"Why the U.S. Economy Remains Solid Despite Four Major Policy Shocks Including Tariffs" - Brookings Institution

Despite four major policy shocks last year following the launch of the second Trump administration - steep tariff hikes, a sharp decline in net immigration, an increase of several trillion dollars in government debt, and the erosion of the independence of the Federal Reserve (Fed) - the U.S. economy continues to sail smoothly, maintaining solid growth.

According to the International Monetary Fund (IMF) outlook released in January this year, U.S. growth is projected to reach 2.1% in 2025 and 2.4% in 2026. These figures are lower than the 2.8% recorded in 2024, but higher than the advanced-economy average of 1.7% in 2025 and 1.8% in 2026. The unemployment rate remains below 5%, and although inflation is still above the Fed’s 2% target, it has fallen below 3%, a significant drop from the period immediately after the pandemic.

Why, then, is the U.S. economy remaining on a path of sustained growth despite adopting a policy line that runs directly counter to the conventional wisdom of mainstream economics?

On January 29, the Brookings Institution held a panel discussion titled “One Year of ‘America First’ Trade Policy: What Have We Learned and What Comes Next?” Ben Harris, deputy director of economic studies at the Brookings Institution, delivered a presentation offering his own analysis. The article based on his remarks was posted on the Brookings Institution website on February 3 (local time).

Deputy Director Harris first outlined four distinct policy shocks. The first is the attack on free trade. During the first Trump administration, the average tariff rate was raised from 1.5% to 2.8%, but under the second administration the average tariff rate was increased from 2.4% on Inauguration Day to as high as 28% by April of last year.

The second shock is the unprecedented collapse in U.S. net immigration. Until recently, the U.S. immigration system, through both legal and unauthorized immigration, had broadly met domestic labor demand, with annual net immigration typically ranging from 500,000 to 1.5 million people. In 2025, however, net immigration was at a near-collapse level. According to a recent study by Wendy Edelberg and Tara Watson of the Brookings Institution, conducted jointly with researchers at the American Enterprise Institute (AEI), last year’s net immigration is estimated to have been between -10,000 and -295,000.

The third shock is the accumulation of government debt amounting to several trillion dollars in the absence of either war or recession. According to analysis by the Urban-Brookings Tax Policy Center, President Trump’s “One, Big, Beautiful Bill” is expected to increase public debt over the next 10 years by 4.2 trillion dollars, equivalent to 9% of gross domestic product (GDP). This bill is the main driver of the widening fiscal deficit, and the Congressional Budget Office (CBO) projects that the fiscal deficit will grow by an average of 2.1% per year over the next decade.

The fourth shock is the undermining of the Fed’s independence. The issues include President Trump’s persistent pressure for interest rate cuts, his attempt to dismiss Governor Lisa Cook, the appointment of a Fed governor who simultaneously serves as chair of the Council of Economic Advisers (CEA) at the White House, and, above all, the criminal investigation targeting Fed Chair Jerome Powell.

Deputy Director Harris noted, “Any one of these four would constitute a major shock, and the fact that they have occurred simultaneously is even more extraordinary. If you had told 100 economists a year ago that this scenario would unfold, almost all of them would have predicted that the U.S. economy would stagnate, or in the worst case collapse, but that has not happened,” and he offered four explanations.

The first is that the shocks may not have been as severe as initially thought. In the case of tariffs, once tariff evasion, transshipment, and implementation delays are taken into account, the sharp rise in the average tariff rate cited above may be overstated. Net immigration may be closer to zero than to -300,000, and in a labor market that is gradually cooling, the impact could be limited. As for Fed independence, financial markets may judge that the composition of the Federal Open Market Committee (FOMC) leaves relatively little room for political pressure.

Tariff revenues have increased by less than 200 billion dollars per year. This is a burden for U.S. consumers and businesses, but not enough to shake a 30 trillion dollar economy. Retaliation by trading partners has also been very limited so far. Likewise, attacks on Fed independence have not yet led to an abrupt shift in the stance of monetary policy.

The second explanation is that there are stimulus factors offsetting the negative shocks. The increase in government debt has, on the other side of the ledger, brought higher disposable income, and Goldman Sachs estimates that disposable income will rise by 0.4 percentage points in the first half of 2026. Looser capital regulation is spurring investment, and according to the Federal Reserve Bank of St. Louis, the artificial intelligence (AI) boom has so far accounted for about 40% of GDP growth. In addition, the president’s trade framework includes large-scale investment commitments and expanded purchases of U.S.-made products.

The third possibility is that economists’ existing models may simply be wrong. It may be that the value of immigration, free trade, Fed independence, and a sustainable fiscal outlook has been overestimated. Harris said, “I think we need to be humble about this possibility,” adding, “The experience of 2025 and the pandemic has reaffirmed the lesson that the scale and diversity of the U.S. economy help shield it from a sharp downturn.”

The fourth explanation is that it takes time for these shocks to permeate the broader economy. The positive effects of immigration emerge over the course of many years, and the crowding-out effect of government debt on private investment also manifests itself over the long term. The erosion of Fed independence likewise takes time to be fully reflected in monetary policy decisions. As for tariffs, U.S. trading partners are only now beginning to seriously explore alternative options to replace the U.S. market.

Harris concluded his presentation by saying, “I have offered four explanations as to why the economy has not collapsed despite these simultaneous policy shocks. My conclusion is somewhat pessimistic rather than hopeful. If these policy shocks persist, it is highly likely that the negative impact will be much greater than what we have observed so far. I sincerely hope I am wrong.”

This content was produced with the assistance of AI translation services.