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John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.” The point being that, even if you’re right about where the stock market is bound to go eventually, the market doesn’t have to follow your route or timetable in getting there.
Since “Liberation Day” last week when the U.S. announced punishing new tariffs on just about every country in the world, a lot of Americans are learning a corollary to Keynes’ maxim: Donald Trump can stay irrational longer than you can remain solvent.
During the years of our supposed economic captivity, the American economy became the envy of the world. So now we ... don’t want that?
President Trump’s irrationality on trade is the fundamental problem. Over the weekend, he explained yet again that he sees any trade deficit as a “loss” we need to be compensated for. He believes that trade deficits are “subsidies” paid by America to other countries. His made-up math ignores our trade surpluses in services, to the tune of a quarter trillion dollars annually. He is oblivious to the relationship of trade deficits to foreign investment in America — when we send dollars abroad for goods and services, most of those dollars ultimately come back to America. And he refuses to grasp that tariffs are taxes paid by domestic importers, not foreigners.
As many have noted, Trump’s mercantilism is one of the only policy convictions he’s held for nearly his entire adult life. Indeed, one of the administration’s favored defenses of his policies is that “Trump’s been talking about this his whole life.” Or, as Commerce Secretary Howard Lutnick put it in various interviews over the weekend, “Donald Trump’s been talking about this for 35 years.” The idea seems to be that Trump’s consistency on the issue somehow makes him correct on the merits, and that he has a mandate to follow through on his views. So as Lutnick declared on CNN last week, everyone should relax and “let Donald Trump run the global economy.”
The first contention is preposterous. If a President Bernie Sanders was trying to socialize medicine or issue his own version of protectionist trade policies, the fact that he’s been consistently wrong his whole life wouldn’t persuade opponents to drop their opposition out of deference to his consistency.
How do I know? Because we’ve been here before, watching the fiasco of Trump’s first-term trade war with China.
The second argument is also ridiculous but has some superficial political merit. Trump was honest and open about his love of tariffs — the “most beautiful word in the world” in his telling — and he got elected. And unlike his first term, there is nobody in his entourage or the Republican Party who can talk him out of the idea that he has a mandate to do whatever he wants.
Back in February, I celebrated the fact that the markets, unlike his human enablers, would not support Trump’s ill-conceived and irrational love for protectionism. Efficient capital markets are valuable for all sorts of obvious reasons, but one of the most underappreciated — and vexatious for politicians — is that they don’t lie. They might be temporarily “wrong” in some sense — hence Keynes’ point about occasional irrationality — but millions of investors don’t put partisan desires ahead of their financial interests. The markets have hated Trump’s views on trade from the get-go, which is a major reason markets have lost some $11 trillion in value since his inauguration.
Trump’s new taxes may reduce the spending power of American consumers, but that is not a president’s only concern. He also must protect some U.S. industries.
Like a great many people, I hoped that Trump would listen to the markets more attentively than he does to the retinue of sycophants he surrounds himself with. Tragically, that has not happened.
But there is an upside. The markets are not merely saying that Trump’s policies are bad for stock prices or corporate profits. They are saying to other politicians and policymakers, “We’re not going to save you from Trump’s irrationality.”
That realization is starting to dawn on some Republicans who bought the preposterous idea that Trump has a mandate to unilaterally and irrationally bend the international economy to his will. The Constitution gives responsibility for taxation, including tariffs, to Congress, not the president. Congress ceded that authority over decades to the president, for good reasons and bad. What might have once been defensible is now indefensible because Trump is abusing that authority on a massive scale, claiming emergency powers when the only emergency is the crisis he himself is creating. And Republicans are starting to understand that their political solvency won’t last longer than Trump’s irrationality.
Some Republicans in Congress, led by Sens. Chuck Grassley of Iowa and Mitch McConnell of Kentucky, are finally moving to claw back that power (and leading conservatives are mounting legal challenges to his trade authority). Of course, Trump has vowed to veto the legislation.
It should never have come to this, but it’s progress when Republicans listen to markets instead of Donald Trump.
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Ideas expressed in the piece
- The article argues that President Trump’s tariffs are rooted in a flawed understanding of trade deficits, which he falsely equates to economic “losses” requiring compensation. This perspective ignores the U.S. trade surplus in services ($250 billion annually) and the role of foreign investment in recycling dollars back into the American economy[3][5].
- Tariffs are characterized as taxes paid by domestic importers, not foreign entities, with the 2025 tariffs projected to increase federal tax revenues by $258.4 billion—a 0.85% GDP tax hike described as the largest since 1982[1][2]. Critics highlight the policies’ regressive impact, with after-tax income falling by 1.9% for most income groups and low-income households facing annual consumer losses of $1,700[2].
- Markets are portrayed as rejecting Trump’s protectionism, with $11 trillion in lost value since his inauguration cited as evidence. The article emphasizes that markets reflect investor rationality, unlike what it calls Trump’s “irrational” trade agenda[4][5].
- Congressional Republicans are increasingly challenging Trump’s use of emergency powers to impose tariffs, arguing that trade policy authority constitutionally belongs to Congress. Legal and legislative efforts to reclaim this power are framed as a response to economic and political risks[5].
Different views on the topic
- The Trump administration defends tariffs as necessary to address “large and persistent” trade deficits ($1.2 trillion in 2024), which it claims hollow out U.S. manufacturing, weaken supply chains, and jeopardize national security. Reciprocal tariffs aim to counter non-reciprocal trade practices like foreign VAT systems and intellectual property theft[3][5].
- Officials cite studies claiming tariffs stimulate domestic production without significant price spikes, such as a 2023 U.S. International Trade Commission report linking tariffs to reduced Chinese imports and increased U.S. manufacturing output[3]. The administration projects long-term economic gains, including a $728 billion GDP boost and 2.8 million new jobs from a 10% global tariff[3].
- The White House asserts that tariffs rectify imbalances caused by “unfair” foreign policies, such as currency manipulation and wage suppression, while incentivizing reshoring. Exemptions for USMCA-compliant trade aim to shield allies like Canada and Mexico from broader tariffs[1][5].
- Supporters argue tariffs protect strategic industries like steel and automotive manufacturing, with the average effective U.S. tariff rate rising to 22.5%—the highest since 1909—to counter foreign overproduction and dumping[2][3].
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