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.…