Tariffs Projected to Significantly Lower the Budget Deficit

Tariffs are the equivalent of a sales tax, although, unlike a pure sales tax, exporters and the retail value chain do absorb a portion of the tax.  Taxes are universally unpopular, so it is no surprise that there has been substantial opposition to the tariffs.  In addition, the opposition party is motivated to point out the pitfalls of tariffs and exaggerate the negative economic impacts.  Unfortunately, the Federal Reserve Board has made yet another policy error by not recognizing that tariffs are the equivalent of a sales tax and should be ignored for the purpose of formulating monetary policy.  The Fed’s mistake is causing it to continue the Fed’s ultra-tight monetary stance.  The base money supply has shrunk by over 9% year-over-year which is causing the economy to slow down, with housing nearing recessionary levels.  Tech investment, however, has never been stronger which is offsetting the decline in housing so the Fed’s policy error of not cutting rates is unlikely to cause a recession.

What almost all economists and political commentators have missed is that tariffs are pro-growth in the intermediate and long-term.  Specifically, tariffs produce substantial tax revenue which lowers the Federal budget deficit and results in more capital being available for private investment as Federal budget deficits crowd out private investment.  We forecast that the 2026 Federal budget deficit will be only $1.4 trillion, which is $300 billion less than the CBO, as they have not forecasted significant tariff revenue in its latest deficit forecast of a $1.7 trillion for fiscal 2026.  A $1.4 billion deficit will be only 4.5% of GDP, which means the deficit is sustainable as GDP normally grows at 5% nominally resulting in a stable ratio of Federal debt to GDP. The increase in private investment of $300 billion is likely to result in approximately $50 billion of incremental GDP, raising the sustainable growth rate of the US economy be .2% per year.