next year or so, the collapse in private spending will reduce competition for available savings and interest rates will fall and the supply destruction effect of higher interest rates will be muted. But so long as the underlying fiscal structure of the U.S. sees large budget deficits even when the economy is at full employment, this means that interest rates will be high during these full employment periods and investment will be suppressed, leading to slower future productivity growth.

A key aggravating factor of the supply-destroying effects of higher deficits in coming years is what they were used for: simply to give much higher disposable incomes to rich households in the United States.          

One could imagine a counterfactual in which instead of using debt to finance higher disposable incomes for the rich, the federal government used this debt to make significant investments to mitigate emissions of greenhouse gases. This would leave the country with a higher stock of “green” capital (capital used to mitigate greenhouse gas emissions) and a smaller stock of conventional capital. This would be an affirmatively good thing. It would effectively be leaving future generations with slightly lower productivity in producing conventional goods and services, but a more livable and viable climate. Consistent economic growth essentially guarantees that future generations will be significantly richer than the current one in their ability to buy conventional goods and services. Trading off a bit of this advantage for a livable planet would be welcomed by this future generation—and it’s a trade-off they won’t be able to make. Only their ancestors can make it for them.

Alternatively, one could imagine a world in which the federal government took on additional deficits of the size generated by the 2025 Republican megabill to radically increase investments in children: providing federal financing of universal, high-quality pre-kindergarten; boosting aid to K–12 public school systems; and providing a universal Child Allowance to end child poverty. This would not only raise human welfare much more than tax cuts to rich people would; it would also see some of the deficit costs defrayed in coming decades as today’s children grew up healthier and better educated and worked more and earned higher wages in the decades to come. Some of these offsets could be considerable.[19]

There are no such happy offsets that stem from running larger deficits simply to give tax cuts that are radically tilted toward households that don’t need them—the ones at the very top of the income distribution. These deficits are supply destruction for the sake of intentionally increasing inequality.

Threatening a political takeover of Federal Reserve policy decisions

The Trump administration has been far more forceful than previous ones in pressuring the Federal Reserve to fall in line with the administration’s economic goals. They have demanded that the Federal Reserve set interest rate policy to meet the administration’s short-term economic goals and have constantly demanded lower interest rates, even as conditions do not warrant cuts in interest rates (inflation remains above the Fed’s long-run target, and unemployment remains generally low).

If decision-makers throughout the economy—households, businesses, and state and local governments—begin to think that the Federal Reserve’s interest rate decisions will be managed entirely by the executive branch, they might well raise their expectations of inflation in the future. This, in turn, would likely require any future Federal Reserve that committed to reducing inflation (and inflation expectations) to raise interest rates higher than they would otherwise have to be. These higher long-run interest rates would, in turn, reduce investment and slow productivity growth (much like too-large deficits run during times of full employment).

How much will supply destruction slow growth in coming years?

It is very hard to provide any convincingly precise estimates as to how much supply destruction will result from this portfolio of Trump administration policies. What determines the ebb and flow of productivity growth in advanced economies is one of the most debated topics in economics, and one in which no consensus exists. Yet we can give some very rough bounds for how important each element of this potential supply destruction might be over the next decade. The sum of these negative effects would be highly significant for future living standards growth—or affordability.

We start with the Congressional Budget Office’s (2025b) forecasts of potential output growth for the next decade. Currently they forecast that annual growth will average 2.0% between 2025 and 2034.

About 30% of the 2.0% that CBO forecasts (or 0.6% of this growth) stems from their estimate of how much the labor force will grow in those years. However, if one accounts for the Trump administration’s meeting their mass deportation goal of removing 1 million immigrants each year from the United States, this would imply that the labor force will barely grow at all in those years, translating into a 0.4% slowdown of growth in potential output.[20]

More than half of the projected growth in potential output comes from CBO’s forecast of growth in total factor productivity—a measure of how much extra output can be obtained holding inputs constant. TFP growth is often interpreted as a measure of pure technological advance—using new processes and production techniques to get more output out of a given stock of inputs. However, as we noted before, Fieldhouse and Mertens (2025) have estimated that fully one-third of TFP growth in recent decades can be accounted for by direct federal spending on research and development. The Fieldhouse and Mertens (2025) results would imply that a 20% cut in federal research and development spending would reduce projected productivity growth in the U.S. over the next decade by 0.2% annually.[21] This, in turn, would reduce potential output enough by roughly $2,500 for every adult and child in the United States by 2035.[22]

Importantly, their estimates do not include the effect of federal support for institutions of higher education, and this support has been large and critical for these centers of scientific research—likely as important as the direct federal research and development spending. This could easily double the effects from direct federal research and development spending, especially if one accounts for the long-run loss in the labor supply of trained scientists and researchers capable of undertaking research and development that will occur as higher education funding erodes.

CBO (2025b) has estimated that the 2025 Republican megabill will add roughly 7.1 percentage points to the ratio of public debt to GDP by 2034. Using earlier estimates from CBO (2025e) to translate the effect of a higher debt ratio on economic growth, this level of debt increase (assuming no recession intervenes) would slow growth by 0.1%–0.2% by 2034 through its effect on interest rates and investment. Given that Figure D previously showed that higher interest rates really have emerged in recent years, this effect seems possible.[23]

Estimates of the growth effects of the Trump administration’s trade policy are more uncertain. The Yale Budget Lab indicates a long-run effect on the level of GDP of 0.4%. However, it is hard not to make a comparison between the strategy-free actions of the Trump administration and a similar lack of planning that went into the United Kingdom’s exit from the European free trade area (Brexit). Estimates of the effect of Brexit are substantially larger than 0.4%—on the order of 2%–3% of GDP over 10 years (Bloom et al. 2025). If we think that Brexit is a suitable potential model for the fallout from the Trump trade policy—similarly chaotic and unplanned—this would imply a reduction in productivity growth of around 0.25% over the next year.

The long-run growth effect of eroding the federal government’s state capacity through budget cuts and downsizing is harder to estimate. One suggestive paper on this is Klein Martins (2025), who looks at episodes of sharp permanent spending cutbacks in advanced countries over the past 30 years. He estimates highly persistent negative effects on GDP growth of these cutbacks, over timespans well longer (15 years) than could be explained simply by the effect of these spending reductions adding to demand shortfalls. Klein Martins finds that each 1% of GDP in public spending reductions leads to GDP that is 2% smaller 15 years later. Say that half of these effects were driven by the erosion to state capacity stemming from these cuts. The cuts to the federal workforce in 2025 will result in a reduction of federal government spending of roughly 0.1% of U.S. GDP, which would imply (using half of Klein Martins’ estimates) a reduction in GDP of about 0.1%.

Tedeschi (2024) estimates how much higher interest rates driven by political events (like the capture of Fed policymaking by the executive branch) could reduce growth in coming years.[24] He finds that if the political events just moved the “country risk premium” of the United States to look more like the United Kingdom, this could reduce growth by 0.1% annually. If instead, this country risk premium deteriorated enough to look more like other rich, stable economies like Spain, the damage could be closer to 0.3% annually.

Adding up supply destruction from Trump policies

The Trump deportation goals could reduce labor supply growth by 0.4% over the next decade. The cuts to direct public research and development spending and this spending supported by institutions of higher education could each slow productivity growth by 0.2% over this period. Financing the Trump administration’s tax cuts for the rich with debt could reduce capital investment and hence productivity by 0.2%. If Brexit is the best model for the administration’s strategy-free trade policy, this could also reduce productivity growth by 0.2%. If the Trump-led attacks on the Fed led to steep concerns in international financial markets that raise the U.S. country risk premium and other interest rates significantly, this could slow growth by up to 0.3% in coming years. The administration’s attacks on the state capacity of the federal government could reduce growth by 0.1%. Their capture of Federal Reserve policy—leading to rising interest rates—could slow growth by between 0.1%–-0.3%. Adding these up, this means growth could slow by just under 2% on average over the next decade, with productivity growth slowing by well over 1%.

Somewhat ironically, the optimistic projections of how much advances in AI could boost U.S. productivity growth over the next decade tend to cluster around 1% annually.[25] The damage being done by the Trump administration to the economy’s supply side over the next decade is hence potentially as large as the most optimistic projections for how much a new burst of technology could boost it. If this came to pass, it would constitute just the latest episode of poor policy decisions squandering the potential benefits of economic growth and technological advance. The typical U.S. household today is not poorer in absolute terms compared with decades ago. But they are shockingly poorer relative to the potential growth they could have enjoyed with smarter policy that prioritized their economic security over showering the rich with even more perks.

Trump policies will raise inequality—the worst blow to families’ affordability

As we noted before, affordability is determined simply by the race between families’ economic resources (wages, incomes, and publicly provided subsidies and benefits) and prices. When affordability is strained, it is overwhelmingly because something—a recession or slowing of potential output growth, for example—has dragged on growth in families’ economic resources. Moreover, even when the aggregate economy seems strong—free of recession or inflation and with adequate growth in potential output—affordability for the vast majority of families can be squeezed if growth in these families’ resources lags far behind average growth. This mismatch between growth in typical families’ resources and average growth is driven by strongly above-average growth at the top of the income scale—the precise problem that has afflicted the U.S. economy in recent decades and the true root of nearly all U.S. families’ concerns about affordability.

Figure E

The Trump policy agenda will push income away from low- and moderate-income families and toward the top along many different margins. Even if (as expected) inflation rates return to normal during the second Trump term, this will be unlikely to boost the inflation-adjusted resources available to most families because the policies of the administration will actively claw resources—or the market power to claim these resources—away from typical families.

In the short run, the Trump budget megabill will cause an enormous jump in inequality

The signature legislative achievement of the second Trump administration is the 2025 Republican megabill, a budget reconciliation package that continues the individual provisions (and some business provisions) of the 2017 Tax Cuts and Jobs Act. The megabill also enacts steep cuts to health care and nutrition programs (Medicaid and the Supplemental Nutrition Assistance Program, abbreviated as SNAP). On top of this, the megabill also failed to either roll back or otherwise modify the corporate income tax cuts of the 2017 TCJA, but also fails to extend the supplements to subsidies for purchasing health insurance in the marketplace exchanges established by the Affordable Care Act that were passed as part of the Biden-era American Rescue Plan.

To give a sense of scale of the bill’s impact, we compare the one-year change that will result directly from the 2025 megabill policy with the entire upward redistribution of income that happened between 1979–2019, a period widely recognized as one during which U.S. inequality exploded. The share of total income claimed by the top 10% of households over that period rose by roughly 10 percentage points over a period of 40 years (or about 0.25 percentage points per year). But the Republican megabill alone will in one year raise the share of income claimed by these top 10% of households by 1 full percentage point. The 40 years between 1979 and 2019 saw the top 10% gain an average of 0.25 percentage points in the share of income they claim. This means the Republican megabill will see the rate of inequality growth quadruple in its first year, and it will essentially accomplish 10% of the entire post-1979 rise in inequality in a single year.

In the longer run, Trump policies empower the rich and disempower everybody else

Besides these large fiscal changes, other policy priorities of the second Trump administration include stripping workers of the effective right to organize unions and bargain collectively, deregulating some of the most abusive parts of the financial sector, and shrinking the federal workforce. All of these will lead to rising inequality.[26]

Trump policies continue the conservative assault on labor and workers’ rights

The Trump administration has continued to move forward with parts of its first-term priorities like the assault on labor and the bargaining power of typical workers. Two obvious high-profile indications of this were the stripping of collective bargaining rights of more than a million federal workers (including terminating the collective bargaining agreement of the Transportation Security Administration and firing National Labor Relations Board (NLRB) Member Gwynne Wilcox for “unduly disfavoring the interests of employers.” Further, the Trump administration nominated a partner at the very law firm that is currently challenging the constitutionality of the NLRB to be the NLRB’s general counsel. [27]

The assaults on labor and the bargaining leverage of typical workers continue a long-term conservative effort that has been highly successful in suppressing wage growth for low- and middle-wage workers and which has been a primary contributor to the long-run rise of inequality in the U.S. economy. [28]

Normalizing the most abusive parts of the financial system

The rise of the financial sector’s power has played a large role in the upward redistribution of income in the U.S. economy in recent decades. Finance is possibly the economic sector that has most benefitted from the federal government’s intentional industrial policy support. Between deposit insurance, the day-to-day liquidity provisions of the Federal Reserve (like the discount window that provides overnight reserves at the Fed), and the regular occurrences of extraordinary support provided in financial crises, the financial sector is obviously far larger in capitalist economies than it would be without this public support.

Significant public support of the financial sector is warranted—finance provides needed services to the rest of the economy, and without public backing, market failures would prevent these necessary services from being continually available. But this public support also justifies a robust regulatory and supervisory framework surrounding the financial sector.

The history of finance in the United States is one of accepting public support (especially during bad times for finance) while constantly trying to escape regulation and supervision that constrain profits during good times. The period from the late 1970s to 2007 saw regulation and supervision atrophy. This resulted in exploding profits and incomes in the financial sector with very little obvious benefit to the rest of the economy and the spectacular crash of 2008 that demanded even more public support for the sector. In short, the industrial policy support that the financial sector has received is a case study for how complementary policies (regulation and supervision in this case) are needed to ensure public support for a specific sector is not siphoned off into the incomes of economic players with substantial market power.[29]

In the financial regulation space, the Trump administration has continued conservative efforts to keep public supports for finance strong while expanding the scope of what the sector can do to seek profits.[30] The administration has directed the Consumer Financial Protection Bureau to shrink its scope and cede regulatory oversight to state agencies and has supported congressional efforts to slash funding for the bureau. The administration has also stopped U.S. movements toward harmonizing regulations with the Basel III recommendations—essentially meaning that large banks are no longer required to hold as large a set of capital buffers to protect against financial market stress. These capital buffers are there to prevent the public sector from having to bail out large parts of the financial sector during these periods.

The administration has also endeavored to bring cryptocurrency into the realm of traditional financial institutions, but under a loose regulatory regime. This approach would essentially allow some parts of the crypto ecosystem to put the public sector on the hook for bailouts needed due to instability in the sector, but would also allow many of the worst abuses of the crypto ecosystem—its use in illegal transactions and its speculative excesses—to continue unregulated. The approach to crypto represents the worst of all possible worlds. It gives the public sector heavier responsibilities to ensure that crypto crashes are managed but robs them of the tools needed to supervise the sector.

Attacks on the federal workforce

Between January and December 2025, federal payroll employment fell by roughly 290,000 due to the cuts started by the so-called Department of Government Efficiency. We noted previously that these cuts would sharply hurt growth in potential output in coming years. They will also lead to a less equal economy.[31]

Besides providing key inputs to public-sector production that markets generally fail to provide, the activities of federal workers often involve providing a countervailing force against unchecked corporate power. The Federal Trade Commission and the Antitrust Division at the Department of Justice ensure that markets remain competitive and block firms from exercising monopoly power. The Centers for Medicaid and Medicare Services must set reimbursement rates for the health care delivered by private-sector providers but paid for by the federal government. Private-sector health providers have seen a wave of consolidation in recent years and often can exercise pricing power against patients and other payers—the price-setting decisions of the federal government are a key bulwark against this pricing power. The Occupational Safety and Health Administration and the Food and Drug Administration have workplace inspectors to ensure that firms do not try to maximize profits by underinvesting in basic protections for worker or consumer safety.

Further, in a country where the federal tax system remains at least moderately progressive (with richer households facing higher tax rates than low- and moderate-income households), effective administration of the nation’s tax laws is equality enhancing. The vast majority of unpaid taxes are owed by the very rich. As such, attacks on the capacity of the Internal Revenue Service to administer this tax law are intentionally designed to lighten the tax burden of the privileged without passing new legislation.

Measures of GDP and income understate harms of Trump policies

Most of the discussion above concerns economic forces that affect measured GDP and incomes. But the economic security and happiness of U.S. families cannot be captured entirely based on these measures. For example, many Americans report feeling overworked and wish they had more leisure time. Increases in leisure time do not show up as greater GDP or incomes, yet clearly are valuable to families.

A number of policy choices made by the Trump administration will have profoundly damaging effects on families’ welfare that are not captured by GDP or data on incomes. For example, much of the damage done by climate change will not be well captured in these statistics. At the starkest level, climate change is forecast to lead to worse health outcomes and more premature deaths. The famous Stern review of climate change (2021) noted that accounting for these non-GDP influences likely at least doubles the true economic cost of climate change.

Similarly, the cutbacks to health insurance coverage signed into law by the Trump administration will cause poorer health and excess deaths in the coming decade if they stand. These deaths will not directly affect GDP, but obviously they need to be accounted for when assessing the impact of these policy changes.

Some of the outcomes of public policy raise GDP but actually reduce welfare. As climate change makes people spend more money on air conditioning, for example, this shows up as an increase in GDP yet makes peoples’ lives worse. Similarly, an increase in health spending driven by maladies related to climate change will raise GDP yet reduce welfare.

Further, some government spending provides outputs that GDP does not measure well at all. The value of less air and water pollution, for example, is immense but not captured in contemporaneous GDP. Much of its value will implicitly show up in future GDP numbers, as less pollution will lead to a healthier and more productive workforce in the future, but in real time, the benefits are not precisely measured. A similar finding concerns investments in children generally. Some of the benefits might occur in the moment (say, child care subsidies that allow parents to work more and earn higher incomes), but most accrue over time as children grow up healthier and become more productive and higher-earning adults.

Just because the benefits of much public spending do not mechanically show up in contemporaneous GDP measures do not mean they cannot be measured. When they are measured, there is ample evidence that families value this spending and the output it produces immensely. Often the estimated value of such spending is on the order of $1.50 for each $1.00 spent, with most of the benefit coming from welfare gains not captured in GDP. Welfare gains this large from public spending are strong suggestive evidence that public spending is already extremely under-provided, and further cuts will make it far worse.

Conclusion

It is essentially a guarantee that the policy path charted by the second Trump administration will leave the U.S. economy poorer and less equal. But much of this damage will be subtle and hard to see in month-to-month or even year-to-year changes in economic statistics. The Trump administration’s inability to implement a policy agenda without rank chaos might lead to a short-run recession that will temporarily expose much of the damage being done. But even if the recession does not come and even when it passes, there will be a steady hollowing out of the U.S. economy’s simple ability to produce the goods and services families need, and the inadequate growth that does get generated will flow disproportionately to the richest households.

In short, the macroeconomic consequences of the second Trump administration are profound. They will leave the vast majority of American families poorer over the next decade, and if Trump’s successors continue in this vein, they will leave the current generation’s children far poorer.

Notes

[1] The obvious historical counterexample to the rule that supply tends to grow slowly and predictably occurred during and immediately after the COVID-19 pandemic and Russian invasion of Ukraine, when these shocks broke global supply chains and led to sharp supply disruptions that restored themselves only with lots of volatility. This was, however, an unprecedented behavior of supply in advanced economies over the past century and is highly unlikely to repeat in the future.

[2] For this calculation, assume a counterfactual in which the unemployment rate stood at 4.0% over the 2007–2017 period and multiply by the size of the labor force in each year. Then, subtract this level of unemployment from the actual rate and sum over the years. For evidence of the damage this excess unemployment did to wage growth, particularly for lower-wage workers, see Gould et al. 2025.

[3] For details on the strength of the economy the Trump administration inherited, see Bivens 2025a.

[4] Numbers in this paragraph about cuts in the 2025 Republican budget megabill are taken from CBO 2025b, c.

[5] See Lo et al. 2025.

[6] This current policy baseline is a wrong and dishonest one to use when grading a law’s fiscal impact in coming years, but it’s the right one to use when figuring out whether growth will accelerate or decelerate in coming years due to policy changes.

[7] See Zipperer 2025 for estimates of the employment impact of the Trump administration’s mass deportation goals.

[8] For a wide range of views on the “Liberation Day” tariffs, resulting pullback and recession risks, see Nathan, Grimberg, and Rhodes 2025.

[9] Numbers in this paragraph can largely be found in Bivens (forthcoming).

[10] See Shierholz 2025 for this broader argument.

[11] Stark evidence that it is the race between wages and prices (and not just prices) that determines affordability can be found in Gould et al. 2025. They show that inflation-adjusted wage growth for low- and middle-wage workers was extremely strong from 2019 to 2024 but was actually negative over the five years following the previous business peak (from 2007 to 2012), even as this 2007–2012 period saw much lower rates of inflation. The strength of the labor market dwarfed changes in inflation in these periods, for good and bad.

[12] See Bivens 2017 for evidence that healthy labor markets support faster productivity growth.

[13] For example, according to the National Income and Product Accounts (NIPA) Table 1.1.10, between 1979 and 2007 residential investment was about 4.7% of overall GDP, whereas between 2007 and 2019 it was just 3.3%.

[14] See Bivens 2025b for an overview of the short- and long-run effects of steep cutbacks in the federal workforce.

[15] See the Yale Budget Lab’s State of U.S. Tariffs feature for a real-time assessment of trade policy under the second Trump administration.

[16] Numbers in this section are taken from CBO 2025b.

[17] Bivens 2019 estimates that a budget deficit of 2.5% or lower is likely consistent with a roughly stable debt ratio when the economy is near full employment.

[18] See Banerjee and Bivens 2022 for an overview of secular stagnation and how it intersects with fiscal policy debates.

[19] See Lynch and Vaygul 2015 for an accounting of the costs and benefits of investments in early childhood education.

[20] Bivens 2025c looks at a scenario in which net immigration between 2025–2034 was halved relative to CBO projections made in January 2025. The goal of deporting 1 million immigrants would yield reductions in immigrant labor supply very close to that “halving net immigration scenario” in that report.

[21] Marr and Cureton 2025 note that the administration’s proposed budget calls for cuts larger than 20% in federal research and development spending.

[22] For this calculation, we compare a scenario in which the $204 billion spent on government research and development in 2024 is cut by 20% going forward and compare it with a scenario in which (as has been largely the norm) this spending was instead held constant as a share of GDP. By 2035 this implies a funding shortfall of nearly $80 billion. We multiply this funding shortfall by the high end of estimated returns to this kind of spending from Fieldhouse and Mertens to ascertain the total cumulative reduction in GDP by 2035, which is 2% of projected GDP in that year. We then divide this by 10 to get the average effect on productivity growth over that time.

[23] In CBO 2025e, they present the effect of GDP on two different scenarios regarding growth in the debt ratio over time. Using this, one could back out the implicit effect on GDP of a given increment of increase in the debt ratio. If this incremental effect holds for the increase in the debt ratio caused by the 2025 Republican budget megabill, one can hence get an estimate of its growth effects.

[24] While Tedeschi 2024 is not just writing about the takeover of the Fed, he absolutely mentions this as one thing that could threaten the very low current “country risk premium” enjoyed by the U.S. The country risk premium is essentially how much lower a return that international investors are willing to take on investments in the U.S. due to the perceived safety and stability of U.S. investments from political manipulation.

[25] See Bivens (forthcoming) for a quick discussion of these estimates.

[26] For a comprehensive assessment of policies undertaken by the Trump administration and their likely effect on typical working families, see Economic Policy Institute 2025–2026.

[27] For a comprehensive overview of actions taken by the Trump administration (including those mentioned in this paragraph) that harm workers’ leverage in labor markets, see McNicholas, Poydock, and Bivens 2026.

[28] See Farber et al. 2021 for the link between unionization and inequality throughout U.S. history.

[29] See Epstein 2018 for a good overview on how powerful economic actors in finance are able to claim a larger share of society’s incomes and resources than their economic contribution justifies.

[30] Much of this section relies on Gensler et al. 2025.

[31] Much of this discussion relies on Bivens 2025b.

References

Banerjee, Asha, and Josh Bivens. 2022. Will Secular Stagnation Return? The Stakes for Current Economic Debates and Fiscal Policy. Economic Policy Institute Report. August 4, 2022.

Bivens, Josh. 2017. A ‘High-Pressure’ Economy Can Help Boost Productivity and Provide Even More ‘Room to Run’ for the Recovery. Economic Policy Institute, March 2017.

Bivens, Josh. 2019. Thinking Seriously About What ‘Fiscal Responsibility’ Should Mean: Full Employment and Reduced Inequality Are the Most Important Targets of Fiscal Policy. Economic Policy Institute, September 2019.

Bivens, Josh. 2025a. “President-Elect Trump Is Inheriting a Historically Strong Economy.” Working Economics Blog (Economic Policy Institute), January 17, 2025.

Bivens, Josh. 2025b. “The Economic Effects of Rapid Federal Downsizing” in Gensler, Gary, Simon Johnson, Ugo Panizza, and Beatrice Weder di Mauro (eds), The Economic Consequences of the Second Trump Administration: A Preliminary Assessment. Centre for Economic Policy Research Press, December 2025.

Bivens, Josh. 2025c. The U.S.-Born Labor Force Will Shrink over the Next Decade: Achieving Historically ‘Normal’ GDP Growth Rates Will Be Impossible, Unless Immigration Flows Are Sustained. Economic Policy Institute, October 2025.

Bivens, Josh. Forthcoming. “How Are AI Investments Affecting the U.S. Economy?” Working Economics Blog (Economic Policy Institute).

Bloom, Nicholas, Philip Bunn, Paul Mizen, Pawel Smietanka, and Gregory Thwaites. 2025. “The Economic Impact of Brexit.” National Bureau of Economic Research (NBER) Working Paper no. 34459, November 2025.

Bureau of Economic Analysis (BEA). 2025. “National Income and Product Accounts (NIPA)” (web page). Accessed December 2025.

Bureau of Labor Statistics (BLS). 2025. “Major Sector Productivity and Costs Database” (web page). Accessed December 2025.

Congressional Budget Office. 2009. The Budget and Economic Outlook: 2009 to 2019. January 7, 2009.

Congressional Budget Office. 2024. The Distribution of Household Income in 2021. September 11, 2024.

Congressional Budget Office. 2025a. “Estimated Budgetary Effects of Public Law 119-21 to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14, Relative to CBO’s January 2025 Baseline” [Excel files]. Published July 21, 2025.

Congressional Budget Office. 2025b. Key Budget and Economic Data.

Congressional Budget Office. 2025c. The Budget and Economic Outlook: 2025 to 2035. January 17, 2025.

Congressional Budget Office. 2025d. The Estimated Effects of Enacting Selected Health Coverage Policies on the Federal Budget and on the Number of People with Health Insurance. September 18, 2025.

Congressional Budget Office. 2025e. The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget. May 2025.

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Epstein, Gerald. 2018. “On the Social Efficiency of Finance.” Development and Change 49, no. 2: 330–352. March 2018.

Farber, Henry S., Daniel Herbst, Ilyana Kuziemko, and Suresh Naidu. “Unions and Inequality over the Twentieth Century: New Evidence from Survey Data.” Quarterly Journal of Economics  136, no. 3: 1325–1385. August 2021.

Fieldhouse, Andrew J., and Karel Mertens. 2025. “The Returns to Government R&D: Evidence from U.S. Appropriations Shocks.” Society for Economic Dynamics Annual Meeting Working Paper, June 26, 2025.

Gensler, Gary, Simon Johnson, Ugo Panizza, and Beatrice Weder di Mauro, eds. 2025. The Economic Consequences of the Second Trump Administration: A Preliminary Assessment. Centre for Economic Policy Research, December 2025.

Gould, Elise, Katherine deCourcy, Joe Fast, and Ben Zipperer. 2025. Strong Wage Growth for Low-Wage Workers Bucks the Historic Trend. Economic Policy Institute, March 2025.

Hirtle, Beverly, Anna Kovner, and Matthew Plosser. 2019. “The Impact of Supervision on Bank Performance.” Federal Reserve Bank of New York Working Paper no. 768. May 2019.

Hsieh, Chang-Tai, Erik Hurst, Charles I. Jones, and Peter J. Klenow. 2019. “The Allocation of Talent and U.S. Economic Growth.” Econometrica 87, no. 5: 1439–1474. September 2019.

Hughes-Cromwick, Ellen, and Julia Coronado. 2019. “The Value of U.S. Government Data to U.S. Business Decisions.” Journal of Economic Perspectives 33, no. 1: 131–146.

Klein Martins, Guilherme. 2025. “Long-Run Effects of Austerity: An Analysis of Size Dependence and Persistence in Fiscal Multipliers.” Oxford Bulletin of Economics and Statistics 87, no. 2: 330–356.

Lo, Justin, Larry Levitt, Jared Ortaliza, and Cynthia Cox. 2025. ACA Marketplace Premium Payments Would More Than Double on Average Next Year If Enhanced Premium Tax Credits Expire. KFF, September 30, 2025.

Lynch, Robert, and Kavya Vaghul. 2015. The Benefits and Costs of Investing in Early Childhood Education. Washington Center for Equitable Growth, December 2015.

Marr, Chuck, and Josephine Cureton. 2025. Administration’s Proposed Cuts to Non-Defense R&D Pose Long-Term Risk to Rising Living Standards. Center on Budget and Policy Priorities, October 2025.

McNicholas, Celine, Margaret Poydock, and Josh Bivens. 2026. 47 Ways Trump Has Made Life Less Affordable in the Last Year. Economic Policy Institute, January 2026.

Nathan, Allison, Jenny Grimberg, and Ashley Rhodes. 2025. Top of Mind: Tariff-Induced Recession Risk. Issue 138. Goldman Sachs Research, April 2025.

Shierholz, Heidi. 2025. “Everyone Is Talking About Affordability—and Making the Same Mistake: Focusing on Just Prices Misses the Bigger Picture.” MS NOW, November 29, 2025.

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Tedeschi, Ernie. 2024. Political Risks to the U.S. Safe Harbor Premium. The Budget Lab at Yale, May 2024.

The Budget Lab at Yale 2025. The State of U.S. Tariffs: November 17, 2025. November 17, 2025.

Yellen, Janet. 2016. Macroeconomic Research After the Crisis. A speech at ‘‘The Elusive ‘Great’ Recovery: Causes and Implications for Future Business Cycle Dynamics.’’ 60th Annual Economic Conference sponsored by the Federal Reserve Bank of Boston, Boston, Massachusetts, October 14, 2016. No. 915. Board of Governors of the Federal Reserve System.

Zipperer, Ben. 2025. Trump’s Deportation Agenda Will Destroy Millions of Jobs: Both Immigrants and U.S.-Born Workers Would Suffer Job Losses, Particularly in Construction and Child Care. Economic Policy Institute, July 2025.

Federal statistical agencies (FSAs) produce the gold standard economic data that employers, investors, job seekers, workers, and policymakers rely on to assess the health of the U.S. economy. Today, FSAs face historically unprecedented threats to their capacity and even their independence. This raises the specter of a future where FSA data cannot be relied upon to honestly report whether the U.S. economy is experiencing dysfunction.

This dashboard displays a range of data not collected or disseminated by FSAs to shed some light on the economy during the pause in government data collection during the shutdown and—even more importantly—to provide an accountability check against efforts to manipulate FSA data in the future.

This set of “next-best” data sources is clearly inferior to the datasets that have historically been collected and analyzed by the nonpartisan, expert professionals who staff FSAs. Among many other relative weaknesses, these next-best data offer no insights on how the economy is affecting U.S. households differently by race, gender, or ethnicity.

Data Accountability Dashboard

Indeed job postings vs. BLS JOLTS

    

Indeed job postings correlate strongly with total job openings from the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). JOLTS job openings tend to fall in recessions and rise in expansionary periods.

The Indeed Hiring Lab, the research arm of job search website Indeed.com, publishes a job postings data index that aggregates a complete count of all job postings on the Indeed website. This includes a measure of new job postings, which only counts job postings the first time they are visible. The data—available starting in February 2020—are collected daily and reported as a seven-day average. For this comparison, we take monthly averages of the seasonally adjusted daily data.

In the figure, we show that Indeed new job postings track closely with job openings from JOLTS. The correlation between these measures between February 2020 and August 2025 is quite high (0.95).

While Indeed data are only available for the last five years, JOLTS data go back to 2000 and show a clear relationship between job openings and business cycles. Job openings tend to fall in recessions and rise in expansionary periods. That relationship is clearest in the 2001 and 2007 recessions and expansions, where a fall in job openings preceded the start of the recession.

In the wake of the government shutdown, the Indeed new job postings can give use some information on the state of new positions needed by employers. Moving forward, a strong and sustained divergence of trends between the Indeed and BLS measures could provide a worrying signal of degraded data quality or integrity in BLS reports.

Data Accountability Dashboard

ADP employment vs. BLS private-sector payrolls

    

Monthly changes in ADP employment levels tend to track changes in private-sector payroll employment from the BLS Current Employment Statistics, and both measures show that private-sector employment growth falls in recessions and rises in expansionary periods.

The ADP National Employment Report is a monthly measure of the private-sector labor market based on aggregated payroll data of more than 26 million U.S. workers. ADP Research, a research arm of the ADP payroll processing firm, releases the report monthly. While the report provides much detail of employment by firm characteristics, the topline number in the report is private-sector employment changes, available since January 2010.

ADP employment changes track closely with the Bureau of Labor Statistics (BLS) measure of private-sector payroll employment in the Current Employment Statistics survey, data that is published every month as part of the Employment Situation Summary, also known as jobs day. In the figure, we compare seasonally adjusted monthly changes in employment for each measure smoothed to three-month moving averages. These smoothed changes are highly correlated (0.76).

While ADP data are only available as of 2010, BLS private-sector employment data goes back to 1938 and shows a clear relationship between the number of jobs and business cycles. Employment falls in recessions and rises in expansionary periods. The close relationship between these measures allows us to track any notable and sustained divergence, which would indicate a concern about the quality of government data.

Data Accountability Dashboard

Revelio vs. BLS employment data

    

Revelio Labs generates monthly U.S. employment estimates by counting social networking profiles on sites like LinkedIn. Total nonfarm employment changes from Revelio generally track BLS-based estimates.

Seasonally adjusted and nonseasonally adjusted estimates from Revelio are released monthly by industry, occupation, and geographic region. National data are available as of 2021. The data are normally published the day before the BLS employment report is released. Historically, Revelio’s monthly change usually falls below the BLS estimate, but over relatively short periods of time, the data series do tend to rise and fall together.

Data Accountability Dashboard

Challenger, Gray & Christmas vs. BLS unemployment rate

    

The Challenger job cut report data are somewhat noisy on a month-to-month basis, but spike noticeably during recessions.

Challenger, Gray & Christmas collects its job cut data by tracking public announcements made by U.S. companies in both the private and public sectors. The job cuts can include cuts in multinational plants (i.e., outside the United States). The report has been published monthly since 1994 and is typically released at the end of every month or the first week of the following month. The figure shows that large increases in announced job cuts occur in recessions (and when the unemployment rate spikes).

Of note, the spike in layoffs in spring 2025 was partially driven by announced layoffs in the federal government.

Data Accountability Dashboard

State-level UI claims vs. BLS unemployment rate

    

Monthly changes in unemployment insurance claims track the unemployment rate and provide a useful indication of recessionary periods.

While the U.S. Department of Labor (DOL) aggregates unemployment insurance (UI) claims data and is the source of the national data, it relies on administrative data processed at the state level that are generally posted on state government websites, potentially allowing a real-time accuracy check if concerns are raised about the accuracy of data released through the DOL portal. During the shutdown, the number of initial and continued claims has been updated weekly on the 539 report, a DOL-compiled dataset based on information submitted by state unemployment insurance offices. Right now, the data are only available on a nonseasonally adjusted basis because of the shutdown. The figure displays continued (or insured) UI claims and the unemployment rate, both as 12-month moving averages to remove some volatility and seasonality.

Continued UI claims closely track the unemployment rate: They spike during recessions and fall during economic recoveries. The close relationship between UI claims and the unemployment rate allows us to track any notable and sustained divergence, which could indicate a concern about the quality of government data. More information on the UI claims data, including initial claims, federal claims, and state-specific data, is updated weekly on EPI’s UI claims page.

Data Accountability Dashboard

Google Trends vs. BLS unemployment measures

    

Google Trends provides real-time data on the relative frequency of search terms for a given keyword, category of keywords, or a topic. With the right search terms, we can construct an index that tracks the overall unemployment rate

Google Trends is a publicly available database maintained by Google that provides Search Volume Indices. Search Volume Indices are a measure from 0–100 of the relative search intensity (number of searches for a given keyword divided by total searches) by geographic location and period. The data are updated in real time and are available from 2004 onward.

Google Trends data can be benchmarked to several different economic indicators. In fact, academics have used Google Trends data to “nowcast” GDP, private consumption, unemployment, recessions, and health outcomes. The figure shows the monthly average of select labor market-related search terms and the unemployment rate. The Google Trends relative search frequency for these terms tracks the unemployment rate and spikes during recessions. The close relationship between these measures allows us to track any notable and sustained divergence. Any prolonged increase in the search frequency of these select search terms could indicate a recessionary period.

Data Accountability Dashboard

Economic policy uncertainty vs. recession indicators

    

The economic policy uncertainty (EPU) index clearly responds to business cycle downturns—spiking sharply during the recessions of the early 1990s, early 2000s, late 2000s, and the COVID-19 pandemic.

The EPU index is calculated by Baker, Bloom, and Davis, and their full methodology can be found here. The index aggregates information from three basic components: search results from 10 large national newspapers measuring the volume of news articles discussing economic policy uncertainty; the number of federal tax code provisions set to expire over the next year; and the degree of disagreement among economic forecasters about future levels of key economic variables.

While the EPU is clearly cyclical, it does rise during some non-recessionary periods, most notably in the early 2000s and from 2011–-2013. The early 2000s increase is almost surely driven by the Iraq War. From 2011–2013, a rolling series of economic crises in the Eurozone, as well as short-term extensions of expiring provisions from the tax cuts passed in the first George W. Bush administration explain the spikes. The very large spike in early 2025 was related to the “Liberation Day” tariff announcements.

Data Accountability Dashboard

University of Michigan consumer sentiment data vs. recession indicators

    

Sharp falls in consumer sentiment are often followed shortly by recessions.

The University of Michigan consumer sentiment index has been calculated since 1960 (and has been calculated monthly since 1978). The index is derived from answers to five survey questions that have categorical answers (that is, their questions provide survey respondents with two to three possible responses to choose from, for example, “Would you say that your (and your family) are better off, or worse off financially than you were a year ago?”).

For each question, the University of Michigan researchers calculate a relative score for answers that subtracts the unfavorable responses from favorable responses. The sum of responses is then compared with a base value from 1966.

The index reached lows in 2022 that were comparable with most recessionary periods, despite a very strong economy. The clear explanation for that was the sharp inflation spike in late 2021 through mid-2022. Early 2025 saw similarly low measures, likely driven by concerns over the potential effects of tariffs.

Because the 1966 base year was a long time ago, it seems fair to ask if there are structural changes that might reliably change the level of consumer sentiment over time. For example, if rising inequality (or anything else) made U.S. households consistently less happy about their relative economic situation over time, they might generally have a lower “baseline” level of favorable sentiment.

To assess this, and to evaluate whether the University of Michigan consumer sentiment index might be useful for assessing the broader health of the economy, the figure below shows changes in the level of consumer sentiment and changes in inflation-adjusted personal consumption expenditures (the broadest level of household spending). The theory is that consumers’ sentiment about the economy should correlate positively with their actual spending patterns. The pattern is clear: Changes in consumer sentiment do indeed coincide tightly with changes in consumer spending.

Data Accountability Dashboard

Data Accountability Dashboard

Chicago FED's flow consistent unemployment rate (FCR) vs. BLS unemployment

    

The Chicago Federal Reserve flow-consistent unemployment rate (FCR) combines several sources of labor market data to predict monthly unemployment rates. The Chicago Fed FCR closely predicts the official unemployment rate published by the Bureau of Labor Statistics (BLS).

Twice a month, the Chicago Federal Reserve publishes the Real-Time Unemployment Rate Forecast, which predicts the BLS unemployment rate in advance of its official release. The key ingredient in this prediction is the Chicago Fed’s flow-consistent unemployment rate, which is in turn a prediction of Current Population Survey job finding and separation rates using real-time data like UI claims; Google Trends index for unemployment; Bloomberg consensus unemployment rate forecasts; Indeed and Lightcast job openings; ADP employment levels; weekly Morning Consult unemployment and job search activity; Conference Board labor market differentials; and JOLTS layoffs, discharges, and hiring rates. As a result, the Chicago Fed labor market indicators are partially based on U.S. government data, but they can be extended even in the absence of government data releases.

House Republicans wanted to find a way to defray the cost of the tax cuts they passed for the richest households in the country. They chose to slash programs helping some of the most vulnerable families—including Medicaid and subsidies that let people buy health insurance through the Affordable Care Act (ACA). This direct transfer of income from vulnerable families to the richest can be summarized in a striking symmetry: If the bill becomes law, the annual cuts to Medicaid would average over $70 billion in coming years—the same amount millionaires and billionaires would gain in tax cuts each year.

These health care spending cuts would lead directly to millions of people losing health insurance. A widely cited Congressional Budget Office (CBO) estimate of 13.7 million people losing coverage was preliminary, and the CBO noted that more-precise estimates to come would “somewhat further increase the estimated number of people without health insurance.” More recently, the Center on Budget and Policy Priorities estimated coverage losses of at least 15 million.

The cuts to Medicaid would also damage local economies and workers throughout the United States. Even during times when the national unemployment rate is low, tens of millions live in weaker local economies with higher county unemployment rates and far less ability to weather sharp spending shocks like a Medicaid cutback would provide. In fact, a disproportionate share of the House bill’s Medicaid cuts would almost surely fall exactly on these weaker local economies. We estimate that roughly 27 million workers are in these weaker local economies, and that Medicaid cuts could depress local spending enough to force the loss of 850,000 jobs.

Download the Unemployment rates and Medicaid coverage by US county spreadsheet

Republicans believe their strongest argument in favor of the health insurance cuts in this grotesquely unequal bill is that they’re simply demanding that able-bodied adults receiving Medicaid must work. Every part of this argument falls apart once the details of this bill’s cuts and their ripple effects are examined. Concretely:

• The bill’s cuts are broader and more expansive than just the work requirements for able-bodied adults.
• It is decisions made by employers and policymakers, not individual workers, that are most responsible for any particular worker being able to rack up enough work in a given month to satisfy the work requirements in the House bill.
• The more workers that are covered by public insurance programs like Medicaid, the better it is for workers’ wages—cutting Medicaid hence will harm wages going forward.
• Taking health insurance away from 15 million people will impose costs on other groups—insurance premiums for other workers could rise and state and local government contributions for uncompensated care will increase.
• Health care providers and hospitals will be forced to downsize and close, particularly in rural areas. This will not just reduce residents’ access to care—it will cause huge disruptions to local economies.

House budget cuts are not just work requirements

The House budget would cut roughly $715 billion from Medicaid over the next decade, according to preliminary estimates. The House bill also fails to extend premium tax credits that made insurance more affordable through the Affordable Care Act, constituting an additional $335 billion cut over the next decade. Adding these health insurance cuts together implies more than $1 trillion in cuts over the next 10 years. The work requirement provisions in the House bill are scored to yield $280 billion in savings. In short, the House bill’s cuts are far more expansive than just the work requirements.

Policymakers and employers, not workers, decide if work is available for all who want it

Work requirements are often defended as providing an incentive to work. But the U.S. provides essentially no cash welfare at all to non-workers—the incentive to work is that it is the only way for the non-wealthy to live free of grinding poverty. Policy failures and the whims of employers—not insufficient incentives—are what stop people from engaging in steady work.

Only policymakers—like the Federal Reserve, Congress, and the president—have the power to ensure that unemployment remains low and jobs remain plentiful in the U.S. economy. When they do this, hours of work in the poorest families rise sharply—proving that it is availability of jobs, not individual incentives, that determine how much work these families can secure.

But even when the national unemployment rate is low, the low-wage labor market—the one most relevant to those facing Medicaid’s work requirements—sees huge amounts of churn. About 20% of workers in the bottom quarter of the overall wage distribution will see a spell of joblessness in the next three months.

Another way to illustrate this churn: About 2 million workers are laid off in the U.S. economy every single month. If these workers do not near-miraculously find new jobs instantly, they will risk being ineligible for Medicaid while having no access to employer-based coverage either. Again, it is failures by policymakers and the decisions of employers that create an unstable and insecure low-wage labor market that are the real barriers to steady work, not individual incentives.

More public health insurance coverage—like Medicaid—is good for workers

U.S. workers would benefit greatly if health coverage was delinked from specific employers and instead provided by the public sector. A pro-worker policy would be expanding the coverage provided by public plans like Medicaid, not cutting it.

Most fundamentally, the labor market is unequal—employers clearly have power advantages relative to most workers. Aside from collective bargaining, the main way workers should in theory be able to wring better conditions and wages from employers is by threatening to quit and move to other jobs. But this threat is not credible if overall unemployment is high (which it is far too often in the U.S.), and it is often not credible due to all sorts of frictions in the job market keeping workers from seamlessly changing jobs.

These frictions can stem from all sorts of mundane sources like low information about other opportunities, too few employers in their field, or insufficient child care resources near employers. But because access to health insurance for non-elderly people in the U.S. runs mostly through employers, workers’ need to assess what any new employer’s health insurance policies might mean for their well-being is a huge friction. If more U.S. workers relied on public insurance like Medicaid, this reduced friction could lead to a better-functioning labor market and allow workers to wield greater power in securing wage increases from employers.

Further, public insurance programs like Medicaid and Medicare have historically done a much better job in containing costs than employer-based plans. Every $1 saved in health care costs is $1 that could instead go into workers’ paychecks. Getting more workers covered by public plans that are better at saving these dollars would be good for wage growth.

Finally, employer-based health insurance is not free—it is paid for in the long run by extraordinarily large subsidies from the federal government and workers foregoing wages in lieu of health insurance coverage. The public subsidies stem from workers not having to pay taxes on the compensation they receive in the form of employer contributions to health insurance premiums. The value of this public subsidy is more than half as large as federal Medicaid spending. This subsidy for employer-provided health insurance is greater for more highly paid workers, and given the higher cost of employer-based insurance, can easily be greater on a per-worker basis than the average cost of Medicaid.

The wages foregone in lieu of employer contributions to health insurance premiums are also large. In 2023, employers paid over $900 billion in insurance premiums, an amount that would likely have gone to wages if employers were not the main payers of health insurance in the United States. Further, because the cost of any individual health insurance policy is a fixed amount, employer-provided health insurance is essentially financed by a flat tax on workers, which means it takes a much higher share of wages from lower-paid workers. It has been estimated that this implicit flat tax system costs non-college workers roughly $1,700 per year relative to a system of public insurance (like Medicaid) financed by proportional taxes.

All in all, workers should want more people in the labor force able to be covered by public plans, not fewer. Unraveling the too-small public coverage we already have will just see increasing downward wage pressures from rising health care costs and frictions in the labor market.

Removing health insurance from 15 million people could raise health care costs for all

Taking health insurance coverage away from 15 million people will obviously impose the greatest harm on the newly uninsured group. They will face greater financial stress and likely forego needed health care. Their health and living standards will suffer.

But as much as House Republicans want to defect from the social contract regarding health coverage, it remains the case that there is widespread agreement among Americans—enshrined in law and policy—that simply withholding needed health care from sick and injured people who cannot pay for it should not be done. So, if somebody with diabetes is kicked off Medicaid and can no longer access their insulin and falls into an acute medical crisis, they will be cared for—too late to salvage their full health and at much greater expense—in emergency rooms. All of this will greatly exacerbate a significant problem with emergency department overcrowding, boarding, and wait times. And it should be obvious that this irrational deferral of care until more damage has been done is not helping this person become a more productive potential worker.

All of this means that the rise of uninsurance stemming from the House bill will cause a flood of uncompensated care—health care delivered in places like emergency rooms that the patient themselves cannot pay for because they’re uninsured. State and local governments will foot the bill for much of this uncompensated care. Some of it might be passed on to higher prices generally for health care, pushing up premium costs and out-of-pocket costs for even those who remain insured.

It is worth noting the main target of the House bill’s Medicaid cuts are the Medicaid expansions that were passed as part of the Affordable Care Act—and these Medicaid expansions made a huge dent in the problem of uncompensated care that was endemic before the ACA’s passage. Uncompensated care costs essentially fell by a third due to the ACA’s passage, almost entirely because of its Medicaid expansions.

Health care is a key engine of local economies that will be damaged by these cuts

The House bill would lead to health care providers losing $770 billion in payments over the next decade. Because the ACA’s Medicaid expansion was so crucial to keeping rural hospitals afloat in the past decade, a sharp rollback would inevitably force shutdowns and cutbacks at medical providers and hospitals, particularly in these rural regions.

This would be a disaster not only for access to health care but also for local economies. Health care is by far the largest employer of any sector in the United States, employing 18 million workers. It’s also a key source of good jobs—the unionization rate in the hospital sector is twice as high as the rest of the private sector.

In 2009, the Obama administration used increased federal payments to Medicaid as a key strategy in their American Recovery and Reinvestment Act, a plan to boost employment and end the Great Recession. This worked spectacularly well—the gold standard study examining this policy found that that each $1 billion in additional spending to Medicaid resulted in 38,000 jobs gained, with more than 75% of the jobs being gained outside of the health sector as Medicaid coverage boosted disposable incomes and hence consumption spending across all sectors. Adjusting for inflation, this would imply that each $1 billion spent on Medicaid in 2025 would see 25,000 jobs gained. This result means that Medicaid cuts will impose a sharp anti-stimulus to local economies. Jobs in health care will be cut, and three times as many jobs outside of health care will be cut.

It is true that overall macroeconomic conditions are different now than in 2009—a year that saw the steepest recession to that point since the Great Depression of the 1930s. It is possible that some local economies today might be strong enough to weather a Medicaid spending shock. But overall economic strength is not guaranteed to hold in coming years when these cuts will take effect. Several economic forecasters are predicting a high chance of recession over this time.

Further, even when the national economy is strong, there are still hundreds of counties with weaker economies. For example, the national unemployment rate was 3.6% in 2023. A rough rule of thumb holds that an unemployment rate that is 0.5% above the minimum rate it hit over the past year indicates a weak economy likely to enter recession. If we take this rule about unemployment rates over time and apply it to unemployment rates across space, we see that about a quarter of counties had unemployment rates 0.5% above the national average, with 27 million workers living in these counties. Medicaid cuts hitting these places—already economically weak and considerably more recession-prone than the nation as a whole—will absolutely trigger the strong anti-stimulus effects described above.

Worse, there is a strong positive relationship between higher-than-average unemployment rates and the share of a county’s population that is covered by Medicaid—as shown below in Figure A. In other words, the Medicaid cuts will destroy health care jobs and cause other spillover job loss in exactly those areas that can weather this the least.

Figure A

Let’s assume that the research showing 25,000 jobs are lost for every $1 billion cut in Medicaid spending held today only in those counties with unemployment rates at least 0.5 percentage points higher than the national average. Assume as well that Medicaid cuts will fall in proportion to a county’s share of adults ages 19–64 who are enrolled. This implies that roughly half of the spending cuts (48.5%) will fall on counties whose local economies are not strong enough to weather them without seeing job losses in response. Multiplying the size of these cuts in billions of dollars by 25,000 jobs implies that 850,000 jobs in weaker local economies could be lost—a number that would increase the number of unemployed in these counties by upwards of 40%.

Conclusion

The damage from the House bill’s cruel and logic-free cuts to Medicaid and other health services will fall mostly heavily on the 15 million who will lose health insurance. But the damage won’t be contained there—nearly everybody else in the U.S. will feel the harms of less efficient health care and labor markets, higher needs to pay for uncompensated care, closures and cutbacks in health care providers and hospitals, and even damage to entire local economies that are reliant on this health spending. For the very rich who will see enormous tax cuts from this bill, it all might end up being a good deal. For everybody else, it will not.

In recent decades Americans have seen a huge increase in trade (flows of exports and imports). This influx in global trade has posed significant challenges to U.S. workers. The trade flows (and policy responses to them) have contributed to anemic wage growth for workers without a college degree, caused severe damage to manufacturing communities throughout the country, and represent an increasingly unsustainable organization of global production and consumption.1 People in the U.S. have good reason to be conflicted about the challenges that globalization and the rise in trade pose to their working lives and communities, and the potential benefits trade can create.

U.S. workers have also watched as too many policymakers enthusiastically push a proliferation of trade agreements. These agreements have accelerated trade flows and carved out corporate-driven “rules of the game” for a globalization that puts almost no priority on the well-being of regular people in the United States or the resilience and sustainability of the overall economy. Most of the Washington, D.C., establishment has supported these trade agreements, promising a supposed influx of good jobs and increased standards of living that would come because of increased trade.

Given this history, it is no surprise that many of these workers want something different from policymakers regarding our nation’s approach to globalization. And the Trump administration’s current approach is certainly different—it is even worse than what came before. This approach is motivated by ever-changing and contradictory goals and is built entirely on threats of historically high and broad-based tariffs that change by the day (or even hour) rather than opportunities for mutual benefit from cooperation.

Ratcheting up tariffs across the board is not a serious response to, nor will it solve, the larger challenge of lackluster wage and job growth for noncollege workers. Lower tariffs were not a significant driver of the larger trade flows that pressured wages for these workers in recent decades. This is not to say that there are not real problems with the U.S.-led global trading system nor useful changes to be made to policies regarding globalization. But historically high and broad tariffs are not among them, and domestic policy choices have had much more to do with the wage suppression most U.S. workers have experienced in recent decades (Mishel and Bivens 2021).

In this paper, we provide a rough outline for how those concerned about the economic plight of working-class Americans should approach issues concerning globalization and trade. Often the best approach to issues intersecting with international trade does not directly implicate traditional trade policy tools (like tariffs). For that reason, we say that these recommendations constitute a progressive approach to globalization in the 21st century.

Key challenges that globalization poses to U.S. workers:

• Growing import flows from lower-wage nations and threats to offshore jobs put modest, but steady, downward pressure on wages of workers without a college degree.
• Chronic trade deficits have reduced employment in U.S. manufacturing and raised our foreign debt.
• The inflation stemming from pandemic and war shocks between 2020 and 2024 highlighted the fragility of global supply chains. These supply chains should be strengthened to prepare for a future prone to larger and more frequent shocks.
• Competition from foreign trading partners that permit unfair and abusive labor practices has made labor artificially cheap.
• A failure to harmonize climate regulations internationally threatens to see greenhouse-gas polluting production simply migrate away from the United States to low-standard locales rather than being reduced globally, undermining U.S. industry and forcing the burden of adjustment onto workers in greenhouse gas-intensive sectors.
• A failure to harmonize corporate tax treatment internationally allows corporations to play countries off each other and ensures that some countries will almost always have incentives to act as tax havens, making it harder for all countries to impose reasonable taxes on corporate profits.

Although policymakers from both parties have too often been reluctant to admit to the problems created by a U.S.-led, corporate-friendly global trading system, none of these problems presents insurmountable challenges. Our key recommendations to solve the central problems of globalization are the following:

• While trade flows have put downward pressure on wage growth for large portions of the U.S. workforce in recent decades, trade policy would have only weak and unreliable effects in reversing this. Instead, policymakers should strengthen key domestic policy bulwarks that underpin workers’ leverage and bargaining power to boost wage growth. These domestic policies include a substantial increase in the minimum wage, protections for workers to freely associate and bargain collectively in unions, and full employment macroeconomic policy management, which will have larger and more reliable effects on wage growth.
• Reducing damaging trade deficits cannot be solely achieved through trade policy unless it is so restrictive that it functionally returns the country to an isolated regime with no trade at all. Instead, more balanced trade will only result from macroeconomic policies consistent with lower trade deficits, including exchange rate management and a reasonable mix of fiscal and monetary policies.
• Supply chain resilience is important, yet individual businesses will underinvest in it without public support. Collapsing supply chains initially sparked the post-COVID-19 inflationary spike across the globe. Supply chains remain vulnerable to disruptions from natural disasters, geopolitical events, and even human and computer errors. Unless one is entirely confident that these events will never happen again, the costs of supply chain fragility are potentially large enough that it’s worth using policy measures to build up supply chain resilience. Trade policy tools like tariffs and subsidies are potentially useful measures here.
• The U.S. should reward countries that respect labor rights with preferential access for their imports and should incentivize other countries to enforce labor standards. This can be done by imposing tariffs that shrink as countries improve in upholding labor rights. These tariffs cannot fully protect U.S. workers from competition from countries where exploitation makes labor cheap, but tariffs can provide some buffer from this, and imposing them provides a valuable political signal that simple fairness matters for trade policy (as it does for all other types of policy).
• Effective climate policy must be global, if not universal. In terms of driving destructive climate change, it does not matter where greenhouse gas pollution originates. National policies that raise the price of pollution locally but simply push emitting factories offshore fail to deal with the overall problem while putting domestic industries at unfair disadvantage. Until there is a more coordinated global approach to greenhouse gases (a global carbon tax or something similar), national governments should be willing to leverage trade policy tools (like tariffs tied to the intensity of greenhouse gas emissions involved in producing imports) to promote lower-pollution industries while avoiding “carbon leakage,” reduce global emissions, and incentivize industry investments in carbon-reducing technologies.
• International coordination of tax policy that ensures large multinational corporations pay their fair share in taxes would help U.S. workers far more than either higher tariffs or more trade agreements. The global tax system currently provides easy access to tax havens for corporations and encourages the offshoring of both paper profits and real factories away from the United States. Much of this problem can be solved unilaterally, but even the remaining problems constitute a far more important and pressing target for useful international coordination than further trade agreements do.

Policy recommendations to address these challenges

In this section, we provide some high-level recommendations about how policies should address globalization’s challenges.

Trade policy can do little to spur wage growth, but domestic policies would be much more effective

The production of imports from lower-wage nations tends to intensively use noncollege labor relative to U.S. exports. This means that the pattern of trade flows between these nations and the U.S. reduces the demand for noncollege labor in the United States, as imports displace more noncollege labor than exports support. Hence, trade flows put steady, albeit modest, downward pressure on wage growth for noncollege workers, a group comprising over 60% of the workforce (EPI 2025). The downward pressure on wage growth is nontrivial. Between 1979 and the mid-2010s, these trade flows likely depressed wages of noncollege workers by between 5%–6% (Bivens 2013; Autor, Dorn, and Hanson 2011). For workers who have seen extremely slow growth in wages over this entire period, another 5%–6% of wage growth would have been most welcome.

Crucially, this downward wage pressure stemming from trade flows does not just affect workers in tradeable industries. It spills over and puts downward pressure on wages for noncollege workers throughout the economy. Further, the wage suppression that trade flows imposed on noncollege workers allowed income gains for college-educated workers and business owners. 2 Yet policymakers never offered compensation to noncollege workers at anything close to the scale of this redistribution of income away from them. Instead, policymakers offered vague promises of retraining and empty assurances that trade was always “win-win.” This policy neglect added a deep insult to the injury of trade-induced wage suppression for these workers.

Yet it is important to remember that this policy neglect was not confined to globalization. In fact, nontrade forces supported by intentional policy decisions were putting far more intense downward pressure on wages than trade flows did.3 One aspirational benchmark for wage growth is economywide productivity growth. In the 30 years after World War II, broadly equal wage growth among all workers was clearly a target for policymakers who supported strong institutions (from unionization to fast-growing minimum wages to the maintenance of full employment) to meet this target. But over the 1979–2019 period, wage growth for noncollege educated workers decoupled from overall productivity growth, and as productivity growth continued, worker wages lagged behind—cumulatively by close to 50 percentage points over this period.

Trade competition certainly contributed to this decoupling and stagnation of wages. But analysis shows that nontrade sources explain three-quarters or more of the entire wage suppression these workers experienced in this time (Mishel and Bivens 2021). Reversing the nontrade forces that have contributed to wage suppression would do far more to help noncollege workers than any policy that could influence trade flows. Further, besides these nontrade forces having more force in boosting wage growth, they are also far more reliable in their effect. The policy levers available to influence trade flows are generally weak and unreliable unless taken to utterly extreme levels.

Finally, while growing trade flows with lower-wage nations reduced wage growth for noncollege labor in recent decades, they also boosted business profits and wages for workers with a college degree. Using tariffs to reverse these trade flows might, after long periods of time, lead to a reorientation of production in the United States that boosts demand for noncollege labor and raises their wages (though it might not). If tariffs did lead to this production reorientation, however, it would also lead to reduced wages for college-educated labor and lower profits, and the decline in college wages and profits would be larger than the increase in noncollege wages.

To be clear, this distributional shift toward noncollege labor and away from college-educated labor and profits would be a progressive outcome, and if it was the only option available to policymakers to make noncollege wages rise faster, we would be in favor of it. But it would be an extremely inefficient way to boost noncollege workers’ wages. Other wage-boosting policies like increased unionization or maintenance of full employment would not clearly lead to overall growth declines and might even boost growth. In short, while rising trade flows have put downward pressure on noncollege wages in recent decades, using the tool of tariffs to reverse this would be an extremely inefficient way to raise noncollege wages relative to other available tools.

Macroeconomic policies supporting a ‘strong’ dollar are the real causes of damaging trade deficits

Trade deficits are driven near entirely by the value of the U.S. dollar being too high to balance imports and exports—an outcome that can be traced to macroeconomic policy choices.4 A high value of the dollar makes imports cheap to U.S. consumers and makes U.S. exports expensive on global markets. This, in turn, leads to an excess of imports over exports. It is often taken as given that the United States should pursue a “strong dollar” policy, and that has often been the implicit (sometimes even explicit) goal of Treasury departments during both Republican and Democratic administrations. This bias toward dollar strength has led directly to toleration of excess trade deficits.

A rule of thumb for thinking about policies to reduce trade deficits and boost manufacturing is simply that if a given policy does not lead to a reduction in the value of the U.S. dollar, it will not have any traction in reducing trade deficits. The value of the U.S. dollar is driven by the demand and supply of dollar-denominated assets in global markets—traditionally called the capital account of the United States’ international balance of payments and now sometimes referred to as the financial account. When the demand for dollar-denominated assets is high relative to supply, the dollar rises in value and vice versa (Blecker 2009).

This rule of thumb is why tariffs are highly unlikely to be effective in reducing U.S. trade deficits unless raised to prohibitive levels. Tariffs actually raise the value of the U.S. dollar, which causes exports to fall roughly in proportion to the import declines following imposition of tariffs. This effect is compounded by the fact that many U.S. exports today contain substantial imported content, which causes export prices to rise directly in response to tariffs.5

Currency interventions from foreign governments

The demand for and supply of these dollar-denominated assets is set by macroeconomic policy decisions. One such decision is to allow the capital account to be influenced by intentional decisions of foreign governments. Often, for example, the Chinese and Japanese governments have intervened in global financial markets to purchase dollar-denominated assets to keep the demand for dollars high and to subsequently allow their own exports to gain a cost advantage in U.S. consumer markets. U.S. policy encouraged such policy actions through trade agreements that incentivized offshoring manufacturing production and strong support for financial liberalization that exposed countries to excessive risks of currency, banking, and financial crises.

The role of private capital flows

Another decision is to allow the capital account to be influenced by speculative private capital flows, even if they lead to an uncompetitive value of the dollar. In the late 1990s, for example, capital flowed from European countries to the United States largely due to European investors looking to buy rapidly appreciating U.S. corporate equities. When the U.S. stock market bubble eventually popped, the flow of capital from Europe largely dried up, and the dollar lost considerable value relative to the euro. This reversal led to a welcome decline in the U.S.–euro area trade deficit in the early 2000s. Until the end of 2024, a similar trend seemed to be occurring as the U.S. stock market had seen very large gains relative to those in Europe. This was associated with a large increase in the dollar’s value in recent years. The recent sharp decline of U.S. stock markets has not been mirrored in Europe, so some welcome relief from chronic upward pressure on the dollar stemming from these capital flows may well arrive over the next year.

The safe haven of the U.S. dollar during financial crises

As liberalized global financial markets have grown more volatile and prone to crisis (Reinhart and Rogoff 2011; Claessens and Kose 2013), nation states and financial institutions have sought to insulate themselves by accumulating ever-greater reserves of U.S. dollar financial assets. This demand to acquire dollar-denominated assets led directly to upward pressure on the dollar, which, in turn, led directly to these countries running large trade surpluses (that is, selling more exports to the United States than the imports they buy from the United States). This practice of self-insuring against systemic financial risks caused by liberalized global markets accelerated following the 1997–1998 Asian Financial Crisis, when countries learned it was too costly to depend on external institutions like the International Monetary Fund to help manage these risks.

When instability threatens international capital markets, investors and financial institutions “flee to safety,” meaning they sell off relatively risky assets and buy relatively safe U.S. dollar assets. The worsening of the dollar’s overvaluation occurs at a time when U.S. exporters are under the highest stress. The upshot of all of this is that a more effective international regime to aid countries facing currency and financial crises could reduce the need for countries to “self-insure” by trying to build up dollar reserves. This would be good for both the self-insuring countries who could now use precious financial resources on other social goals and for U.S. trade deficits.

Fiscal and monetary policy choices

Fiscal and monetary policy decisions are other macroeconomic policy choices affecting the U.S. trade balance. In regard to fiscal policy, when the U.S. economy is near full employment, federal budget deficits can push up trade deficits. If budget deficits run at full employment lead to higher interest rates (as they often do), this will lead foreign investors to demand more dollar-denominated assets to earn these now-higher rates. Increased demand for U.S. assets, in turn, causes the dollar to appreciate and the trade deficit to expand.

In regard to monetary policy, the same dynamic holds when the Federal Reserve raises interest rates. Whatever the source, a widening spread between U.S. and foreign interest rates attracts more capital to dollar-denominated assets, and this causes a rise in the value of the dollar, which, in turn, harms U.S. net exports.

Strategies to manage the value of the dollar

Keeping the value of the dollar at a level that more closely balances imports and exports, hence, requires a range of macroeconomic strategies. The most controversial would see the U.S. engage in more active currency management to ensure that foreign influences—either intentional government policy decisions or destabilizing private capital flows—are not allowed to push the demand and supply of dollar-denominated assets out of balance. Currently, Congress requires the U.S. Treasury to monitor currency management by foreign countries and make biannual reports naming countries that undertake active currency management for competitive gain. In practice, Treasury has more often than not demurred on naming clear instances of currency management. (Treasury 2024).

The U.S. government has much stronger options than mere surveillance and naming to countervail trade-distorting currency practices of other countries. If, for example, a foreign government began buying dollar-denominated assets, the U.S. could simply begin buying assets denominated in the currency of the foreign government, thereby neutralizing the effect of the foreign governments’ intervention in the U.S. capital account.6 Another possible option is for U.S. policymakers to institute a “market access charge” such as the one proposed in the 2019 bill, Competitive Dollar for Jobs and Prosperity Act (2019) that would levy a small tax on the foreign purchase of U.S. dollar assets for countries maintaining sustained trade surpluses with the United States (Hansen 2017).

Running fiscal and monetary policies that are consistent with lower levels of interest rates would also relieve upward pressure on the dollar’s value and help close trade deficits. On the fiscal side, this simply means that when the economy is at full employment, deficits should not be increased or should even be reduced. The how of this deficit reduction at full employment is every bit as important as the how much in terms of its effect on the welfare of U.S. residents, but it is the how much that determines the degree to which deficit reduction can help pull down the trade deficit.7 On the monetary side, the Federal Reserve should set interest rates at the lowest level consistent with stable inflation and avoid periods when unnecessarily high interest rates put upward pressure on the value of the dollar.

The advantages of a stronger dollar

Among policymakers, the reflexive privileging of a “strong dollar” policy has contributed to chronic trade deficits in the United States. However, any change in the value of the dollar creates both winners and losers. A strong dollar, for example, makes imports cheap to U.S. consumers and foreign travel more affordable for U.S. residents. It also makes it easier for U.S. businesses both domestically and abroad to attract foreign capital for investment projects. It allows retailers like Walmart and Amazon to source goods more cheaply for resale. These are not trivial benefits.

The advantages of a weaker dollar

But a lower value of the dollar would bring its own significant benefits. Most importantly, U.S. exports would be on a much more level playing field in global markets. Export-oriented production in the United States would expand. Domestic businesses competing with imports would gain competitive breathing room and expand their production. The manufacturing sector in the United States would expand. The reduction in trade deficits would lead to less future income leaking out of the U.S. to foreign investors.

Globalized supply chains are fragile. Industrial policy and trade protection can support their resilience

In recent decades, multinational corporations have prioritized maximizing short-term profits, even at the expense of investing in the resilience of their supply chains. For example, a company that focuses on maximizing current profits might source all inputs from the single lowest-cost producer. They might also minimize the size of their inventories of key inputs to production since inventories, by definition, are inputs not being sold in the current period and generating profits.

This short-term focus both ignores risks to the company’s own operations from supply chain disruption and creates a negative spillover cost for other businesses and consumers that rely on their products. In the jargon of economists, underinvestment in supply chain resilience creates a negative externality, a cost of business that is absorbed by others besides the actor undertaking it.

Underinvestment in supply chain resilience is a valid target of industrial policy interventions, sometimes including trade protection. For example, businesses focused on resilience should spread production of key inputs among different producers to hedge against the risk of disruption at a key link in their production chain, even if this modestly boosted the current cost of producing these inputs.8 This could also include “reshoring” of key inputs if policymakers were worried about threats to resilience stemming from international conflicts that would stop the ability to source imports. One way to ensure this greater regional diversity (including a larger role for U.S. production) of key inputs could include trade policy measures like tariffs.

This logic lies behind the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed in the Biden administration. It offers subsidies for chipmakers to set up manufacturing facilities within the U.S., largely in hopes of avoiding the extreme shortage of chips that drove the first wave of inflation in the post-pandemic recovery. There are also undeniable geostrategic issues driving the CHIPS Act (for good or for ill), but even these geostrategic concerns largely center on the basic question of how to make the U.S. economy more resilient to economic shocks.

Further, a resilience-minded business could maintain buffer stocks of key inputs (such as semiconductor chips or fuel oil), so they can keep production flowing in the event of supply delays or disruptions. Failure to do so can create large costs for the firm and the broader economy, as evidenced by the inflation stemming from pandemic- and war-related supply shocks between 2020 and 2024. One obvious long-running example of this is the Strategic Petroleum Reserve, which the federal government can run down or build up to help smooth out fluctuations in energy costs.

Because individual companies are unable to ensure systemic supply-chain robustness, the rational incentive for them is not to incur costs trying to do this. This market failure defines a key role for policymakers in creating incentives for investments to make supply chains more resilient. Besides creating incentives for more private investment, there are also explicitly public roles for policymakers in bolstering resilience. One key example is having federal agencies monitor supply chains for areas of weakness. Providing subsidies or other public supports for investments in resiliency is a worthy priority for policymakers concerned with the challenges of globalization.

The U.S. should buffer its workers against abusive foreign labor practices and incentivize trading partners to strengthen labor standards

The U.S. should reward countries that respect labor rights with preferential access for their imports and incentivize other countries to enforce higher labor standards. Laws and regulations protect workers and businesses against having to compete with producers willing to exploit vulnerable workers within the domestic economy. Given that, there is good reason to be concerned when this kind of unfair competition is embodied in imported goods as well.9

Much of the wage differential between U.S. workers and workers in lower-income countries like Mexico and China is driven by productivity differentials. The U.S. economy is the most productive in the world, while productivity (defined as average output generated in an hour of work) is much lower in our lower-income trading partners. But some of the wage differential between the U.S. and other countries reflects not just productivity differentials, but the state of labor standards and enforcement.

Econometric analysis by Rodrik (1999), for example, shows that the level of democratic institutions has large and significant impacts on national wages. Rodrik finds that moving from a level of democratic quality that characterized Mexico in 1999 to a level characterizing the United States in that year could see wages in Mexico increased by up to 40% even with no change in productivity. Palley (2005) further finds that this effect runs entirely through greater degrees of democracy leading to higher levels of labor standards, measured by the number of International Labour Organization (ILO) “core labor standards” ratified in a given country. In short, even after accounting for productivity differences, labor can be made significantly cheaper through nondemocratic, exploitative labor regimes.

Widespread violation of labor rights and democratic norms is problematic for fairness and for the competitive position of U.S. workers. In countries like China, substantial investments in production technologies and human capital development (health and education) are narrowing the productivity gap with the United States, which should, in theory, lead to less wage pressure. But if the degree of labor exploitation intensifies, this can undo some of the useful lessening of wage pressure that should have accompanied Chinese productivity growth.10 Even when low-income countries might wish to boost labor standards, the destructive race-to-the-bottom logic of global competition among open economies can lead them to hold back for fear of losing export competitiveness and foreign investment attractiveness.

There are many potential benefits for both U.S. workers and for workers throughout the world to engage in economic competition along many margins. But the scope of useful competition should be focused on who can make their exports more efficiently, not who can more effectively serve up their own nation’s workers for exploitation—whether by local or multinational firms. When trade competes on low labor standards, few of the potential benefits from trade flow to workers.

Two different groups have resisted efforts to incorporate enforceable labor standards within the structure of existing international trade rules. On one side, there are developing country interests concerned about losing the comparative advantage of exploitation who see labor standards as a kind of neoprotectionism. In theory and reality, strong labor protections favor, rather than hinder, growth in late-developing economies (Storm and Capaldo 2018). On the other side are advanced economy corporate interests profiting from this exploitation by substituting workers in their own countries for oppressed workers offshore.

The linkage between trade policy and labor standards has a long intellectual history, yet very few workable proposals have been made during that time. For most of this debate, the primary focus was on whether enforceable labor standards should be part of the main treaties governing the global economy, whether it be trade agreements between countries or multilateral agreements like the World Trade Organization (WTO). But these efforts largely aimed to put the onus for enforcing labor standards on national governments that may not have the capacity, resources, or interest in upholding worker rights instead of on the companies profiting from the exploitation. Further, the efforts were hampered by the need to achieve unanimity among parties to an agreement.

A different model was instituted with the so-called Rapid Response Mechanism (RRM) in the U.S.-Mexico-Canada Agreement (USMCA) that entered into force in 2020. In addition to implementing new and improved labor laws in Mexico, USMCA’s RRM allows enforcement of labor standards at the factory level by an independent panel investigation (rather than a government inspector for whom incentives may be conflicted) when freedom of association and collective bargaining labor rights are violated. While the RRM represents a substantial policy innovation, it is not a match for the challenge of lifting labor standards at a systemic level. To date, only slightly more than two dozen cases have been alleged (ILAB 2025). Meanwhile, wages in Mexican manufacturing today are below their level in 2002 in inflation-adjusted terms and now stand at just 10% of U.S. manufacturing wages, or a mere $2.76 per hour.11

A ranking system for countries based on respect for labor rights

There is, however, no real reason why the U.S. must wait until new trade agreements are signed to begin the process of incentivizing better labor standards in trading partners and buffering U.S. workers from destructive competition. Rodrik (2019), for example, urged the U.S. to institute unilateral domestic safeguards.

The broad brush of our proposal is simple. The United States (perhaps led by the International Labor Affairs Bureau (ILAB) in the Department of Labor) should work with other international bodies and experts to develop a five-tiered ranking of countries around the world based on their respect for labor rights.12 Tier one would be countries that have legislated and successfully enforce the highest degree of labor protections around the world. Tier five would be countries whose labor regime is so odious that the U.S. should simply refuse to accept their imports until it is improved. In between, tier two countries should face a 5% tariff on all exports to the U.S., tier three countries a 10% tariff, and tier four countries a 15% tariff.

Are we positive these are the exact right number of tiers and tariff levels? Of course not, but that’s something that could be researched and assessed by the institutional staff assigned to this task. Further, this proposal is not meant to be calibrated to precisely solve the entire problem of differing labor standard regimes around the world. Instead, it is meant to show that the U.S. government takes seriously how labor is treated around the world and how that spills over onto workers in the United States. It is also meant to provide a competitive buffer against unfair competition that is a bit more than purely symbolic. The highest tariff level here (15%) would cut roughly in half the wage penalty imposed by being in the bottom tiers of democracy or labor standards enforcements identified by Rodrik (1999) and Palley (2005).

One difference between this broad proposal and some others that try to address the “social dumping” of exploitative labor practices is that it is country-based, not product-based. Often proposals aimed at integrating labor standards and trade policy require a finding that abusive labor practices provide a competitive advantage in a particular export good. We think a country-based approach makes more sense for two reasons.

First, it requires much less granular information to sort countries into tiers based on their general approach to labor rights than it does to investigate the cost structure of every possible export to the United States and how it might be impacted by labor practices at particular plants. Second, poor countrywide labor practices have powerful externalities that will pull down wages paid in exporting plants, even if the plants themselves have decent labor standards. Export plant owners only have to pay wages above those in the surrounding labor market to attract the workforce they need. If the surrounding labor market has wages suppressed by substandard national labor policy practices, then the exporting plant can have decent labor practices within its walls yet benefit strongly from the substandard national labor environment. Given these considerations, a commitment to provide better market access to entire nations based on their labor practices is a more workable policy.

The highest tariff level in this broad proposal would not be trivial, and it certainly might apply to large and important trading partners like China unless they make some welcome changes to their labor rights regime. In this sense it might sit uneasily with our skepticism about the use of tariffs in the previous section on trade deficits. We argue that it doesn’t. This labor standards-based tariff would be in effect regardless of the state of trade balance between countries. It does not aim to reduce trade deficits (and it cannot). Further, unlike the second Trump administration’s tariffs, it has a clear goal and specifies a clear road map for how trading partners could change their behavior to have it removed.

Harmonizing climate policies will help reduce greenhouse gas emissions and strengthen U.S. industry

Without harmonized climate regulations, individual countries risk the migration of greenhouse gas-intensive production to low-standard locales and the replacement of domestic production with carbon-intensive imports. This dynamic means that national climate policies and emissions regulations might simply push production to lower-standard locales rather than reducing global emissions overall. If, for example, the U.S. instituted a carbon tax and China did not, instead of reducing carbon emissions globally, some of the effect of this U.S.-based tax could be to push production that emitted carbon offshore to China. This “carbon leakage” would undermine the environmental goals of the carbon tax, and it would see U.S. producers of these emitting industries having to find new economic activity to engage in for no particularly useful reason.13

All of this is highly theoretical so far. The U.S. does not have robust regulations against carbon emissions (in part because of rollbacks to key greenhouse gas regulations during the first Trump administration), and no such regulations seem to be on the horizon. But if the day comes when some countries want to move ahead with stricter emissions controls, these countries should have the freedom to use trade tools like tariffs based on the carbon content of goods to ensure that production is not just moved offshore.

But until there are internationally harmonized climate policies, the progressive approach to globalization for the United States would be to leverage trade policies to herd the global economy toward reduced greenhouse gas pollution and other economic practices that threaten planetary boundaries critical for sustained life on Earth (Richardson et al. 2023). As with labor standards, U.S. trade policy could be designed to reward countries pursuing climate change-mitigating policies that incentivize foreign producers to reduce polluting emissions and clean up their manufacturing industries. The latter could be accomplished by forcing the internalization of costs of greenhouse gas emissions embodied in imports. By preventing “leakage” of emissions to foreign pollution havens, U.S. climate policy would also ensure that domestic, emissions-intensive industries would not be put at a cost disadvantage while shouldering the burden of adjusting to low-carbon production on their own.

The European Union is already putting such a policy regime in place with the Carbon Border Adjustment Mechanism (CBAM). This mechanism, in essence, levies a tariff on goods equivalent to the cost of greenhouse gas emitted during production in the country of origin. Beginning in 2026, EU importers will be required to purchase CBAM certificates covering the embodied emissions they import, consistent with EU pricing for equivalent emissions. Foreign producers that pay for emissions costs domestically will receive credits against fees due under the CBAM. Initially, the EU’s CBAM will apply to imports of iron, steel, and aluminum products; cement; fertilizer; hydrogen and electricity goods; with the mechanism expanding to cover imports from additional emissions-intensive industries, such as chemicals and polymers, down the road.

A policy to level the playing field in terms of emissions pollution is critical both to addressing the imminent climate crisis and to ensuring fair competition for U.S. industries. These industries are among the world’s cleanest producers but are up against other countries whose rapidly expanding production capacities are among the world’s dirtiest (Hersh and Scott 2021). During the Biden administration, the United States and European Union made strides toward a cooperative regime to limit unfair global competition from polluting imports with the Global Arrangement on Sustainable Steel and Aluminum. The agreement would provide a platform for onboarding like-minded countries intent on greening the most pressing industrial emissions (Mullholland and Meyer 2024; Malhotra and Tucker 2023). Legislators have already introduced a number of proposals for U.S. versions of a CBAM (JEC 2024).

This approach to limiting global greenhouse gas emissions and the competitive advantage for polluting countries also may conform to World Trade Organization (WTO) rules. The WTO carves out explicit rights for national regulation of “process and production methods,” recognizing that traded goods can be distinguished by how they are made, although WTO case law has yet to define clear boundaries for how such distinctions can be regulated (Benson et al. 2023; Porterfield 2023).

New international agreements should focus much more on taxes than on trade

Most of the benefits of freer trade can be secured by countries unilaterally and do not require international agreements. If a country decides that it is in their economic interest to allow imports to enter without tariffs, they do not need to strike an agreement with a trading partner to allow this. These unilateral tariff reductions are usually the largest source of estimated gains from trade by far.

Taxing capital income (profits from corporations and returns to wealth), however, is different. Here, effective policy requires some degree of international coordination. Without this, some countries will seek to become tax havens and carve out benefits for themselves at the expense of other countries’ ability to tax the richest entities in society. 14

The levers of international reform that would end tax havens and profit-shifting by rich corporations are well known and require political will to enact. One obvious lever would be for countries to agree upon and adopt a global minimum tax on corporate profits, regardless of where profits are booked. Proposals to adopt such a global minimum tax could, by themselves, raise roughly $500 billion over the next decade (Clausing 2021). The Biden administration made some promising first steps in cobbling together an international coalition to adopt and enforce such a tax—but future policymakers need to build on this progress, not tear it down.

Other reforms would build on Senator Sheldon Whitehouse and Congressman Lloyd Doggett’s No Tax Breaks for Outsourcing Act (2025), which would, among other things, fully tax the foreign income of U.S. multinational corporations, eliminate the tax-free return on foreign tangible assets, and eliminate a subsidy for excess profits from exporting that exists in current law. The overarching principle is that taxes owed should depend on the level of income, not the type of income (or one’s accountant’s creativity in claiming what type of income is being earned).

The current method of taxing capital incomes, and especially the corporate income tax, provides an incentive for corporations to shift both accounting profits and tangible production abroad.15 The current tax method essentially subsidizes firms to generate income outside of the United States. This is a perverse and inefficient setup, one aiming to serve the interests of rich corporations rather than the broad U.S. economy. It can be stopped with some straightforward policy changes.

Conclusion

Donald Trump’s approach to trade policy is bad for the United States and the rest of the world. But this does not imply that the pre-Trump global trade regime was working well. As usual, Dani Rodrik (2019) has put it best, arguing about Trump’s first term: “In a way, one of the worst consequences of Trump [emphasis added] is that he is reinforcing the views of the architects of the existing system as to why there shouldn’t be a change.”

The flawed approach inherited by Trump’s first administration perpetually sought to extend a set of international agreements and norms that privileged corporate interests over workers. From a progressive perspective, the bad part of this system was that it privileged corporate interests. From Trump’s perspective, however, the bad part was that it was a set of international agreements.

The Biden administration made some useful breaks with past practice on globalization. While the administration did not go far enough on many margins, it set off in a useful direction. The administration prioritized the effect of trade on workers, not just consumers, and didn’t prioritize corporate-led trade agreements. Key industrial policy targets aiming to solve market failures were put ahead of ideological fealty to free trade. In short, the Biden administration was not simply a return to the pre-Trump globalization regime that was so bad for American workers—instead they had tentatively begun charting a new path.

The second Trump administration has completely spurned this new path and doubled down on xenophobia and dominance displays as the center of trade policy. If this policy approach continues, it will lead to a poorer United States and a poorer global economy. It will not lead to a renaissance of good jobs in manufacturing.

At some point, a serious approach to the challenges of globalization will need to be reestablished. We hope this paper can help spark and inform that more serious debate.

Notes

1. See Bivens 2017 for an overview of the effect of globalization on American wages and how policy has amplified the harms of globalization. U.S. Bureau of Labor Statistics (BLS), “Table A-4. Employment Status of the Civilian Population 25 Years and over by Educational Attainment: Monthly, Seasonally Adjusted” retrieved from FRED, Federal Reserve Bank of St. Louis, February 12, 2025. David H. Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103, no. 6 (2013): 2121–2168.

2. The theory here (supported by evidence) is called the Stolper-Samuelson theorem. Its broad outlines are explained in Bivens 2017. The summary is that it predicts that trade with labor-abundant countries will lower wages in the United States and raise returns to other factors of production (like human capital).

3. See Mishel and Bivens 2021 for a decomposition of all the policy changes that led to wage suppression and wage inequality.

4. For a broad overview of trade deficits and their economic effects, see Blecker 2009.

5. See Steil and Della Rocca 2021 for an assessment of the economic effect of tariffs introduced in the first Trump administration. Another obvious issue in regard to tariff effects on the balance of trade is the retaliation that may occur.

6. See Gagnon 2020 for a discussion of countervailing currency intervention and its role in keeping trade deficits manageable for the U.S.

7. See Bivens 2019 on how different routes to deficit reduction imply very different outcomes for the welfare of most Americans. In a nutshell, deficit reduction achieved through higher levels of revenue raised progressively (mostly from rich households and corporations) can see deficit reduction go hand in hand with improved welfare for most, but deficit reduction achieved through cuts to income support, social insurance and public investment programs will harm welfare for the majority.

8. See Acemoglu 2021 for a broad discussion of how private investment decisions can lead to supply chain fragility.

9. See Rodrik 2019 for a good overview of these types of fairness concerns when domestic regulation and the rules of the global economy seem to conflict.

10. From 2010 to 2025, Chinese output per hour of work increased from 11% to 24% of the U.S. productivity level (ILO 2025a, 2025b). A recent ILO report (2025a) confirms China’s expanding use of mass detention and forced labor in export industries. Friedman 2014 shows how labor regulation in China has evolved to increase repression as wages and development have increased—a model that is being exported to other developing economy countries with increasing Chinese foreign direct investment.

11. EPI analysis of ILO (2025b) and BLS (2025a, 2025b) data.

12. There are numerous bodies around the world that collect detailed information on the state of labor rights in countries around the world. Freedom House periodically publishes a report on the global state of workers’ rights, the International Labour Organization and the International Trade Union Confederation annually track countries’ progress in protecting key labor freedoms, and the WageIndicator Foundation and the Centre for Labour Research collaborate to produce a tiered ranking of countries’ labor protections called the Labour Rights Index. In short, much of the raw material to provide a ranking of the type called for in this report already exists.

13. See Sato and Burke 2021 for an explanation of “carbon leakage.”

14. See Zucman 2015 for an overview of the problem of tax havens.

15. For evidence on this, see Kimberly Clausing, “Profit Shifting and Offshoring, Then and Now,” and Rebecca Kysar, “Profit Shifting and Offshoring in the New International Regime,” presentations for “Will the Trump Tax Cuts Accelerate Offshoring by U.S. Multinational Corporations?,” a conference hosted by the Economic Policy Institute, May 7, 2018.

References

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So far, the “stock market veto” has turned out to be nothing more than wishful thinking. In his second term, President Trump has continued to loudly proclaim his support for the anti-growth policies of broad and high tariffs and mass deportations. He has also added a new anti-growth twist of arbitrary and illegal firings of federal employees and cancellations of federal contracts. Finally, he has enthusiastically backed a U.S. House budget resolution that would slash disposable incomes for the bottom half of U.S. households. Besides being substantively unwise, these policy efforts have been undertaken with maximum chaos.

And the stock market has indeed rebelled. The S&P 500, for example, is down 8% in the last month.

This raises the question: Was there ever anything useful in the “stock market veto” view of the world? After all, there is no general correlation between stock market movements and what’s good for broadly shared growth, so it seemed odd to think a stock market veto would somehow come to the aid of the broader U.S. economy.

In what follows, we’ll present the good and the bad of stock market ups and downs and what they might mean for the trajectory of economic policy. In the end, it turns out that today the stock market and the economy are mirroring each other: Stock market weakness is reflecting broader economic weakness. In short, if there was ever going to be a “stock market veto” of broadly anti-growth policies, it is past time for it to kick in.

What does the stock market measure?

Most of the time when people are talking about the stock market, they are referring to an index that measures changes in the prices of stocks of a number of publicly traded companies. Examples are the S&P 500 index (which includes 500 firms) and the Dow Jones Industrial Average (which includes about 30 firms).

In theory, the stock price of any given firm reflects investors’ expectations about the returns they will see from holding its stock into the future. These returns include the annual dividends paid out from these firms to shareholders and the capital gain that would be available if shares were sold in the future (with the capital gain being the difference in price between when it is sold and when it was bought).

The stock market does not measure broader economic health

Because stock market prices generate a new data point every day (or even every hour), they tend to be discussed far more than broader measures of economic health. However, many know that the stock market has little to do with the economic health of U.S. households. For one, the stock market doesn’t tell us anything about jobs and wages. There are times when broad-based economic strength pushes up jobs, wages, and the stock market, and other times when broad-based weakness causes these all to fall together. But more often what is happening to stock prices gives us no insight into the wider economy. And as we will talk more about below, there are times when stock market strength can be a pure zero-sum transfer away from the wages of typical workers—reflecting stronger profits earned solely from successful wage suppression strategies.

Because most households depend overwhelmingly on wages from work as their primary source of income and not returns from wealth-holding, the stock market tells us nothing about these households’ economic situations. The wealthiest top 10% of households own over 85% of all corporate stock, and the top 1% alone own roughly 50%. Roughly half of all U.S. households have essentially zero invested in the stock market, even when including indirect investments they might have, like holdings in 401(k)s.

What causes stock prices to rise or fall?

There are dozens of reasons why an individual firm’s stock price might rise or fall. A drug company might announce the discovery of a new blockbuster drug. An oil company’s stock might rise if the global price of oil begins rising. For the stock market as a whole, it is usually macroeconomic trends that cause increases or decreases in stock indexes. But just because it is macroeconomic trends that drive overall stock indexes, this does not mean they always move in the same direction—sometimes favorable macroeconomic trends can push up stock prices, but sometimes they can actually push stock prices down.

Overall pace of growth

One macroeconomic influence that can affect stock prices broadly is expectations about the pace of economic growth in the future. If, for example, investors believe that economic growth will accelerate in coming years, this should (all else equal) lead them to believe that profits will accelerate, and this should lead to some combination of faster dividend growth or higher capital gains in the future. Expectations about the pace of future economic growth can be driven either by expectations of long-run productivity growth (how fast the economy can grow on average over long periods of time holding inputs fixed) or by expectations about the business cycle (i.e., whether the economy is about to enter or emerge from a recession).

Redistribution from wages to profits

A redistribution of income from wages to profits is another macroeconomic influence that affects stock prices. For any given rate of expected growth in corporate sector income, the value of owning stock rises if profit’s share of this income rises. A number of things influence this distribution of corporate income between profits and wages. A rise in monopoly power in product markets, for example, will boost profits and therefore raise the share of corporate income claimed by shareholders. Similarly, a decline in labor’s bargaining power in labor markets will also cause such a redistribution by boosting profits. For example, some estimates indicate that nearly half of the rise in real corporate sector wealth between 1989 and 2017 can be attributed to a zero-sum transfer from wages to profits.

Reduction in corporate income taxes

U.S. corporations pay income taxes on their profits. Reductions in this corporate income tax rate (either through legislation or tax avoidance strategies) will hence make any $1 in pre-tax income more valuable to investors, and this will broadly bid up the price of stock.

Interest rate movements

We’ve established that the price of a given stock represents investors’ expectations of the returns to owning this stock in the future. But whenever future gains must be assigned an economic value to compare with current values, one must use an appropriate discount rate, which measures how much more valuable $1 is today than $1 is a year from now. Even ignoring inflation, there are reasons for this discounting. For example, people are impatient and $1 in consumption today is valued more highly than $1 next year. Further, every $1 in consumption foregone today can be invested and yield more than $1 next year.

The measure of how much money invested today can earn over the next year risk-free is usually proxied by something like the rate of return to U.S. Treasury bonds, which are assumed to never default. As discount rates fall, the value of wealth today rises. This means that falling interest rates push up the current value (and price) of the stock market broadly. This effect is sometimes underrated in how powerful it can be. Say that you think stock prices generally reflect what investors believe returns will be over the next 10 years. In this case, a fall in interest rates from 7% to 3%—essentially the fall we have seen over the past 30 years in the U.S. economy—will boost the value of stock prices by almost 20%.

The Trump administration’s policy agenda is weakening the economy—including the stock market

The real value of the S&P 500 rose a stunning 27% in the last year of the Biden administration. Further, the share of corporate sector income claimed by profits instead of wages remains extraordinarily high in historical terms. Despite this, many felt after the election that stock markets would continue rising during the Trump administration because they inherited a fundamentally strong macroeconomy that would continue to generate profit (and wage) growth. Further, the inflationary spike of the immediate post-COVID recovery was clearly over, and there seemed to be some room for the Federal Reserve to reduce interest rates.

There was zero concern among investors that the Trump administration would raise taxes on corporations, and even some hopes that they would be cut further. Finally, the first Trump administration was a never-ending assault on institutions and policies that provide bulwarks to typical workers’ leverage and bargaining power in labor markets. These assaults had been successful in keeping real wage growth lower than one would have expected based on historical experiences with unemployment rates as low as what prevailed in the late 2010s. In short, as long as the second Trump administration did not do something extremely stupid to upend the strong inertial growth they were inheriting, their tax policies and their policy aim of redistributing money from wages to corporate profits were expected to bolster stock prices.

And yet stock prices have been falling in the past month as the Trump administration’s policy agenda comes into clearer view. The agenda is anti-growth and inflationary—a rare and bad combination. Slowing overall growth will slow profit (and wage) growth in coming years, which will depress stock prices. The administration’s illegal cutbacks to federal employment and contracts—and the spending cuts in the House budget resolution (if passed)—will drag sharply on economy-wide demand. The chaotic tariff policy and threatened mass deportations will constitute a large and inflationary supply-side shock. This will both slow growth and provide a real obstacle to the Federal Reserve continuing to cut interest rates.

The current Trump administration has predictably launched a number of attacks on workers’ bargaining power, and these might prove effective in boosting profits at the expense of wages. But the profit share of income in the corporate sector is already starting from an extremely elevated level, making further increases likely harder to attain. Further, the effect on stock prices of any such redistribution will likely be overwhelmed by the broader downward pressures noted above.

If a recession caused by the Trump policy agenda (as well as by any consumption cutbacks spurred by the falling stock market itself) is sharp enough, the Federal Reserve will cut interest rates. Given what we noted about the powerful effect of interest rate cuts on stock prices, this could halt the fall in stock prices and even provide some slight rebound. But by then the damage to the real economy— households’ jobs and wages—will have been done.

In short, while the stock market isn’t the economy, the stock market declines we have seen in recent weeks are genuinely worrying. They are a symptom of much larger dysfunctional macroeconomic policy that will likely soon start showing up in higher unemployment and slower wage growth for the vast majority. If ever there was a time for the “stock market veto” to activate, it is right now.