Two Truths and a Lie From Trump’s 2025 Macro Policy

Trump’s tariff regime has led to an extremely unique economic situation. While inflation for some goods is high, many other goods have little inflation, and new job creation is lagging. Any Keynesian economist could weasel their way around this, but it gives compelling evidence against the assumptions of their most revered models. The Phillips curve connects high inflation to high employment. It operates on the assumption that monetary factors drive employment rather than real business needs. However, this is put into question by the labor market’s softness even with the Fed’s lowered interest rates. The continued low demand for workers even in a Keynesian “low unemployment environment” suggests that companies are holding back from hiring for some reason not understandable to simplistic Keynesianism. The current macroeconomic situation puts into doubt Keynesian assumptions, provides evidence for the real factors behind employment growth, and shows how directly taxes play a role in increasing inflation.

Government spending is only a few hundred billion below the all-time high reached during Covid this year, despite Trump’s promises of efficiency and cutting waste at the beginning of his term. This high spending along with an interest rate reduction would be a textbook example of where Keynesian economists would expect unemployment to decrease. The relatively high rate of inflation would also suggest a booming economy in the Keynesian model. Of course, the main means by which inflation was tied to unemployment was through aggregate spending, which is not necessarily high in this situation, as firms are cautious about macroeconomic conditions. A Keynesian retort to this evidence would be that the government has not lowered the interest rate strongly enough, yet this would actually only make the inflation problem worse. The Federal reserve is caught in a bind, and they are paying for their incorrect understanding of the economy in indecision. The Keynesian obsession with aggregates is harming their ability to properly assess the situation and respond effectively. Even a non-economist could understand that businesses will be reluctant to increase hiring in our current environment of instability, yet Keynesian theories will be used to justify inflationary policies even as the fundamental assumptions of Keynesianism are strongly evidenced against.

The current unmooring of employment from monetary factors suggests that the real factors behind employment growth are plans for future expansion and the trade-off between labor and capital. AI has allowed many businesses to slow hiring even while increasing output. Some businesses have chosen to maintain productivity as they let some employees go. Artificial intelligence and other technologies have temporarily allowed employers to get more done with less employees. This technology is just one example of the many confounders that make it impractical to establish a causal link between monetary policy and employment. Technological shocks can account for far more employment level variation than the archaic Keynesian model would assume. The many constantly shifting factors influencing employers’ need for labor make employment level targeting an impractical moving target to structure monetary policy by. Additionally, government-caused uncertainty is greatly limiting the ability of businesses to commit to future expansion. Businesses must keep a far wider range of options open than they had to in the past to account for the extreme volatility of policy changes. Naturally, they will not commit to increasing employment if they cannot be confident that institutions will remain stable. Constant regulatory and monetary fluctuations hurt businesses’ ability to commit to future growth and increase employment.

The effect of tariffs on inflation in specific good categories clearly demonstrates the strong effect of taxation on inflation. The goods that are tariffed have experienced the greatest level of inflation. This should surprise no one, but it should make people more conscious of government-created inflation. Whether through tariffs or other forms of taxes, almost all increases in tax burden lead to some sort of price increase. Because producers bear a larger tax burden than most citizens, their desire to gain coupled with their ability to set prices means that no tax comes without consequences for the consumer. The idea that taxes can be constantly increased on businesses underestimates the true power of competitive markets. Without government interference, markets face competitive downward price pressures to the point where most companies do not have much margin to cushion with. Taxation affecting all the companies within an industry shifts the overhead structure for the various firms. Every business must become embroiled in the tax avoidance business if they are to stay afloat. More importantly though, these prices are generally passed on to consumers, and the tariff example clearly shows how there is truly no free lunch, even for the government.