Trump’s erratic policy and the end of American hegemony

NEW YORK – It has become almost routine to end each year talking about “polycrisis” and recognizing the difficulty of anticipating a future that seems fraught with the risk of new wars, pandemics, financial crises and climate-driven devastation. However, 2025 has added a uniquely toxic ingredient to this mix: the return of Donald Trump to the White House, whose erratic and illegal policies have already destabilized the post-war era of globalization. In the face of such confusion and uncertainty, can we say anything with confidence about the direction the US and global economies are taking?

One thing we can say is that the US economy is not performing as well as Trump, the eternal con man, would have us believe. Job creation has largely stagnated, which is not surprising given that Trump has sown uncertainty and weakened the economy in unprecedented ways.

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On the supply side, its most pernicious policy has been the frontal assault on immigrant workers (and darker-complexioned American workers more generally).

The administration’s mass deportations — carried out by masked Immigration and Customs Enforcement (ICE) agents who arrest people on the streets — have eliminated a major additional source of labor at a time when the national workforce is shrinking.

This affects everyone, because not only do Americans depend on immigrants in sectors ranging from agriculture and construction to tourism and caregiving, but these immigrants are also a source of demand.

However, today, many people of color living in the US – including US citizens – are afraid to leave their homes for fear of being detained and brutalized by ICE.

The negative effects of Trump’s indiscriminate cuts to the public sector have also rippled throughout the economy. There are multiplier effects in government contractions, just as there are in expansions, and, in the current context, the costs have been amplified by the erratic nature of the process.

The administration’s incompetent and clumsy approach sowed even more uncertainty and caused businesses and consumers to adopt precautionary behaviors.

Trump’s tariffs – imposed or threatened – and other intermittent policies must be recognized for what they are: a major supply-side shock to the economy. They needlessly added uncertainty to production costs and the prices consumers pay, making it impossible for companies to engage in serious long-term planning.

And these are just short-term effects. The long-term prospects for the US economy look even bleaker, all thanks to Trump. After all, America’s comparative advantage has always been based on technology and unfettered higher education.

By attacking research and trying to deprive universities of federal funding unless they submit to his demands, Trump is shooting the American economy in the foot.

As several Nobel Prize winners in Economics have highlighted, the “wealth of nations” resides in institutions, especially the rule of law. But Trump is trampling on the rule of law and replacing it with an extortionate regime of favor-trading (and self-favoring) in which public benefits (like export licenses for Nvidia or subsidies for Intel) are granted in exchange for shares in the company’s future profits.

Of course, over time, Trump’s extortion targets will diminish. Having realized the danger of depending on the United States, many countries are already looking for new trade agreements.

The future of an illusion

Why, then, does GDP continue to grow (although not as robustly as under President Joe Biden), with the stock market reaching new highs and inflation remaining below the levels that critics had warned about?

There are several explanations for this apparent strength. As far as the stock market is concerned, the boom is, in reality, very small, concentrated mainly in a small group of technological giants: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

And yet, these companies’ valuations reflect expectations of long-term monopoly profits that may never materialize. (This is particularly true in the case of Tesla, due to the fact that Elon Musk supports Trump, which has alienated many consumers).

I myself am among the many analysts who see current valuations as the product of a bubble, a bubble that has propped up not just the stock market but the entire economy.

Huge investments in AI have offset the weakness in the rest of the economy. But, like all bubbles, this one will eventually burst. No one knows exactly when, but with such a large share of the economy dependent on one sector, the collapse will inevitably be felt across the board.

Worse still, if AI is as successful as its proponents anticipate, it will be a harbinger of other serious problems, because then the technology will likely replace many workers and cause even greater inequality.

If we add to this the reduction of the State demanded by the technological pseudo-libertarians of Silicon Valley, we are left to question what can sustain the US economy in the coming years.

As far as inflation is concerned, there is a simple explanation for why it has not yet risen sharply. For starters, Trump’s tariffs have generally not been as high as he initially threatened (although the punitive 50% tariff imposed on India, a country the US treated as a friend before Trump’s return, is shockingly brutal).

Furthermore, the effects of tariffs often manifest themselves with long time lags. Many companies have held off on raising prices until they see what their competitors will do, and some will not raise prices until they exhaust stocks of goods purchased before the tariffs were implemented.

But if the tariffs that Trump threatened to impose on China were actually imposed, the situation would be different. In fact, the dismantling of supply chains could trigger price increases greater than the tariffs themselves.

This brings me to the fundamental question: What country would willingly submit to the whims of a mad king? It’s not as if the US has absolute control over the supply of critical minerals or rare earths, without which the modern industrial era would fall apart.

It’s not like there aren’t markets elsewhere. The law of supply and demand works well, with or without the USA.

As Adam Smith and David Ricardo taught us, economic growth consists of taking advantage of comparative advantages and economies of scale. But as Trump (and Russian President Vladimir Putin) have taught us, relying on unreliable trading partners can be extremely disadvantageous.

Furthermore, the USA is no longer as important as it used to be. Currently, they represent less than 10% of world exports. While some companies’ profits will suffer in a post-American global economy, others will benefit. While some workers will have to find alternative jobs, others will find new demand for their skills.

It is certain that the short term will not be easy. But in the new global economy that will emerge in the long term, the US will have lost its hegemony. That’s where we’re headed, as we enter the second year of life at the mercy of the whims of an unbalanced president.

The transition has already begun, and although global growth will suffer, the pain may be less than many fear. In Europe, for example, investments in rearmament – ​​another byproduct of Trump’s self-destructive policies – will provide a significant boost.

Perhaps the decisive moment will come with the legislative and gubernatorial elections in 2026 in the USA, in November. Elections that are not as free and fair as would be expected in a genuine democracy (as many fear) would mark a dark turning point.

But if growing dissatisfaction with Trump’s economic management and the country’s slide into authoritarianism result in Democrats taking back at least one house of Congress, it would be a turning point in the opposite direction. In either case, the US and the world will continue to face at least two more years of economic incompetence and uncertainty.

Joseph E. Stiglitz, Nobel Prize laureate in economics, is former chief economist of the World Bank, former chairman of the US President’s Council of Economic Advisers, professor at Columbia University and author, most recently, of The Road to Freedom: Economics and the Good Society (WW Norton & Company, Allen Lane, 2024).

Copyright: Project Syndicate, 2025