But tariffs were the most important element of his economic program—and last week, the Supreme Court blew it up.

The Court’s ruling invalidated about half of those tariffs and their revenues, specifically those applied to trading partners who haven’t cut a deal with Trump, including Canada, Mexico, Brazil, Thailand, and Israel. So, it punctured his fantasy that tariff revenues would contain budget deficits, lower long-term interest rates, and bolster growth. Following his rebuke from the Court, including two of the three justices he appointed, he’s threatened to impose new, 15 percent worldwide tariffs under Section 122 for 150 days, as the law allows. But those revenues will be considerably less and temporary, increasing the pressure on interest rates as the deficit swells.

The other half of Trump’s original tariffs involve countries that cut deals superseding those tariffs, including South Korea, China, India, Great Britain, and the countries of the European Union (EU). Even so, the Court’s ruling tacitly upended those deals. Trump’s tariffs were a gun pointed at those countries’ heads during negotiations. Now these mammoth trading partners know it was loaded with blanks, so their commitments to invest trillions of dollars more than they otherwise would have are unlikely to come to fruition—and already, the EU has hit pause on implementing its deal.

So, the Court’s ruling also punctures Trump’s fantasy that an investment boom fueled by foreign companies will keep the economy humming. “We’re the hottest country in the world,” he plaintively keeps insisting, citing ever larger claims of foreign investment.

The Supreme Court’s evisceration of Trump’s tariffs comes amid a stream of discouraging economic news. Last Friday, the Bureau of Economic Analysis (BEA) reported that GDP grew at an anemic 1.4 percent in the final quarter of 2025 and 2.2 percent for the entire year, compared with 2.8 percent in 2024. And the Bureau of Labor Statistics had already reported that job growth slumped from 1,030,000 in 2024 to 414,000 in 2025.

The BEA data also show that real disposable income was flat through the second half of 2025, and the agency’s favored gauge for inflation, the personal expenditure index or PCE, rose steadily since the second quarter of last year, when Trump imposed his tariffs.

Pull it all together, and the ruling’s impact on revenues, deficits, and interest rates, along with steadily rising inflation, weakening job growth, and flat disposable incomes, has almost certainly punctured any fantasy Republicans had that a strong economy would stave off big losses in the midterm elections.

Trump could undo some of the damage by graciously accepting the Court’s decision—I know how ludicrous that sounds—and returning the tariff revenues to the companies that paid them. The claim that refunding the payments would be a Herculean task, a White House canard echoed by Justice Brett Kavanaugh, is nonsense. The Treasury issues nearly 100 million tax refunds annually without fuss, including millions to companies. And the data required to refund tariff payments is easily available, since every company that pays a tariff declares it as a business expense or “cost of goods” in its tax filings.

To be sure, likely, American consumers would never see much of it. But the refunds would still flow back into the economy through purchases and investments by the businesses and their shareholders.

Beyond the myriad ways that Trump’s signature initiatives weaken growth and jobs and make life less affordable, the tariffs continue to upend the global trading system we established after World War II as the world’s dominant economic and military power. Unsurprisingly, our design has always favored us. As Japan, East Asia, Germany, and now China have become serious economic powers over the past 80 years, the United States has remained the world’s largest trading power. In 2024, U.S. imports and exports totaled $7.36 trillion, still $150 billion more than China’s total trade.

Our enormous trade flows rest on a complex, organic network of interdependencies, managed by the rules and operations of hundreds of multilateral and bilateral agreements, all bearing our fingerprints. And those agreements involve not only trade, but also investment flows, taxation, banking, regulation, government financing, and economic innovation through intellectual property protections. Our economy’s long-term growth and stability, and the tacit assumptions most of us make about the security of our material lives, depend on our multifaceted economic interrelationships with the rest of the world.

Trump’s reckless tariff war against the world has breached hundreds of agreements with our partners and rivals and threatens to unravel the system. The Supreme Court offered him the opportunity to restore global faith that the United States will stand behind its commitments. But that’s not how Donald Trump rolls. Heedless or ignorant of the risks, he has chosen to raise the stakes, doubling down on tariffs. Over time, we will all pay the price.

This essay appeared originally at Washington Monthly.

At every level of government, public officials endure physical threats and violence. Studies by the Brennan Center found that over the past three years, 43 percent of state legislators reported being physically threatened or attacked. The Bridging Divides Initiative at Princeton University reports that, on average, 18 percent of city and county officials receive physical threats each calendar quarter. And the U.S. Capitol Police recounts that over the past four years, members of Congress received an average of 9,000 violent threats per year against themselves, their families, and staff.

Some extremists carry out those threats. An assailant shot and wounded Trump during the 2024 campaign, while another missed. A Utah youth has been indicted for killing \the conservative activist Charlie Kirk. The Democratic leader of the Minnesota state House and her husband were murdered, while a state senator colleague and his wife survived but were shot and badly wounded. The husband of former House Speaker Nancy Pelosi was brutally attacked, and the residence of Pennsylvania’s Governor Josh Shapiro was firebombed.

Trump has been a national role model for such violence by regularly threatening retribution against opponents and critics. As a candidate, he encouraged supporters to assault demonstrators at his rallies. As president, he charged that Barack Obama and Joseph Biden, Hillary Clinton, Generals Mark Milley and James Mattis, intelligence chiefs John Brennan and James Clapper, and former National Security advisers John Bolton and Susan Rice, along with former FBI officials James Comey, Peter Strzok, and Andrew McCabe, were guilty of crimes “punishable by death.” In each case, his targets received hundreds of death threats from his MAGA supporters.

Recently, two U.S. senators and four representatives also received hundreds of those death threats after the president accused them of treason for urging service members to decline to carry out illegal orders. It happened again after Trump denounced Indiana’s GOP governor and state senators for opposing his plan to gerrymander the state’s congressional districts—and again after he decried erstwhile allies, Representatives Tom Massie, Marjorie Taylor Greene, and Lauren Bobert, for supporting legislation mandating the release of the Jeffrey Epstein files.

A decade of Trump’s public threats, pardons of January 6 rioters who assaulted police, and refusal to investigate ICE agents attacking and even killing innocent citizens and immigrants created the impression that violence against the president’s critics is permissible. We know that a majority of Trump’s MAGA followers—more than 20 million Americans—unabashedly support political violence to defend his actions and advance his agenda.

MAGA is not the first mass movement to endorse violence in the service of its leader’s aspirations. If history is a valuable guide for understanding this moment, the most penetrating historical analysis is, famously, Hannah Arendt’s work, The Origins of Totalitarianism, which has been much discussed since Trump rose to power.

Unquestionably one of the most important Western political thinkers of the 20^th century, Arendt was shaped by Adolph Hitler’s rise. She had been a student of Germany’s three leading philosophers of her time—Edward Husserl, Karl Jaspers, and Martin Heidegger. As a Jew, she fled Germany for Paris in 1933. She emigrated to the United States in 1939, where she taught at Princeton University, the University of California, Berkeley, the University of Chicago, and the New School for Social Research.

Her 1951 analysis of the movements that propelled the rise of the Nazi and Stalinist regimes begins with the insight that their followers were not a typical interest group seeking benefits or rights. Instead, they’re individuals who feel that recent disruptive societal changes cost them their status and are brought together by a charismatic leader who exploits their shared sense of injury.

The leader of these movements offers lies to explain why his followers lost their place, claims he can restore it given enough power, and, equally important, manipulates his followers’ anger to support violence committed at his behest.

With violence and threats now part of our politics, the question becomes, is the MAGA movement a populist version of a normal interest group or an extremist faction of the type that modern dictators have used to help establish and support their rule?

That MAGA is a mass movement is not in question. A 2025 survey by The Economist and YouGov.com found that 16 percent of American adults self-identify as MAGA supporters, totaling 43 million people. Those numbers are consistent with the findings of a large-scale academic survey conducted by the Violence Prevention Research Center at the University of California, Davis. They interviewed 7,255 Americans—3,916 Democrats and Independents, and 3,339 Republicans, including 1,128 MAGA Republicans. They identified MAGA Republicans based on their agreement with the Trump claim (and big lie) that “the 2020 election was stolen from Donald Trump, and Joe Biden is an illegitimate president.” Those believers accounted for 34 percent of self-identified Republicans, representing about 15 percent of U.S. adults (39 million).

While MAGA followers are fiercely loyal to President Trump, they differ on some matters, most prominently the release of the Epstein files. This divide appears anomalous because a substantial share of them came from the QAnon movement. The UC Davis study asked its thousands of participants if they agreed with QAnon’s founding fantasy that “the government, media, and financial worlds in the U.S. are controlled by a group of Satan-worshipping pedophiles who run a global child sex trafficking operation.” About 53 percent of the MAGA Republicans agreed, compared to 13 percent of the non-MAGA Republicans. So, as Trump tries to bury the evidence around the world’s most notorious sex-trafficking pedophile, the MAGA Republicans’ belief in QAnon’s basic tenet splits them off. It’s hard to imagine another issue that could comparably test their loyalty to him.

Virtually all Republicans, MAGA or not, broadly support Trump. Part of it is our current climate of extreme partisan polarization: An average of 94 percent of Republicans voted for Trump in 2016, 2020, and 2024, the same average share of Democrats who voted for Hillary Clinton, Biden, and Kamala Harris. Large majorities of Republicans back controversial Trump actions, such as their 70 percent support for sending armed military forces to U.S. cities.

But his MAGA followers are his most reliable supporters across many issues. Surveys by The Economist and YouGov.com in 2025 found that 88 percent of MAGA believers endorse his positions on the economy, inflation, jobs, foreign trade, health care, education, civil rights, and civil liberties, compared to 64 percent of non-MAGA Republicans.

A greater divide among Republicans is apparent around the use of violence in politics. The UC Davis study found that 83 percent of MAGA believers agreed that “the American way of life is disappearing so fast, force may be necessary to save it,” compared to 46 percent of other Republicans.

When the issue is reframed more tentatively as, ‘if elected politicians will not protect American democracy, the people must do it themselves, even if it requires taking violent actions,’ MAGA agreement edged down to 73 percent. Non-MAGA Republican support edged up to 50 percent.

Such substantial support also reflects a serious decline in Republican support for democracy itself: 69 percent of MAGA believers and 58 percent of other Republicans agree that “having a strong leader is more important than having a democracy.” Nearly equally disturbing, they’re joined by 36 percent of Independents and Democrats.

Arendt also highlighted the role big lies play in building a mass movement to support an aspiring strongman’s rise, as well as the use of violence against the objects of those lies. Trump introduced his first big lie when he announced his candidacy in 2015, declaring that Americans should fear Mexican immigrants and support expelling them because they were criminals or here to steal jobs from Americans.

Scapegoating non-white immigrants remains a central part of Trump’s playbook, and Republicans, especially MAGA, support it: 83 percent of MAGA believers and 58 percent of others agree that “native-born white people are being replaced by immigrants,” the Great Replacement conspiracy theory. Remaking ICE into a new corps of armed, masked agents to manhandle, arrest, hold, and sometimes shoot immigrants and their supporters is central to Trump’s current agenda. Most of his devoted followers endorse it: 75 percent of MAGA Republicans agree that “violence is justified to stop illegal immigration.”

The current waves of random and sometimes lethal violence by ICE have badly eroded public support for ICE’s brutal tactics. But there is no evidence that MAGA believers’ endorsement of violence against undocumented immigrants has flagged.

Trump’s second big lie for his mass movement has become tied directly to his followers’ declining support for democracy. When he lost his bid for re-election in 2020, he called his defeat a fraud and those who attacked Congress on January 6 righteous patriots trying to right the wrong. He had laid a foundation for the lie in his 2016 campaign with the story that Hillary Clinton and Barack Obama were trying to rig the election, and when he won but trailed Clinton by almost 3 million votes, the lie shifted to Democrats rigging the popular vote by corralling illegal immigrants to the polls.

The MAGA movement quickly embraced the big lie explaining his 2020 defeat, and eventually, most non-MAGA Republicans followed. In 2021, a University of Washington study found that 98 percent of self-identified MAGA members believed Trump won the 2020 election. By early 2024, 69 percent of all Republicans agreed that Democrats stole the presidency in 2020.

In the interim, Trump’s lies that he was the victim of a vast conspiracy by enemies also became his public defense when he was indicted in four criminal cases, convicted in one of them, and found liable for fraud, sexual abuse, and defamation. Trump then used these lies to re-energize the MAGA movement and other Republicans by framing his 2024 comeback as a mission to protect Americans from Democrats, immigrants, and the media determined to rig another election.

Many MAGA members not only believe it; 50 percent of them say violence is acceptable “to stop an election from being stolen,” and 48 percent see violence as justified “to stop voter fraud.”

Arendt also found that those drawn to mass movements based on big lies gradually lose their ability to distinguish between facts and lies, in general, and especially when facts conflict with loyalty to the leader. This past year, after he imposed tariffs, when inflation increased, he told his followers that “every price is down.” He declared his Big Beautiful Bill ” did not touch Medicaid” when it cut the program by $1 trillion over 10 years. He dismissed evidence that thousands of African children died because he slashed foreign assistance; he said foreign aid was a program to send $100 million in condoms to Hamas. He insisted he never pressured the Justice Department to bring charges against his opponents, even as he publicly posted a text message directing the Attorney General to indict James Comey and Letitia James.

Trump’s lies are always stark when they support his foundational big lies. He repeatedly claims that mail-in voting leads to rigged elections and every other country has banned it, when investigators found four cases of fraudulent mail-in ballots for every 10 million votes cast. Mail-in voting is widely used in Canada, the United Kingdom, Germany, Australia, and Switzerland. When people protested peacefully against ICE raids in Portland and Los Angeles, Trump said he had to deploy troops because immigrants were “burning down” the cities. When public videos showed ICE agents killing innocent protestors in Minneapolis, Trump said they were domestic terrorists, and his agents acted to safeguard the public from criminal immigrants.

Given the facts that contradict Trump’s lies, his target audience is his MAGA supporters, who believe him because they believe in him, and endorse violence in support of his big lies. Their role is not to take up arms themselves, but to intimidate Trump’s critics and opponents, often with direct threats, and rationalize the violence of the masked, armed federal agents.

As a matter of history, the role of Trump’s mass movement in advancing his ambitions to become an American strongman has some parallels with Hitler’s devoted followers in the Sturmabteilung, the Brownshirts of the SA. The SA began as an outside movement affiliated with the Nazi Party that intimidated and harassed Hitler’s opponents and Jewish Germans. It was always distinct from the Schutzstaffel or SS, the brutally violent agency of the Nazi government that broke off from the SA following the Night of the Long Knives purge in 1934.  Members of the original SA mass movement became loud, public supporters of Hitler’s steps to suspend Germany’s constitution, much like many MAGA followers today.

We don’t have brownshirts brawling across American cities. But threats of government-sanctioned violence are palpably present, as they were in Germany in the early 1930s, and the president and his administration have repeatedly defended the bloodshed in Minnesota and elsewhere by some elements of ICE.

Even so, despite the analogies and despite Trump’s attacks on his opponents, critics, the constitution, and numerous laws, here the opposition party, a fair share of the media, and much of the judiciary have not been neutralized (the verdict on the Supreme Court is still out). But even as Trump has lost popular support, he retains the devotion of his 40-million-strong mass movement.

There is an alternative interpretation of the MAGA movement as an unconventional variant of a typical interest group. In this perspective, MAGA followers were drawn to Trump’s populist persona, and he used them to expand the GOP coalition and become the party’s leader.

How can we tell if MAGA is a mass movement that supports strongman rule and political violence or an atypical interest group still part of democratic, everyday politics?

One gauge is whether Trump expanded Republican support among voters with MAGA’s profile. MAGA followers are distinct within the Republican Party. They are more likely than other Republicans to be women (52 percent versus 44 percent), slightly more likely to be Hispanic (8 percent versus 7 percent), and equally likely to be white. Consistent with media portrayals, MAGA followers also are much more likely than other Republicans to have never attended college (40 percent versus 28 percent) and earn less than $50,000 per year (31 percent versus 23 percent).

In his runs for the presidency, did Trump expand support from MAGA-type voters, compared to Mitt Romney, John McCain, and George W. Bush? Certainly not among women: Trump won an average of 43 percent of female voters in his three races, compared to an average of 45 percent who voted for Romney in 2012, McCain in 2008, and Bush in 2000 and 2004.

On incomes, Trump’s support from voters with incomes below $50,000 averaged 45 percent, the same share Bush won in 2000 and 2004. McCain and Romney carried smaller shares of moderate and low-income voters. Still, the reason was that they ran against Barack Obama: Black turnout peaked for Obama’s historic candidacies, and Black households were more likely than white or Hispanic households to earn less than $50,000. Once Obama left the scene, Trump attracted the GOP’s share of low and moderate-income voters in 2000 and 2004.

The MAGA movement also did not increase Trump’s share of white voters; in fact, that share slightly declined: He won an average of 57 percent of white voters in his three runs, compared to 58 percent when Bush, McCain, and Romney ran. And Trump’s support from Hispanic voters averaged 35 percent across his three races, the same as the average Hispanic support for Bush, McCain, and Romney.

Trump did carry an average of 11 percent of Black voters across his three elections, substantially outpacing the 8 percent average won by Bush, McCain, and Romney. Again, the main reason was Obama, whose candidacy reduced GOP Black voter support to 4 percent against McCain and 6 percent against Romney. And Trump’s 11 percent Black support matched Bush in 2004.

Given Trump’s average support from female, low- and moderate-income, white, Hispanic, and perhaps Black voters, there is little evidence that Trump’s MAGA movement is a new interest group that broadened the Republican national coalition.

The exception is voters who never attended college: Trump won an average of 53 percent of those voters across his three runs, compared with 50 percent who voted for Bush, McCain, and Romney. But those gains changed the GOP coalition without expanding it, because Trump’s support from college-educated voters averaged 45 percent, compared to the 50 percent average who supported Bush, McCain, and Romney.

On balance, the impact of the MAGA movement on presidential elections is at best minimal. Trump’s narrow victories in 2016 and 2024 were based not on an influx of MAGA voters and others like them but on a fortuitous distribution of his national support across a handful of contestable states. His defeat in 2020 by 4.5 percentage points was more definitive but also had little to do with MAGA: He lost mainly because his support fell substantially among those earning $50,000 to $100,000 and college graduates.

Based on the facts, MAGA is not an interest group, even an atypical one, but a mass movement following an aspiring strongman of the kind Arendt saw in Germany. Its political significance rests on its followers’ extreme views about violence and democracy, their faith in Trump’s big lies, their defense of the political use of intimidation and threats, and their support for Trump’s attacks on democratic institutions. In these ways, MAGA shares features of the popular movements that supported the rise and consolidation of dictatorial power in the past century and the early years of this one.

This essay appeared originally at Washington Monthly.

He slowly had to recognize that Generations of transatlantic security integration have fostered profound economic and financial interdependence between the United States and Europe. I suspect economic advisors told the president that directing his generals to occupy Greenland would risk economic and financial meltdown in the U.S.

Trump’s senior economic advisers and the business leaders he consults may be loath to contradict him. But in this case, it seems, some of them wisely feared even more the wrath he would unleash if an economic disaster unfolded and they hadn’t warned him.

The forces that could ignite an economic disaster following a military assault on Greenland were in plain view. European investors are central to the strength and stability of our economy and financial markets. Public data issued by the Federal Reserve show that European governments and private investors currently own $10.4 trillion, or 15.3 percent, of U.S. stocks, $3.4 trillion, or 11.0 percent, of U.S. government securities, and $2.9 trillion, or 11.6 percent,  of U.S. corporate bonds.

Globally, foreign investors, public and private, own nearly one-third of our economy today—31.3 percent of all U.S. stocks, 36.3 percent of U.S. government securities, and 20.1 percent of U.S. corporate bonds. Put the data together, Europe’s public and private investors now own 48 percent of all foreign-owned U.S. stocks, 57 percent of all foreign-owned corporate debt, and 32 percent of all foreign-owned U.S. Treasury and agency securities.

The Europeans know how to protect themselves. In 2023, eyeing China, the European Union (EU) gave itself a powerful economic weapon, the “Anti-Coercion Instrument” (ACI). It empowers the EU Council to suspend government purchases of public securities from countries trying to strong-arm the EU. Unlike other EU Council decisions, the use of the ICU cannot be vetoed by a single member, such as Hungary, whose leader, Viktor Orban, is close to Trump. French President Emmanuel Macron last week publicly suggested invoking the ICU if Trump stayed on course to use military force against Greenland.

It’s a safe bet that Trump’s advisors conveyed Macron’s threat to the president as he headed to Davos, including that EU governments, along with the United Kingdom and Canada, hold $1.5 trillion to $2 trillion in U.S. Treasury securities, with nearly one-third needing refinancing each year. Given that Trump’s 2026 budget deficit absorbs most new U.S. private savings, halting European purchases, including refinancings, would spike U.S. interest rates. Bond and stock investors would likely panic.  The mere suggestion pushed up the rates on 10 and 30-year bonds.

In a U.S-European crisis, private European investors pose a threat as serious as any posed by European governments.

European banks, hedge funds, insurance companies, pension funds, private endowments, and hyper-wealthy families own eight times more U.S. stocks, 19 times more U.S. corporate bonds, and roughly as many U.S. Treasury securities as their governments. Given these holdings, if a critical mass of them began to sell U.S. assets, stock and bond markets could melt down, and major American companies could become insolvent.

We can even predict which U.S. companies and industries will suffer the most. Those corporations with the largest foreign stock ownership and foreign-held corporate bonds are central to the American economy. They include computer and electronics manufacturing, information and telecom services, broadcasting and publishing, chemicals, comprised mainly of pharmaceuticals and oil and natural gas processing. Financial institutions are the U.S. industry with the highest levels of foreign ownership and foreign-held debt, so a large and abrupt sell-off by private European investors could trigger a meltdown in the financial system rivalling the 2008-2009 crisis.

They wouldn’t be alone heading for the door. American hedge funds held $2.9 trillion in financial assets in 2024.At the first sign that European private investors are preparing to sell substantial American assets, U.S. hedge funds would move, followed quickly by U.S. investment and commercial banks that manage the multi-trillion-dollar assets of American insurance companies, pension plans, endowments, and hyper-wealthy U.S. families.

European investors have staked so much on the American economy because the U.S. has been stronger, stable, and more secure economically than other major countries. Returns on U.S. stocks have been higher, taxes on those returns have been lower, and inflation here has been generally lower. European institutions also hold U.S. assets because their rights have been ironclad, based on the American government standing behind its contracts and enforcing private ones.

That’s the rub: NATO is a bedrock contract between the U.S. and Europe, and Trump seizing Greenland shreds that agreement—and, with it, foreign confidence in their ownership of U.S. assets.

A military move on Greenland would make the U.S. an enemy, and European investors know that an enemy can seize foreign-owned assets or impose crippling taxes. As European investors weigh trading U.S. stocks, corporate bonds, and Treasury securities, they must weigh whether their ownership rights are secure.

Trump may not fully grasp the complex interdependence between our economy and Europe’s. We can only hope he now understands that using military force against a NATO ally would shatter the economic integration that accompanies transatlantic security integration.

This essay appeared originally at Washington Monthly.

President Donald Trump famously promised to lower prices “on Day One” in his 2024 campaign. That was bluster, of course, and to be charitable, he meant he would reduce the rate of inflation. Yet he’s dead set against the standard way to do it—keeping interest rates elevated to slow demand. The Federal Reserve hiked interest rates 11 times under Joe Biden, and it worked: inflation slowed from 9 percent to 2.9 percent.

But cutting rates won’t satisfy voters, because recent inflation hasn’t disappeared from prices. From December 2019, just before the pandemic, to today, overall prices in America rose 25 percent, including 25 percent increases for eggs, pork, milk, cars and trucks; 30 or 31 percent increases for housing, rent, food overall, and bread; 37 percent increases for electricity; and 55 percent increases for beef. The relative bargains—items whose prices increased notably less—have been prescription drugs, up 6 percent; and medical care, gasoline, and potatoes, all up 15 to 17 percent.

The government can make some purchases more affordable by subsidizing them, as it often does for health care, energy, and food. Yet Trump and Congressional Republicans have taken aim at those subsidies, making healthcare less affordable by cutting Medicaid and Obamacare supports, making food less affordable by cutting SNAP benefits, and making energy less affordable by cutting support for wind and solar energy.

On top of that, Trump’s mindless tariff policies have increased prices on thousands of products. Inescapably, today’s MAGA government is really MALA, Make America Less Affordable.

The other half of our affordability conundrum is income, because the median income of Americans, after inflation, has been stuck since 2019. In 2024 dollars, the median household income was $83,260 in 2019, and $83,730 in 2024—and prices for food, housing, rent, and electricity have risen faster than overall inflation.

To more fully grasp the affordability story, consider that incomes have two major components: earnings from work (“labor income”) and income from assets (“capital income”).

Typically, people earn more when they become more productive, and over the past five years, productivity has increased at a healthy rate. Those productivity gains depend on businesses investing in new technologies, equipment, and facilities, and workers making the best of those investments. The government does its part by subsidizing both business investment and people’s education and skills. The rise of the American middle class and decades of broad-based upward mobility have rested on wages and salaries rising with productivity.

But here’s another affordability puzzle: Productivity increased 10.4 percent from 2019 to 2024, or about 2.1 percent per year, but incomes stalled. That’s stronger than the 1.7 percent average annual productivity gains in the 1980s, when incomes rose nicely, and nearly as strong as the 2.4 percent average gains in the 1990s, when incomes grew at the fastest rate in decades.

In one respect, Americans’ earnings behave as expected—people with more education and skills continue to earn more. In 2024, real median earnings were 24 percent higher for people with advanced degrees than for college graduates, 66 percent higher for college graduates than for high school graduates, and 26 percent higher for high school graduates than for high school dropouts.

But at every level of education, those real earnings increased from 2019 to 2024 not by 10.4 percent or even half that, but by a total of 0.7 percent for college graduates, 0.5 percent for those with some college but no bachelor’s degree, 1.5 percent for high school graduates and high school dropouts. And for those with advanced or professional degrees, real earnings declined 0.8 percent.

At the heart of the affordability problem: productivity gains didn’t translate into higher earnings.

Why not? Incomes have two major parts: the earnings people receive from working and the interest, dividends, and capital gains they receive from their financial and other assets.

While most Americans’ earnings after inflation virtually stagnated from 2019 to 2024, capital income after inflation increased nearly 30 percent over the same period. And while earnings in America are distributed unequally, capital income is in a class by itself.

The Treasury reports that capital income in 2024 totaled $4.5 trillion, and that the bottom 50 percent of Americans received just 2.5 percent of it. But the top 10 percent pocketed 88 percent of that fast-rising capital income, including 52 percent ($2.3 trillion) for the top 1 percent and 32 percent ($1.4 trillion) for the top one-tenth of 1 percent.

The uncomfortable irony is that most of the capital income came from businesses that increased their labor productivity by an average of 10.4 percent. Yet most of it did not go into people’s earnings but into capital payments to owners and shareholders.

This is not new. Numerous economic studies have found that labor’s share of all national income—the earnings by working people—declined slowly and fairly steadily since the 1970s, while the shares received as capital income (or transfers, mainly Social Security) increased.

It becomes the treacherous political problem it is today for the president and Congress when inflation keeps exceeding or matches income growth, and within incomes, gains in earnings slow or stop, while gains in capital income surge.

And in this context, Trump has compounded his economic malpractice. His tariffs and subsidy cuts not only make America less affordable for most people; they also finance $1 trillion in tax cuts for the sliver of people who collect most of the fast-rising capital income.

That’s today’s crisis of affordability in a nutshell. I was an architect of Bill Clinton’s economic program for ordinary people that produced the 1990s boom, which included market-based reforms and government investments. Yet when the economy shifts, new politics usually follow. Today’s affordability crisis is tailor-made for populism. Given the hollowness and failures of right wing populism under Trump, the door is wide open for Democrats to champion populism from the left.

This essay appeared originally at Washington Monthly.

The economic costs will depend on how long the standstill lasts. If it’s resolved this week or next and the 1.4 million federal workers receive their back pay as the law requires, the economic costs will be minimal. If it persists into November and is followed by more shutdowns, and President Donald Trump ignores yet another law, the costs to the economy will mount.

In either event, today’s shutdown is the opening act or what boxing fans call the undercard—the bout that precedes the main event. The dispute concerns the Democrats’ drive to use the Continuing Resolution to undo Republicans’ directive in their One Big Beautiful (sic) Bill to slash Obamacare premium subsidies for tens of millions of Americans. But the Continuing Resolution provides only short-term federal funding while Congress struggles with the 2026 federal budget. That’s the main event.

Very soon, the brawl over Trump’s 2026 budget will dwarf today’s skirmish. It’s loaded with political third rails that will be as fearsome to many congressional Republicans as the president’s personal threats to keep them in line. With their narrow majorities, how many GOP representatives and senators will vote for policies their constituents reject?

That looming debate will force virtually all of them to support publicly, one by one, the acutely unpopular tariffs Trump needs for his revenues; vast new funding for his far-reaching and even less popular ICE operations to violently arrest and summarily deport millions of law-abiding immigrants and deploy U.S. soldiers and marines to American cities; and carry out the president’s deep and wildly unpopular cuts to Medicaid and research and treatments for diabetes, Parkinson’s, and cancer. As I wrote in these pages three months ago, voting for the final passage of his 2026 budget will also endorse five years of budget deficits projected to nearly equal all U.S. annual private savings.

Given these multiple landmines, the political insider Simon Rosenberg wrote this week, “Under our current rules, passing a budget requires 60 votes in the Senate, all 53 Republicans and 7 Democrats, and a simple majority in the House. Do we think these guys can somehow strike a deal that 7 Democrats, all Congressional Rs, and Trump can agree to?”

And that’s without considering the likely damage to Trump’s political leverage from the pending release of Jeffrey Epstein files. Securing the votes he needs for his budget will make today’s struggle over the Continuing Resolution seem like child’s play.

So, as we consider the shutdown’s economic costs, bear in mind that the coming fierce fights over the 2026 budget may well lead to one or more additional shutdowns, compounding those costs. And that’s all just a prelude to the far greater economic costs from the disruptive policy changes in that budget.

The shutdown’s costs begin with its impact on the incomes and spending of 1.4 million federal employees furloughed or working without pay. The Federal Reserve has found that 37 percent of American households cannot cover an unexpected, $400 emergency expense without borrowing or selling something of value. Even so, many simply couldn’t raise it. That’s chump change alongside the average $1,662 per week that the shutdown costs the 1.4 million furloughed or unpaid federal civilian workers. That tells us that most people cannot cover their regular bills.

Most furloughed and unpaid federal employees and their families are spending less and/or borrowing more (which will only depress their spending later)—and revenues are falling, or will soon, for tens of thousands of businesses where those families pay for food, utilities, rent or mortgage payments, transportation, clothing, healthcare, entertainment, and more. The impact then ripples further through the economy, as those businesses cut back on orders and payments to thousands of other companies that provide and transport the goods and services those businesses sell or use as inputs.

That’s far from the end of it. Additional costs arise from the shutdown’s impact on the federal activities carried out by the furloughed workers. For example, when the national parks suspend operations, the thousands of businesses that supply and deliver goods and services for the parks and their visitors also forfeit revenues they count on. As the shutdown continues or is soon followed by another, those businesses will cut back their operations, jobs, and purchases from thousands of other companies.

The National Park Service is part of the Department of the Interior, and the current shutdown and furloughs also directly affect operations in ten other departments—Defense, Agriculture, Commerce, Justice, Transportation, Homeland Security, Housing and Urban Development, the Treasury, Transportation, State, and independent agencies including the Environmental Protection Agency, the Small Business Administration, and NASA. Hundreds of thousands of private companies and employees are involved in those suspended operations.

Most businesses will try to wait out the shutdown, assuming it will be brief. But if it persists or is followed by additional shutdowns, the revenues and investments of companies and employees at each level of these multifaceted production and sales chains will bear meaningful costs, triggering additional ripple effects.

The shutdown also has regional effects based on where the furloughed and unpaid federal employees work and live. As a share of employment, the places with the highest percentages of federal workers, as expected, are the District of Columbia, Maryland, and Virginia, closely followed by New Mexico and Hawaii, and then by Alaska, Oklahoma, West Virginia, and Alabama. Since everything today is political, we’ll note that the first five are blue and the next four are red. At the other end, the states least affected by the shutdown are New York, New Jersey, Massachusetts, Minnesota, Michigan, Oregon, and Wisconsin, all blue or purple.

Let’s do the math. The shutdown directly affects spending by 1.6 percent of all working households and 1.4 percent of U.S. consumption and indirectly influences the spending of perhaps 4 percent of households and 3 percent of consumption. I estimate that if the stalemate continues into November and the ripple effects take hold, October’s monthly economic growth could be diminished by three-tenths of 1 percent, a modest and wholly unnecessary cost of polarization in Washington.

Greater economic damage will come once the shutdown ends, and Congress and Trump will batter themselves enough to enact some form of his budget. Every major initiative in it—the mass deportations; the military mobilizations in blue cities; the brutal cuts to Medicaid, Obamacare, food assistance, medical research, and education; and, of course, Trump’s tariffs—will damage the economy. For at least the next year, there will be few happy days here again.

This essay was published originally by Washington Monthly

Trump is not the first president to deploy armed soldiers to the streets of Washington. James Madison did it to fight the British military in the War of 1812, and Abraham Lincoln did it throughout the Civil War. Stationing troops in a country’s capital is also routine in military dictatorships, including today those in Libya, Iraq, Sudan, Yemen, and Myanmar facing domestic uprisings, and those in places such as Cuba, Laos, Chad, Botswana, and Burkina Faso that fear future unrest.

More notably, civilian dictatorships today use soldiers in their capitals to keep order and discourage dissent, an unsavory group that includes China, Russia, North Korea, Egypt, Turkey, and Afghanistan.

The United States does not face a foreign army or armed domestic forces that threaten the District of Columbia and our political system. Instead, the Trump administration’s rationale for deploying troops in Washington are the city’s crime statistics from 2023. The claim is wholly fallacious. As Washington Mayor Muriel Bowser and others have noted, the city’s violent crime rate in 2023 was an outlier that was followed by a decline of 35 percent in 2024 and another 26 percent in the first half of 2025.

Violent crime rates are higher in DC than in any state, but those comparisons are also fallacious. Every state contains hundreds of rural communities, towns, and small cities. FBI data show that across the country, those areas have violent crime rates at least 60 percent lower than in cities with populations of 500,000 to 1 million like Washington, with no rural, town, and small city residents.

The proper comparisons for DC are cities of similar size, and the FBI data for 2024 also show that Washington had a lower violent crime rate than Indianapolis, Albuquerque, Memphis, Nashville, or Milwaukee.  Washington also had a lower property crime rate in 2024 than Tucson, Indianapolis, Baltimore, Albuquerque, Memphis, or Seattle.

Finally, FBI data show that the homicide rate in the nation’s capital fell 39 percent in 2024 to a rate lower than Indianapolis, Baltimore, Detroit, Nashville, and Milwaukee, and DC’s  rate for all violent crime was its lowest in more than 30 years.

If urban crime rates for homicide, all violent offenses, or all property crime were a real basis for President Trump sending in troops, they also justify a long-term military presence in at least 11 other major cities.

Crime has always been an entirely legitimate focus and concern for public policy. City police forces have handled local crime in urban areas since the mid-nineteenth century; and if  urban Americans find their police have not been up to the job, they can pay more taxes or float bonds to expand the police’s presence. The federal government also has helped fund municipal police forces since 1968, and the Bill Clinton and Joseph Biden administrations increased that support.  If crime were the issue for President Trump, he could have followed their examples instead of cutting federal funding for local police by $500 million in the One Big Beautiful (sic) Bill Act.

As a practical matter, one of President Trump’s points in stationing troops in American cities is a very stark type of partisan politics. The president first sent troops to Los Angeles and now has named Baltimore, New York, Chicago, and Sam Francisco/Oakland as other place where he also may deploy soldiers. All of them are major cities in solidly Blue states, and all of them have much lower homicide rates than major cities in many solidly Red states.

The city with the country’s highest homicide rate is St. Louis in red Missouri followed by New Orleans in red Louisiana.  The 2024 data show also that St. Louis’s homicide rate was twice the rate in Washington, 1.6 times higher than Baltimore’s rate, 2.5 times the rate in Chicago, and nearly 12 times the rate in New York City. Homicide rates in New York and Los Angeles are also lower than those in Indianapolis, Dallas, Atlanta, and Greensboro, all major cities in states Trump carried in 2024 and unmentioned in his threats.

These actions and threats may serve distinct purposes unrelated to crime. A month before the 2024 election, when threats of terrible punishments were a major theme of the Trump-Vance campaign, I wrote in these pages that Niccolo Machiavelli noted long ago that strongman leaders use such threats and acts to consolidate power and authority. Recent events certainly suggest that President Trump sees his threats and use of troops at home as a means of advancing his authority and agenda. It’s equally certain that their deployments have nothing to do with a president’s traditional domestic use of troops to fight a foreign, invading power or defend cities during an armed uprising.

Earlier this year in these pages, I also pointed to the similarities in Trumpism’s view of American politics as a struggle between friends and domestic enemies and the theories of the Nazi philosopher and jurist Carl Schmitt.  The president’s extraordinary use of the military in American cities now recalls Schmitt’s analysis and belief that when domestic enemies oppose a leader’s policies, the leader has a right and obligation to claim and exercise emergency powers to suppress them.

Trump‘s militarization of the streets of DC isn’t technically illegal, but the distinct odor of authoritarianism is unmistakable.

This essay was originally published in Washington Monthly.

GDP captures everything the U.S. economy produces, whether it goes into consumption or savings and investment.  The BEA data show that Americans’ private consumption grew in the second quarter at an anemic 1.4 percent rate—half the rate in 2024 and half the annual average since 1990. Business investment was also weak in the second quarter, increasing at a 1.9 percent rate or again barely half last year’s rate and one-third the average rate since 1990.

There’s more bad news from other economic fundamentals. Residential investments declined at a 4.6 percent annual rate, compared to 4.2 percent gains in 2024 and average annual gains of 2.5 percent since 1990. And government consumption and investment were nearly flat.

The latest jobs numbers from the Bureau of Labor Statistics also show a weak economy. So far this year, employment has increased an average of 85,000 jobs per month, falling to 32,000 jobs per month over the past three months and versus monthly increases averaging 216,000 jobs in 2023 and 168,000 jobs in 2024.

The official 3 percent growth report for the second quarter does not reflect the economy’s fundamentals. So, where did it come from?

I have an advantage here, because I oversaw the BEA as Bill Clinton’s Under Secretary of Commerce and learned precisely how the Bureau builds the GDP measure.  The answer is that the 3 percent growth number was an artifact of how it accounts technically for changes in imports, which fell dramatically in the second quarter.

Trump’s tariffs initially took effect on April 1, 2025, also the first day of the second quarter. Over the next three months, our imports fell at a virtually unheard-of 30.3 percent rate because markets worked as they were supposed to. As the tariffs began to raise import prices, as confirmed by the recent uptick in inflation, businesses and consumers pulled back sharply on those purchases—an important reason why overall consumption and investment weakened.

That’s what always happens when a country imposes high tariffs. Less well-known is that falling imports are counted as a positive for GDP growth under the BEA’s growth accounting. The approach here logically follows BEA’s larger framework for tracking GDP. Growth represents how much the value of domestic production—the DP in GDP—increases, whether it goes to private or public consumption or savings and investment. Imports present a special case because households, businesses, and the government use them without producing them. So, BEA subtracts imports from its measure of the value of output produced here, and when imports fall sharply, as they did in the second quarter, the decline is counted as a positive for growth. Similarly, when imports rise, the increase is counted as a negative for domestic production.

BEA’s treatment of exports follows the same logic. When we produce and export goods or services, they don’t appear as part of consumption or investment. Accordingly, when exports rise, the increase is seen as positive for growth; when they fall, the decrease is a negative for growth.

That’s how the dramatic decline in U.S. imports since Trump’s “Liberation Day” drove the 3 percent official growth rate for an economy that by every basic measure is weakening.

A simple comparison of past years and decades illustrates today’s economic weakness and how Trump’s tariffs have distorted our import and export flows. (I exclude the years of the financial crisis and pandemic here as Black Swan outliers.)

The weakness in the second quarter came after the economy’s substandard performance in the first quarter, when BEA found that GDP contracted at a 0.5 percent annual rate. Again, consumer spending was weak, and residential investment and government consumption and investment declined. Again, Trump’s tariff plans also played a role: U.S. businesses sharply increased their investments by stockpiling foreign-made equipment, technologies, and inputs before his tariffs raised prices. So, imports surged 38 percent in the first quarter, and under BEA’s accounting, that sharp increase turned sluggish growth into a technical quarterly contraction.

What happens next for Americans will depend on many unknowns, but the outlook seems bleak based on what we know today. Trump just announced higher tariffs on imports from 28 countries including Canada, Brazil, Taiwan, India, and other important trading partners; and a  new survey by the Federal Reserve Bank of Atlanta confirms that most businesses plan to respond to the tariffs by raising prices. So as they take hold, inflation will accelerate, further slowing or contracting consumption and investment. This nexus between tariffs and inflation is the main reason the Federal Reserve hasn’t cut interest rates as the economy has weakened.

As conditions deteriorate later this year, the Fed will cut interest rates at least modestly, but that won’t boost growth much. The Fed directly controls only very short-term rates, while markets determine longer-term rates. As I noted recently in these pages, the most likely direction for those longer-term rates for business loans, mortgages, and most Treasury securities is up, not down. Our coming budget deficits under Trump’s ill-considered tax program are so large as a share of the economy that attracting the domestic and foreign to fund them along with new private lending financing them will require higher rates, especially with inflation rising.

Reversing Trump’s tariff and tax program is the only reasonable way to restore healthy growth for the United States.  Since that’s not going to happen, our most likely prospects for 2026 are stagflation or recession.

This essay was originally published in Washington Monthly.

Whether budget deficits matter and how much they matter have been political issues since the government began regularly operating in the red half a century ago. But deficit hawks cried wolf so often while the United States economy outperformed other advanced countries that most people no longer pay serious attention to the deficit. Liberal advocates of the free-lunch approach to government spending and revenues latched on to “Modern Monetary Theory,” a set of claims that deficits never matter because the government can always print the money to cover them. The president and his cowering congressional Republicans have embraced the same Panglossian view to defend their tax cuts and soaring spending for defense and deportations.

The economics of public finance is indifferent to the expedient rationales of both sides. Deficits always have effects. They’re a key weapon for reviving the economy when it’s underwater. They also matter in normal times because market economies run on credit, and since the government can’t go out of business, it’s always first in line for available credit. So, when companies need loans to purchase technologies and other equipment, build factories, or conduct research and development, and when people need loans for a house, an automobile, or winter jackets for the kids, they compete for the credit left over after the Treasury is done borrowing.

Deficits matter in normal times like today, depending on their size as a share of the economy and the funds available. Together, these factors largely determine the interest rates that the Treasury, private companies, and American consumers must pay for credit.

That now poses a serious dilemma for the economy. The Congressional Budget Office (CBO) analyzed Trump’s program as enacted. It calculated that the budget deficit will exceed $2.3 trillion or 7 percent of GDP next year and every year for the next decade.

Lower taxes for wealthy households and profitable companies will be responsible for most of the tsunami of red ink. CBO reports that over the next five years, from 2026 to 2030, Trump’s One Big Beautiful Act will reduce federal taxes on high-income Americans by an average of $504 billion annually and federal taxes on businesses by $130 billion annually. The sweeping law passed without any Democratic votes also harms millions of Americans by cutting Medicaid and ACA funding by an average of $93 billion annually and reducing clean energy subsidies by an average of $45 billion annually. Even so, those painful cuts will offset less than 22 percent of the reduced revenues from people and businesses at the top.

The result of all this Republican borrowing matters greatly, because a deficit of 7 percent of GDP represents 90 percent of all annual private savings. From 2022 to 2024, those savings averaged 7.7 percent of GDP—4.1 percent of GDP in personal savings by Americans, and 3.7 percent of GDP in retained earnings by businesses. On the path set by Trump and ever-compliant congressional Republicans, financing the coming deficits by ourselves would require, in effect, that everyone invest 90 percent of their yearly savings for retirement, college tuitions, or home downpayments and 90 percent of undistributed business earnings in new Treasury securities.

Fortunately, foreign governments and investors have, for several decades, used some of their savings to buy our Treasury securities, stocks, and corporate debt. At last count, they now hold $9.6 trillion or 33 percent of all publicly-held U.S. government debt, $4.5 trillion or 32 percent of all U.S. corporate debt, and $16.9 trillion or 27 percent of U.S. stocks. When Trump and his America First fans blame other nations for “ripping off” the United States, they don’t mention (and probably don’t know) how much their incomes and lifestyles depend on foreign loans and investments.

The outsized deficits coming under Trump’s program will strain those foreign creditors. Our budget deficits were larger during and immediately following the Financial Crisis and the pandemic, but those spikes were anomalies that receded quickly as the economy recovered. In normal times like today, federal red ink has represented a fraction of what we now face, with deficits averaging 2.1 percent of GDP in the 1990s, 1.5 percent of GDP from 2000 to 2007, and 3.8 percent of GDP from 2012 to 2019.

During the financial crisis and the pandemic, the Federal Reserve also kept the cost of public and private borrowing low. At the same time the deficit deficits surged, the Fed pumped waves of new credit into the financial system through unprecedented purchases of trillions of dollars in Treasury securities and corporate bonds. These “quantitative easing” policies were Hail Mary passes that broadly succeeded because the economy was so depressed that inflation remained low despite the extraordinary levels of fiscal and monetary stimulus.

Trump’s impending avalanche of new federal borrowing is not an emergency response to the economy breaking down. Since mid-2022, the Fed has been selling off the loans it purchased under quantitative easing. Trump’s program will exacerbate post-pandemic deficits that have averaged nearly 6 percent from 2022 to 2025. The hunt for the trillions of dollars in savings needed to finance the coming deficits and support business investment, mortgages, and consumer borrowing will inevitably push up interest rates.

That’s one reason Trump regularly attacks the Federal Reserve and his appointed chair, Jerome Powell, for not cutting interest rates. But acceding to Trump’s demands in this environment won’t produce the effects he expects. The Fed directly controls only one interest rate, the “federal funds rate” for overnight loans between banks. It’s likely that when the market faces trillions of dollars in new annual deficit financings, continuing demand for business and consumer credit and rising inflation, interest rates will increase even if the federal funds rate falls. The resulting slowdown or possible recession will further increase the deficit.

American economic stability in 2026 and onward depends on the willingness of foreign investors and governments to lend us more, year after year, than they ever have before. Their willingness to purchase one-third of our public debt and nearly one-third of our economy has rested on their confidence that the U.S. will remain highly productive, innovative, and stable.

Their confidence will be sorely tested by MAGA running up trillions of dollars in new, annual public debt caused by shrinking tax revenue from the wealthy and corporations and by imposing punishing tariffs on imports from the creditors we need. If they lose patience and reduce their purchases of U.S. Treasury securities—or worse, sell holdings—our interest rates will spike, the stock and bond markets will plummet, and the economy could crash. And this time, more deficit stimulus won’t work, and flooding the system with waves of additional credit won’t work.

Trump is playing chicken with the countries the United States needs to keep its economy going. For once, the deficit hawks are right.

Trump’s tariffs are the most destructive force. Their first-order damages begin by arbitrarily driving up the prices of every product and input we import, followed by price hikes on most competing products and inputs made here. This will leave less money for everything else, depressing growth and jobs even as inflation accelerates—a textbook definition of stagflation. And these first-order costs are compounded by retaliatory tariffs by the primary targets of Trump’s levies, further slowing jobs, wages, and growth.

Six months ago, our economy grew at a healthy 2.8 percent rate, and inflation had eased sharply.  Now, Trump’s policies have ushered in rising prices and the first stage of a recession. .

His program’s second-order costs follow from the unprecedentedly high tariffs on goods and inputs from our three largest trading partners. The 145 percent tariffs on all Chinese imports and China’s 125 percent retaliatory tariffs have established for now a mutual embargo between the world’s two most important economies, alongside Trump’s 25 percent tariffs on most goods and inputs our companies buy from suppliers in Mexico and Canada.

If these policies remain in places, they will not only raise prices and slow the economy.  By mid-summer, their punishing blows will disrupt supply chains, and Americans should expect the types of shortages their grandparents had to endure during World War II. Despite these inescapable second-order costs, Trump and his apprentice dealmakers have yet to begin negotiations with China, Mexico, or Canada—in large part because the president’s personal pique and economic delusions dictate our indefensible positions.

It gets worse. Most U.S. imports from our major trading partners are inputs for U.S. manufacturers, products made by their foreign subsidiaries, or energy we need, and truncating our access to those imports will damage a broad array of separate economic activities related to them. (Hat tip to Brad DeLong.)

Cripple our access to electronic parts from China, vehicles from Canada, or vegetables and fruits from Mexico, and American companies will have no choice but to wind down the jobs and spending for their related marketing, accounting and legal services, transport, and ultimate sales. Our economy will also lose the value that American consumers and businesses derive from using those electronics, cars, trucks, and foodstuffs. It will pummel American manufacturers whom Trump claims he wants to help.

If Trump’s inane tariff regime remains in place for six months or longer, its first and second-order effects could trigger a deep recession akin to 1981-1982 and 2008-2009. And unlike those recessions, the Federal Reserve won’t be able to help much. The tariff-driven inflation will limit the central bank’s ability to cut interest rates, a dilemma that drove Trump to threaten Federal Reserve Chair Jerome Powell.

Equally important, the bond and equity markets’ thumbs-down responses to Trump’s tariffs and threats signal an even more serious problem: Investors are losing confidence in Trump, his presidency, and perhaps the United States.  It’s especially true for foreign investors who reinforced the message by moving away from the dollar, because they’re investing less in our stocks and bonds.

If their response to our president’s ineptitude and capriciousness persists, it could be ruinous. The stability of our financial system depends on trillions of dollars in foreign capital. In 2024, foreign investors and governments held $18.4 trillion in U.S. stocks and $8.5 trillion in U.S. Treasury securities, about 30 percent of all our stock and 30 percent of all our bonds. While most American investors will likely wait out the coming storm, foreign investors with $27 trillion in American financial assets have plenty of alternatives. In a word, the United States could face destabilizing capital flight.

To stave off this grim prospect, the Treasury Department and American corporations will have to offer foreign and domestic investors higher returns. (Yields on U.S. treasuries soared after Trump revealed his chaotic tariff regime and have decreased only slightly since then.) So, regardless of what the Fed does, market interest rates may rise even as the economy declines.

It may not be very far off because the Treasury’s challenge to attract funds to keep the government running is coming to a head. The Treasury already planned to float $1.8 trillion in new bonds in 2025, and that burden will increase substantially as the economy weakens. On top of that, Republicans in Congress will very soon approve Trump’s deficit-busting budget, draining $5 trillion in revenues over 10 years for another round of his 2017 tax cuts, which are set to expire and perhaps up to $4 trillion more for Trump’s other tax promises, plus another $1.5 trillion in increased defense spending.

Trump and his economic courtiers count on tax cuts and higher spending to ward off recession, and in normal times they might have been right. But their hopes are delusions under the new conditions they’ve created since the higher interest rates needed to attract the capital the government and U.S. corporations need will thwart most or all of any stimulus.

Our gathering economic storm includes another feature that could drive the economy onto the rocks. Apart from the tariffs, Trump’s aggrieved attacks on the rule of law also threaten the willingness of foreign investors to continue holding and buying American bonds and stocks. Along with the rest of us, they see Trump and his administration unilaterally abrogating contracts, withholding appropriated funds, dismissing court decisions, attacking judges for enforcing their rulings, deporting people without charges or hearings, providing special treatment for large contributors and favored companies, and threatening law firms and universities without any legal basis.

The erosion of the rule of law under Trump can have enormous economic significance for a foreign government, investor, or company with stakes in our economy. They now know that the U.S. government may ignore its contracts with them or decide not to enforce their agreements with others when it serves the political or personal interests of the president. That’s the way the world works in the kleptocratic dictatorships in Russia and Venezuela, and virtually no one invests in their stocks and bonds.

By following their lead, Trump and his apprentices risk devastating capital flight that could leave many of our leading financial institutions insolvent. In addition to his deeply destructive tariffs, Trump’s sweeping campaign against the rule of law in the United States has raised the economic stakes from a rocky business cycle to a potential financial and economic meltdown with terrible consequences.

This essay appeared originally at Washington Monthly.

By Robert J. Shapiro

Americans are, of course, deeply divided today over race, gender, immigration, religion, and other differences that define us as a people and political culture. These cleavages have existed throughout American history, but in their current iterations, they share a common element in Donald Trump. Both sides of the Trump fault line see him as the first mover in defining the country’s divisions, staking out unyielding positions—as he did last week on race and gender by ending federal anti-discrimination regulations.

Back in office, Trump opened a new division around presidential authority. It pits his ignoring of traditional boundaries and a determination of what he deems necessary to carry out what he sees as his electoral mandate versus the country’s founding beliefs that the Constitution, laws, Congress, and the judiciary establish hard limits on any president’s authority.

To his critics and opponents, Trump’s combative style and record raise fears that he will use his claims to open-ended powers to settle once and for all the country’s longstanding divisions around race, gender, immigration, and more, not in a peaceful or unifying way. For Trump’s supporters, the prospect of him wielding broad authority raises hopes that he will make them more prosperous, secure, and proud.

Both sides of this debate value democracy as they understand it. One side, like James Madison, believes that a large, diverse democracy requires compromise between branches, each with limited power. The other side’s view of democracy rests on the claim that a nationwide election confers the people’s consent on the winner, who can act decisively to serve their interests.

Trump ignores this debate because he operates in a different framework. His approach to politics has always been to cast supporters as friends and critics as enemies. This characterization of politics was first propounded by the German political theorist Carl Schmitt, who has drawn considerable attention. See this New York Times piece from last year, one from the Trumpian Claremont Review, and the leftist Jacobin.

And in Schmitt’s framework, when enemies at home or abroad gain notable political sway, it creates a grave emergency that warrants executive action outside the law. It’s clear why Schmitt was the favored theorist for the Nazi party and a senior jurist in the Third Reich.

It’s safe to assume that the president has never read Carl Schmitt, yet he frequently echoes Schmitt’s thinking. He declared his “authority is total” as president and baldly stated his intention to be “a dictator on day one.” He claims that his domestic enemies weaponized the government and stole the 2020 election, initiating an emergency that justified the January 6 attack on Congress as it prepared to certify Joe Biden’s election. And on the first day of his second term, he pardoned those convicted as “friends” and “patriots.”

In Trump’s first weeks back in office, he asserted presidential authority to end birthright citizenship, announced plans to investigate his critics, suspended funds appropriated by Congress, and summarily fired the Inspector Generals without notice to Congress as required by law. He turned over control of the personal data every American provides to the government to administer Social Security and other taxes and benefits to employees of the mega-billionaire Elon Musk, an open booster of Germany’s AfD party, which is surging in the polls based on anti-immigrant nationalism that echoes the Nazi era.

All these acts are arguably unconstitutional or illegal. All are wholly consistent with a Schmittian view that Trump’s return to the presidency had not yet vanquished America’s domestic enemies, so he can do what he feels is necessary to vanquish them.

This is not muddled thinking or engineered chaos. It’s a coherent view of politics that supersedes the debates between a strong versus weak presidency. A new battle over Trump’s Schmittian approach to America has begun, and the outcome is unsettled.

Our politics are very different from Germany’s in the 1930s. While Germany had been a democracy for less than 15 years before the rise of National Socialism, the United States has been a continuous democracy since the Articles of Confederation 244 years ago. Call me an optimist, but democracy is still embedded in our political DNA.

It also feels doubtful that most Americans will accept that Trump’s opponents are domestic enemies that, in turn, demand the sweeping powers Trump is trying to wield in his first weeks back in office. What happens next depends on how Congress, the Supreme Court, and the media respond to the Trump-Schmitt executive agenda. So far, a Republican Congress has been supine, as even the president’s most controversial nominees speed to confirmation. That leaves the rest of us to decide the kind of America we want, one with a leader with the outside-the-law powers Schmitt championed, and Trump seems to be seizing, or one true to our heritage as the world’s oldest democracy.

This essay appeared originally at Washington Monthly.