Maybe Trump Is Intentionally Creating a Mini-Recession

Key audience isn’t Canada, Mexico, or China, but Jay Powell

A “made in China” Costco beach umbrella on a Massachusetts beach. Photo: The Editors.

What is President Trump thinking? Or is he thinking at all? Every time he talks about imposing tariffs, the stock market tanks. Even so, Trump keeps going out and talking about imposing tariffs. So far he’s destroyed more than $5 trillion in market value.

Bret Stephens interprets it as “dumbness,” proof that Trump is “ignorant” and “incompetent” and “heedless.” The “heedless” part suggests an almost pathological refusal by Trump to accept the reality around him, which is a dangerous trait in an American president, who, after all, has not only power to shape the economy but also controls a nuclear arsenal.

A lot of people agree with the “dumb” or “crazy” explanations of Trump, which aren’t mutually exclusive.

Yet, at least on the tariff persistence issue, there’s an alternative possible explanation for Trump’s behavior that had not occurred to me until a sophisticated paying subscriber to The Editors (a redundancy, because there are no unsophisticated paying subscribers to The Editors) floated it to me earlier this week. I share it here not because I’m entirely convinced it is correct, but because it’s clever, it’s not something I’d seen elsewhere, and the possibility that it could be correct cheered me up.

The theory is that Trump is playing for the long term, or at least the medium term of the ten-year budget window that the Congressional Budget Office uses to “score” legislation by estimating its cost. He knows that his domestic policy legacy will primarily depend on one big tax-and-spending bill that needs to be passed this year before the corporate tax cuts he enacted in his prior term are scheduled to expire. And he wants to go big—lowering the corporate tax rate to 15 percent for made-in-America, eliminating income taxes on tips, social security benefits, and overtime, making interest on auto loans tax deductible, lowering some of the personal rates to 15 percent, adding immediate expensing instead of longer depreciation, perhaps even, as Commerce Secretary Howard Lutnick suggested this week, eliminating the income tax entirely for those earning less than $150,000 a year. “Get that big, fat, beautiful tax cut bill…a real big-bang tax cut…we got to make it huge,” as Steve Forbes said on Larry Kudlow’s show the other night. (Later in the segment, Kudlow describes me as “very smart guy,” which was characteristically gracious of him.)

The problem is that with interest rates where they are, the cost to the Treasury of simply rolling over existing debt is staggering. It doesn’t leave tax cutters much room to operate, even taking into account the dynamic growth effects of the tax cuts. A deficit or tax cut that looks affordable at three percent interest rates becomes more difficult, or impossible, at four and a half or five percent interest rates. The Calafia Beach Pundit, Scott Grannis, has a new update in which he writes, “I detect no reason to worry about inflation.” Federal Reserve Chairman Jerome Powell has been more hesitant to declare victory on that front, at least since the Fed last announced a quarter-point rate cut, on December 18, 2024. The blame-Trump crowd wants to trace the stock market decline to the Trump inauguration, but you could just as easily connect it to the January 29, 2025, announcement by the Fed that the rate-cutting was stopping.

The Fed’s dual mandates under the Federal Reserve Reform Act of 1977 are maximum employment and price stability. The unemployment rate has been steadily hovering around 4 percent. A rise in unemployment would add pressure on Powell—who, despite initially being a Trump appointee as chair, is heavily swayed by the anti-Trump Federal Reserve bureaucracy—to cut rates. It could also help provide some Keynesian “stimulus” justification for tax cuts.

Trump would probably prefer to eliminate Fed “independence” and just be able to order Powell to cut rates, though it is nice to have someone else around to blame for missteps that cause inflation or unemployment. To the extent that higher interest rates translate into higher mortgage rates and auto loan rates, they also hurt consumers and, to the extent people blame or credit incumbents for the economy, Trump’s popularity.

Trump could try the nuclear option of trying to fire Powell or demanding his resignation. That could trigger additional market gyrations, as well as a legal battle, or a difficult Senate confirmation process for any potential Powell replacement.

Short of that, the best tool available that Trump has to outfox Powell may be to tariff-talk down the market enough that layoffs ensue, both because of corporations planning for a potential downturn and because of a negative wealth effect curbing consumer spending. Once the unemployment rate starts rising, Powell will start cutting rates to avoid the mistake Ben Bernanke made in 2006 and 2007 of keeping rates too high for too long. (“Mini-recession,” the term in the headline, is not a technical term. Maybe the unemployment rate could rise enough to trigger Fed rate cuts even without the economy dropping briefly to contraction from growth.)

If that is indeed the plan, then the decision by Republicans to do a six-month continuing budget resolution—which otherwise is hard to explain, because you give up a year of growth, and because they just look unprepared to implement policies immediately even with Republican congressional majorities—makes more sense. Six months from now, the higher unemployment and lower interest rates will have kicked in. The “buy time” aspect of the Thune-Johnson approach isn’t because they don’t have their act together on the legislation, it’s because they understand that they can get better legislation if interest rates are lower. They aren’t just buying time, they are buying a lower interest-rate, higher unemployment environment that, they hope, will be more conducive to enactment of a “huge” tax cut rather than a merely incremental one.

No one in charge in Washington can say any of this out loud, because it’d be politically suicidal to announce that Republicans are intentionally tanking the stock market and throwing Americans out of work in the hopes of forcing Powell to cut rates in a way that enables eventually passing bigger, better tax cut legislation in a few months. And I’m not suggesting Trump’s affection for tariffs is entirely a show; he genuinely does seem to want reciprocity and think Americans are getting ripped off on trade, and to want Mexico and Canada to do more on the fentanyl issue.

It’s just a theory. Longtime readers know that I am not one of those types who think every Trump mistake is part of some genius plan. Maybe “Trump is dumb” or “Trump is crazy” is the Occam’s Razor explanation here. But as with Scott Bessent’s weak dollar on the way to a strong dollar, it could also be that with Trump, investors, and advocates of pro-growth tax cuts, will have to be patient for an eventual payoff.

Recent work: My two most recent columns from the Algemeiner are hyperlinked from the headlines here and are available with no paywall for those interested: “Cartoon of Israeli Hostage Trampling Bloody Arab Bodies Is Sanitized by New York Times” and “New York Times Cheerleads for ‘Pro-Hamas’ Mahmoud Khalil.”