Thought of the Week:
This week, I attended the Conference Board’s Government Relations Executives (GRE) Council meeting in Orlando, FL. I’ve sat on the Council since its inception in 2017, and the corporate member roster reads like a who’s who of global business—BASF, John Deere, Diageo, Fidelity, Lowe’s, Mattel, Sysco, Target, Walmart, Warner Music, and others. We meet in person three times a year to hear from experts across the political spectrum, share best practices, and network. Council meetings essentially offer the equivalent of continuing education credits in the areas of public policy and legislative affairs. This was the first meeting since President Trump took office, and as you would imagine, much of the discussion revolved around DOGE, reconciliation, and tariffs. While no silver bullets were uncovered about how to deal with the business uncertainty that flows from the new administration, there was a renewed sense of purpose among the attendees that it is more important than ever for lobbyists to do what they do best—provide information to the government to inform its decisions and provide accurate information to corporate leaders about how the government works, what to expect, and what is realistic. In particular, it is crucial to deliver information to lawmakers and staff because they are unlikely to fully appreciate the real-world impacts of the proposals they are considering or the possible realm of unintended consequences inherent in the legislation and regulations they are drafting. While often cited, but rarely defined, the law of unintended consequences simply means that the actions of people—especially government—almost always has effects that are unanticipated and often in direct contrast to their proposed intent. Consider trade and tariffs. A key lesson from the trade war that occurred during President Trump’s first term is that tariffs created unintended consequences beyond their immediate economic targets. Trade association and think tank research has shown that the cost of tariffs was largely passed through to American consumers, leading to higher prices for all types of goods. These same studies found that the burden of U.S. tariffs on Chinese imports fell largely on American businesses and households, contradicting the assumption that tariffs would primarily hurt Chinese exporters. What’s more, U.S. manufacturers suffered as firms faced rising input costs and supply chain disruptions. These same dynamics are relevant to the coming trade war. The simple truth is that the effectiveness of tariffs in achieving strategic objectives remains questionable, particularly given that many firms have already adapted to past trade restrictions by developing alternative sourcing strategies. And what about DOGE? Beyond canceled contracts and layoffs, the White House has given federal agencies until mid-April to suggest relocations of bureaus and offices out of the D.C. region. The prevailing view among supporters is that by moving federal agencies out of Washington and closer to the people most impacted would ensure that bureaucrats don’t issue out of touch mandates that disproportionately harm working families, small businesses, and farmers. While 80% of the federal workforce already lives outside of the D.C. area, beyond negatively affecting the local economy, larger-scale efforts to relocate federal offices are likely to have unintended consequences of their own. Consider what happened to the Bureau of Land Management when it moved its headquarters to Grand Junction, Colorado, during President Trump’s first term. The move caused major issues at the agency as more than 87% of affected employees resigned or retired rather than move west, depriving the agency of expertise and disrupting operations. Not fully appreciated is one reason federal agencies were originally intended to be located in a federal district without senators and representatives—once an agency moves outside of Washington and into a state, it immediately becomes a constituency for two senators and at least one representative. All of a sudden voting members of Congress have an immediate motive to grow government and increase budgets to benefit those in their backyard. While every GRE attendee remains sensitive to the threat of placing their company in the Trump cross-hairs, they also recognize that political advocacy remains as important as ever.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Eurasia Group Says Reciprocal Tariffs Could Create Space for Tax Cuts. According to a Yale Budget Lab report, the Trump administration’s reciprocal-tariff policy, if implemented, would raise between $2.3 trillion and $3.5 trillion over a ten-year budget window, depending on retaliation from trading partners and the scope of dynamic reductions in tax revenue. Although Yale is not producing an estimate that Congressional tax writers could use, if it is in the ballpark of what the Congressional Budget Office (CBO) would estimate and the tariffs are implemented, this would give space for Congress to cut taxes beyond analysts’ expectations for 2025. Any additional tax cuts would likely be focused on individuals and families, not businesses. However, using tariffs as a revenue-raiser—as Trump as floated in the past—reduces their leverage in bilateral negotiations (and vice versa), which may become a point of tension between Congress and the White House. While reciprocal tariffs implemented by the White House alone cannot be scored by the CBO as formal offsets, they would eventually become part of the CBO baseline. Republicans can take into account new tariff revenues when considering voting for a deficit-increasing tax package. The report finds that full implementation of reciprocal tariffs would hike the effective U.S. tariff rate by 13 points to the highest level since the Smoot-Hawley era during the Great Depression.
Eurasia Group Sees U.S. Tariffs Disrupting Mispriced Markets in 2025. A flood of policy announcements from the Trump administration is driving geopolitical and geo-economic uncertainty; while tariff increases have thus far only affected China, much more is likely coming, and it is expected to reach disruptive levels. Economic models point to significant fallout from tariffs, including higher inflation and inflationary expectations; should these effects play out, the Federal Reserve is likely to be compelled to react by tightening financial conditions. These expectations reinforce the belief that global economic growth is likely to remain subdued, with inflationary pressures stemming from the combination of a structural decline in potential growth and persistent uncertainty about the path for economic policy in both the near and long term.
Observatory Group Changes Mind, Now Believes Trump 2.0 will be a Macroeconomic Event for the U.S. Economy in 2025. Yes, Trump 2.0 could well be a macro event this year, mainly from high U.S. tariffs hurting growth and causing higher inflation. The previous baseline assumption was that any impact would come from a nationalist agenda (tariffs, deportation), but that the timing and scale were highly uncertain and might not be material. However, after the first month of Trump 2.0, it seems clear that tariffs, especially the most extreme reciprocal versions factoring in other countries’ VAT rates, have the greatest scope to become a macro event, shifting the aggregate supply curve, resulting in less output and higher prices. Similarly, deportation actions are deterring many undocumented and even legal immigrants from participating in informal labor markets, lowering output, and raising prices in agriculture and construction. The melodrama around layoffs and firings of Federal government employees is likely to be more smoke than fire, unless appropriated monies go unspent and government agencies never replace fired workers (even with contractors). In contrast to early assumptions among many forecasters that there would be at least a modest fiscal stimulus in 2025, the evidence now points in the opposite direction. The overall impulse on the economy while negative, remains very hard to measure and is at least partly reversible.
“Inside Baseball”
White House, Congressional Leadership Discuss Using Tariffs to Pay for Agenda. Politico reports that GOP leaders and President Trump are strategizing over how to incorporate revenue from new tariffs into their domestic policy bill; the goal being to counter arguments that the multitrillion-dollar legislation adds to the national debt. Although Speaker Johnson, Senate Majority Leader Thune, and other senior Republicans discussed the topic during their White House meeting this week, the official Republican line continues to be that they plan to keep the tariffs outside of the final reconciliation package. Regardless, the group discussed how to score and eventually count the revenue as part of their plans for a deficit-neutral bill. At present, GOP leaders don’t have the votes to incorporate the tariffs into the bill as the politically sensitive topic would spark an internal GOP war between the free-trade and America First factions of the party, which could derail the entire package. While many Republicans don’t see tariffs as a viable spending offset, GOP leaders are discussing how to estimate the revenue generated by Trump’s tariffs and then apply that figure to their assessment of how much the bill will cost. Under such a scenario, the Trump administration would essentially just tell lawmakers how much money they expect to bring in from tariffs and count that to argue they have a deficit-neutral bill. They’re already counting on economic growth above what nonpartisan scorekeepers are estimating to make the numbers work. Some Republicans are likely to bristle at adding tariff revenue on top of that, but leaders believe they will eventually fall in line.
In Other Words
“We won’t be perfect. But when we make a mistake, we’ll fix it very quickly. So, for example, with USAID, one of the things we accidentally canceled, very briefly, was Ebola prevention. I think we all want Ebola prevention. So, we restored the Ebola prevention immediately,” Elon Musk at this week’s Cabinet meeting, speaking about DOGE’s impacts on USAID; his remarks exemplify the move-fast-and-break-things ethos of DOGE, with which Republicans are currently comfortable, but which could cause tension in the future.
Did You Know
The wealthiest 10% of Americans now account for 49.7% of all spending, the highest since records began in 1989.
Rep. Wilson (R-SC) is drafting legislation to get President Trump’s face on a new $250 bill.
Elon Musk’s businesses have received $38 billion in government funding via loans, contracts, subsidies, and credits.
Graphs of the Week
Recent Conference Board Surveys’ Trend Lines Turn Pessimistic. U.S. consumer confidence fell by its most since August 2021 on concerns about the outlook for the broader economy. The reading added to a growing stack of indicators showing that uncertainty over President Trump’s policies has Americans increasingly worried about their economic future. The Conference Board’s gauge decreased 7 points in February to 98.3, marking its third straight decline. Consumers were also more pessimistic about current and future labor-market conditions as well as the outlook for incomes and business conditions. Perceptions of present and future financial situations worsened and the share of respondents expecting a recession in the next year rose to a nine-month high. This pessimism has Americans cutting back on spending; in fact, more than half of consumers say they are delaying major life plans due to uncertainty over the economy and the consequences of President Trump’s tariff threats. Of those, a third said they were putting off buying a home while one in six have postponed education plans—and one in eight have pushed back retirement.
