We are eight months into Trump’s term, and his administration continues its frenetic pace of change — education, environment, energy, defense, taxes, tariffs — everything seems to be on the table. These extensive and significant policy changes, however, will lead to trouble if they are misconceived and will collide if they are contradictory. In fact, some policies have already collided — especially with the judicial branch.
In the past two weeks, courts have ruled against Trump’s use of soldiers in American cities, against his administration’s characterization of Venezuelan gang members as a “predatory incursion,” and most significantly, against his claim to have legal authority to implement most of his Liberation Day tariffs. (RELATED: Trump on Tariffs, Trade, and Pragmatic Populism)
The administration has its own internal contradictions when it comes to the economy.
But the administration has its own internal contradictions when it comes to the economy. The administration touted the low tax rates in the Big Beautiful Bill as boosting economic growth by taxing business investment less. Yet at the same time, Trump’s broad and steep tariffs on imports have raised taxes on business inputs and supplies higher than they cut business taxes. (RELATED: Don’t Let Tariffs Cancel Out Tax Cuts)
Though some Trump cheerleaders declared tariffs a resounding success just a few months ago, the July jobs report, with significant downward revisions for job creation in May and June, threw cold water on that narrative. Large tech companies, which are largely immune to tariff costs, have boomed while the rest of the economy attempts to adjust to higher taxes. The stock market is doing great, but it is largely buoyed by tech and AI investing. (RELATED: New Study Shows Trump Might Be Right on Tariffs)
Other contradictions abound. The president’s war on the trade deficit flies in the face of his championing massive foreign direct investment commitments. These cannot both happen. Foreigners gain dollars by selling goods and services to Americans for them. But to have hundreds of billions of dollars to invest in the U.S., foreigners need to not spend those hundreds of billions of dollars buying U.S. exports — leading to a trade deficit. (RELATED: Tariffs Have Created the Monster We Feared)
Since foreign direct investment is funded directly by U.S. imports that outweigh U.S. exports (a trade deficit), we cannot reduce the trade deficit and increase the capital account surplus simultaneously. It is mathematically impossible. These contradictions have been highlighted for a while, but there are other contradictory parts of the Trump agenda that have yet to clash in an obvious way. But it is only a matter of time.
Even the president’s push for the Federal Reserve to lower interest rates belies a contradiction or two. President Trump says the current interest rate is a drag on the economy because homebuyers have to pay more for houses, car buyers have to pay more for autos, and businesses have to pay more for capital than they would if interest rates were lower. The federal government also stands to save hundreds of billions of dollars annually for every percentage point decline in its borrowing costs. That’s all true, but it begs the question of what interest rates should be.
If the economy is doing as well as President Trump says it is, both in terms of growth and job creation, then we don’t need further stimulus through lower rates. In fact, lower rates in such a scenario will cause the economy to overheat and put upward pressure on prices. On the other hand, cutting rates might make sense if the labor market is weak and job growth is stalling — something President Trump does not want to admit.
You could make a similar argument for “lowering” the cost of rent or “lowering” the cost of food. But legally restricting the price of these goods below their market price creates unintended consequences like shortages and other disruptions. Legally restricting interest rates will also create unintended consequences.
Cutting interest rates too much or too soon can fuel inflation like in 2021 and 2022. It can also artificially and unsustainably boost business activity in the short run, while creating instability in the long run.
The Trump administration has launched an aggressive deregulatory campaign. They want to get government bureaucrats and restrictions out of the way so that American entrepreneurs and businessmen can build and create goods and services more easily and cheaply. At the same time, the Trump administration has rapidly increased its talk of industrial planning in the economy.
From the defense department’s deal with MP Materials to the “golden share” in the Nippon acquisition of U.S. Steel to the purported investment commitments from Japan and other countries for the president to direct himself, we see a great expansion of government oversight and direction of economic activity.
And so the free market, low-tax, deregulatory arm of this administration is on a collision course with the statist, cronyist, interventionist arm of the administration. Who will win? We don’t know yet — but we do know it can’t be both.
Let’s hope the free marketers win. The long-term prosperity and liberty of every American depend on it.
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