What Trump’s 2nd term might mean for the country’s economy : NPR

DAVE DAVIES, HOST:

This is FRESH AIR. I’m Dave Davies. In his presidential campaign, Donald Trump promised sweeping changes – high tariffs, big tax cuts, mass deportations of undocumented immigrants and deep spending cuts guided by his friends Elon Musk and Vivek Ramaswamy.

If anyone thought Trump might pause after his win, take a few weeks to consider his cabinet choices and then plot a phase-in of his policy moves, they were mistaken. Trump quickly announced a host of high-level appointments, some quite controversial.

And then three days before Thanksgiving, he declared that on Day 1 of his administration, he’d imposed 25% tariffs on goods from Mexico and Canada to remain in effect until they crack down on illegal immigration and drug trafficking into the U.S. That prompted a visit to Mar-a-Lago from Canadian Prime Minister Justin Trudeau and a phone call with Mexican President Claudia Sheinbaum.

Trump also chose an economic policy team, including Treasury Secretary nominee Scott Bessent, a Wall Street veteran who’s not only supported Democrats in the past, but as recently as 2015 was chief investment officer for George Soros – a figure widely reviled by conservatives.

For a look at what all this means in the second Trump administration, we turn to David Wessel, a senior fellow in economic studies at the Brookings Institution and director of its Hutchins Center on Fiscal and Monetary Policy. Wessel spent three decades at The Wall Street Journal. He shared two Pulitzer Prizes for journalism – one at the Journal and the other at The Boston Globe – and has written three books on economic issues. We recorded our conversation yesterday.

Well, David Wessel, welcome back to FRESH AIR.

DAVID WESSEL: Good to be with you.

DAVIES: I want to talk about tariffs for a moment. You know, this idea that he can raise tariffs on other countries and get results, you know, kind of hails back to the mercantilism of a few centuries ago, like when the British Empire would get cheap raw goods from other countries and then manufacture stuff. You know, you manage trade policy to benefit your own industries. And his notion is that if we raise enough tariffs, manufacturers will eventually decide they need to locate in the United States to avoid them. And I’m interested in your view on how realistic that is. I mean, as a thought experiment, if we could take the clock back decades and instead of embracing free trade in the ’90s erected tariffs, could we have prevented the loss of manufacturing jobs over the last few decades?

WESSEL: Well, it’s a good question. And I am sympathetic to the view of many economists that the period of trade liberalization after World War II benefited both the United States economy and those of the rest of the world. But I also recognize that globalization, such as the surge of imports from China after they joined the World Trade Organization, was very damaging to many American businesses and communities and workers. And as a society, we didn’t do enough to manage that. I think that you’re absolutely right in your question. Jamieson Greer, who will be the new U.S. trade representative if he’s confirmed, said in a webcast with JPMorgan before the election that President Trump’s advisers do not see trade as a tool of foreign policy, like many people in Washington do or historically have. They think of it as a tool of domestic policy and industrial policy, very focused on building manufacturing jobs in the United States.

OK, so a couple things to think about here. One is a lot of manufacturing jobs in the United States have been lost not to imports, but to automation, and that’s not because of trade. That’s because of technology has advanced, and profit-seeking companies looking to cut costs don’t use workers where they can use machines if it’s more efficient. And secondly, you sometimes hear from President Trump and his people who agree with him on trade that somehow we should go back to the late 19th century, when we had a lot of tariffs and the economy grew slowly.

And I take my wisdom on that from a very good trade historian at Dartmouth College, Doug Irwin, who has looked at this. And he points out it is true that we had tariffs and we had high growth in the late 19th century – the Gilded Age. But he observes that much of that had to do with the expansion of the population and on capital accumulation – that is, investments – rather than on getting benefits from tariffs. In fact, he thinks tariffs may have discouraged businesses from investing because it made the imported capital goods more expensive. And finally, he points out that the growth in that period, the growth in productivity or output per hour of work, was most rapid in sectors like utilities and services, which had nothing to do with tariffs. So it’s one of those economic things where there’s a correlation. We had tariffs and a lot of growth in the late 19th century, but one didn’t cause the other.

DAVIES: Now, Trump did impose tariffs in his first term. And, you know, when he imposed tariffs on steel and clothing and kitchen cabinets and the like, did companies in the United States make more of that stuff? Did it have a benefit?

WESSEL: Some, but not very much. Those tariffs are a lot more modest than the ones that he is proposing now. Basically, what tariffs do is they raise the cost of imported goods. And by raising the cost of imported goods, the idea is it’s easier for American manufacturers to make this stuff because they have higher costs than, say, the Chinese or the Malaysians or the Koreans or whatever. But in many cases, they impose tariffs on things that we don’t make in the United States or don’t make very much of – shoes and clothing and stuff like that. So all that does is raise costs. And then there’s a separate set of tariffs, and these are the ones that President Biden continued. They have to do with preventing China from surpassing us as the world’s leading economic power.

And I was taken by something that Alan Wolff, who used to be a trade representative, said in a piece he wrote for another think tank, that tariffs are like medicine. If you have a little bit, it can cure you, and if you have too much, it’s poisonous. And I think the risk here is that President Trump, if he does what he has threatened to do, will end up with the kind of poisonous tariffs that raise costs in the United States. After all, a lot of stuff we import goes into making other things in the United States. We import a lot of food. Does he really want to raise the price of food in the United States? So these across-the-board tariffs are economically unwise and, I think, would be quite damaging if they’re something more than negotiating tools.

DAVIES: Right. You know, it’s interesting that Trump actually signed new trade agreements with Canada and Mexico in his first term after some of these tariffs were imposed, which I guess the 25% tariffs would violate, but I guess that’s all negotiable. But it does seem that a lot of industries have taken advantage of the trade agreements among the United States, Mexico and Canada and have built a lot of integrated supply chains. You know, sending material to Mexico to be manufactured and then bringing it in as a part for a different process. This would really shake things up if these tariffs went up, wouldn’t it?

WESSEL: Absolutely. And remember, one of the things that happened was we told people we didn’t want to import a lot of stuff from China, so some of them responded by producing things in Mexico for sale into the United States. So the business community – not only the Canadian and Mexican leaders, but the business community – is all up in arms about this threat to essentially tear up the renegotiated Canada, Mexico, U.S. free trade agreement that President Trump was so proud of before. But I think that on the tariffs and stuff like that – I think that’s a negotiating thing. Look, it’s perfect. He has made this threat to do something on Day 1. Day 1 is January 20. But he’s already started the negotiations with the Canadian and Mexican governments. If it goes right, he’ll be able to say, on Day 1, I already cut a deal with Mexico and Canada. They’re going to stop immigration, stop illegal drugs, and I won’t have to impose tariffs on them. And see what a great deal-maker I am. So I think this is just Trump negotiating in advance. It’s rather unusual, to say the least. It’s almost as if we have two presidents at the same time. But I think that’s a deliberate strategy, and we’ll see how well it goes.

DAVIES: You know, one of the things that I didn’t know until I read this in The New York Times was that when these tariffs were imposed in the first term, you know, a process was set up so that individual companies could apply for exemptions. And I think the Times reported that the Commerce Department fielded up to a half a million of such requests. I mean, that would seem to be the kind of thing that could both undermine your trade policy and also just prove, you know, ripe for favoritism and corruption.

WESSEL: Absolutely. So – and I think we already see industry lobbyists gearing up for this. If you can get and – if you can make a case that you need an exemption, and you can convince the Commerce Department or whoever that you need it and you get it, then you’re happy. How do you get that? Well, is – are there – is this tied to campaign contributions? Is it tied to supporting other parts of their policies? – a lot of really the worst of what we sometimes call crony capitalism.

DAVIES: Before we move on to other stuff, I just want to come back to where I began. Is it realistic to think that tariffs can force or compel or encourage companies to actually establish manufacturing in the United States?

WESSEL: Encourage, yes. Look, we have a lot of foreign automakers who make their cars in the U.S. And some of that was the result of trade policies where we made it more attractive for them to build a plant here than to import the cars from Germany or Japan. At the margin, yes, it will encourage some investment in the United States, but at a cost. And the question is, how much are we going to pay in higher consumer prices for every job that’s created here? And how many of these manufacturing plants that open here are actually going to employ a lot of workers as opposed to be highly automated facilities? So, yes, at the margin, it’ll make a difference. But as a macroeconomic thing, if you think of the good of the U.S. economy as a whole, I think it’s pretty clear to me, it’s a negative.

DAVIES: The jobs of the ’50s and the ‘ 60s aren’t coming back, huh?

WESSEL: No. And remember, manufacturing employment is a very small fraction of all employment in the United States – less than 10%. So Bob Lighthizer, who was the intellectual machine of the trade policy in the first Trump administration – who, for some reason, didn’t get one of the jobs this time around – in his book, he basically says, I think it’s a good deal for America if consumers pay more for what they consume in order for us to have more manufacturing jobs in the United States. Well, I’m not sure that if the question were put that way, a lot of consumers and voters in the United States would actually agree with that. But they elected a president and some members of Congress who do believe that, and it’ll be interesting to see what happens.

Remember, in Trump’s first term, inflation wasn’t an issue. Well, we’ve learned that Americans do not like inflation, and Democrats are going to point out every price increase that’s tied to Trump tariffs. They’re going to blame it on President Trump and his trade policies, and they’re going to get some support from the Fortune 500 and maybe the Walmarts and Amazons of the world. And we’ll see how popular these policies prove to be if they’re really put in effect.

DAVIES: You know, speaking of rising prices, is it smart for consumers today – anticipating higher tariffs and higher prices – to make big purchases or stock up on stuff?

WESSEL: I don’t know. I read that some people are doing that, and some companies are pushing that as a tactic to get more sales. I can understand if you’re a company and you sell something that’s imported from China that it would – might make sense to fill your warehouse now in the hopes that you can get in before the tariffs are imposed. I don’t think that most consumers are that sensitive to – not that many things we buy that would go up in price so much that it’d be worth – you know, you’re going to buy 10 years’ worth of socks to avoid a price increase. I don’t know about that.

DAVIES: Maybe replace your fridge.

WESSEL: I mean, you know, there’s always this game with cars. You know, if there’s going to be tariffs on cars, do you want to buy one now, but you have to offset that by what’s happening in the auto market and what incentives are available and what tax credits for EVs are available now that might not be available if Trump and the Republicans do away with them. So it’s a pretty big calculation. I’m personally not, like, stocking my cellar with French wine in anticipation of tariff increases.

DAVIES: We’re speaking with David Wessel. He spent decades as a journalist covering economics. He is now an economist at the Brookings Institution. We’ll talk more after this break. This is FRESH AIR.

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DAVIES: This is FRESH AIR, and we’re speaking with Brookings Institution economist David Wessel about what to expect from the incoming Trump administration, which has appointed an economics team and is embracing a sweeping agenda, including higher tariffs. So let’s talk about tax cuts – the tax cuts that Trump has said he wants to get accomplished. The tax cuts that came from the 2017 bill passed in his first term – the Tax Cuts and Job Act – many of the provisions in that law will expire at the end of 2025. So that’s going to be an issue, and he wants to renew those, right? First of all, what was the impact on the deficit of the tax cuts of 2017?

WESSEL: Well, it increased the deficit. You cut taxes, you bring in less revenue. You can hope that it’ll make the economy grow faster and you recover some of that in increased revenue, but not all of it. Most of the corporate tax cuts in the 2017 act are permanent. The ones that are expiring are the ones that affect all of us – all individual income tax payers – and some businesses. And I think now the overwhelming assumption is that Congress will vote to basically extend all the tax cuts that are expiring. And they’ll maybe do some kind of fancy gimmickry to say it’s not going to cost very much, but basically that’s about $4 trillion over 10 years above what the Congressional Budget Office predicts would happen if the law was not changed.

DAVIES: Right. So if that happens, where are we on the deficit? What do economists think? Is it reaching alarming levels?

WESSEL: The right answer to this question is it depends. If they do the tax cuts that they’re talking about, it will raise the deficit unless they can do some aggressive spending cuts. My guess is they’re going to get the tax cuts and the spending cuts will be harder to get, but we’ll see. The problem here is that, the fundamental budget problem that the United States government has is that we are an aging society. And we spend more on older people than younger and working people.

So the deficit and the federal debt – the amount we’ve borrowed over time – is going to rise inexorably because we’re an aging society. We have low fertility rates. There’s going to be more retirees for every worker and because the federal government spends a lot of money on health care, and health care spending goes up faster than everything else. And so unless there’s some attempt to restrain spending on health care or on retirement programs, we’re going to end up with a bigger deficit.

Now, you ask, is it alarming? Well, that’s a good question. There are a lot of people who predicted for the last 25 years that we’re on the verge of some fiscal crisis because the government has borrowed so much. And that’s a bit of the “Boy Who Cried Wolf” problem. The U.S. government is, you know, selling $2 trillion of bonds every year, and they’re not having any trouble selling them. And interest rates that they have to pay on them have not gone up very much. So it’s not clear that if we go on for another couple of years, that somehow automatically, the rest of the world will say, oh, my God, we’re not buying your bonds and we’ll be in trouble and we’ll have a crisis. We could have a crisis. I think the crisis is more likely to be caused by political events – like if global investors and markets think that our government is dysfunctional, if Congress really goes crazy and they cut taxes a lot and don’t cut spending, if President Trump does some things that he sometimes says, like we’re going to not raise the debt ceiling or we’re going to renegotiate our bonds or things like that.

And what we’ve seen in other countries – we saw it in the U.K. with Liz Truss, and we’re seeing it now in France – when investors think that the government is sort of out of control and unable to manage its fiscal situation responsibly, markets can turn, and that could lead to an increase in interest rates that I’m sure the president and the rest of us want to avoid. We don’t want interest rates to go up because people no longer think we’re a safe credit. And that’s the risk, but I think the trigger is more likely to be a political one than somehow the debt to GDP ratio across some threshold.

DAVIES: That’s interesting. I mean, so one way of measuring this is, do investors who buy U.S. bonds still think it’s a reliable credit? And are they willing to give you a pretty good rate at borrowing money? That’s said, I mean, interest on the national debt is something like 13% of the federal budget now, if I recall. Is there a point at which this just becomes unsustainable? -that we’re just…

WESSEL: Yes.

DAVIES: Yeah.

WESSEL: This is not sustainable, period. It might be sustainable for another year or a presidential term, but at some point, you can’t grow your debt faster than your economy forever. We don’t really know what the breaking point is. Right now, there’s very little pressure to do anything about this. The markets and global investors are willing to buy our bonds. And the public, despite what you hear from some politicians, doesn’t seem to be really worried about that.

I look at members of Congress as being pretty sensitive to what the voters really care about. And I don’t see a lot of people on the Washington Mall with signs that say, cut the deficit, raise my taxes, cut my Social Security. There doesn’t seem to be political pressure to do that. And the Democrats have decided, why should we be responsible and reduce future deficits when we’re in charge if when the Republicans take over, they just cut taxes again, so there’s kind of like a stalemate?

One of the problems is, as you point out, the more interest grows as a share of the federal budget, the more pressure there is on the rest of the federal budget. And that may crowd out some things that really would be good for the country, but members of Congress may be reluctant to fund them because they’re worried about how much we’re borrowing.

DAVIES: You know, of course, when Republicans have argued for tax cuts for businesses, as they did in 2017 – and, you know, cuts which benefit wealthy Americans – what they say is this will spur investment and economic growth, which will generate new revenue so that the debt doesn’t spiral out of control. Did those 2017 tax cuts result in growth?

WESSEL: So if you cut taxes on investment, you tend to get more investment. And there was some of that after the 2017 tax cuts. Was it anywhere near sufficient to grow the economy fast enough to spin off enough revenue to pay for those tax cuts? Absolutely not. But one of the really interesting dilemmas that the administration is going to have – and I can just hear Kevin Hassett saying this – I’ve heard him say it in academic settings – is that cutting taxes on corporate investment, encouraging businesses to buy machinery, computers, software, do R&D – you can make the case that that increases the rate of economic growth. But those are not the tax cuts that are expiring.

The tax cuts that are expiring are the individual income tax cuts. And there’s very little evidence that cutting individual tax rates, allowing us to spend more money on food and cars and vacations, will lead to faster economic growth in the future. So they’re kind of have a bit of a intellectual problem here. If you want to do tax cuts that you think will increase gross in the future, those are not the ones that are expiring at the end of 2025. I’m sure they’ll find some way around that argument, but that’s the facts.

DAVIES: We are speaking with David Wessel. He spent decades as a journalist covering economic issues. He’s now at an economist at the Brookings Institution. He’ll be back to talk more about what to expect from Trump and his economic policy team after this short break. I’m Dave Davies, and this is FRESH AIR.

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DAVIES: This is FRESH AIR. I’m Dave Davies. We’re listening to the interview I recorded yesterday with economist David Wessel. We’re talking about what to expect from the incoming Donald Trump administration given his professed commitment to high tariffs, big tax cuts, mass deportations of undocumented immigrants and deep spending cuts. David Wessel spent decades as a journalist, sharing in two Pulitzer Prizes and writing three books on economic issues. He’s now director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

So let’s talk about plans to cut government spending, which takes a unique form in Donald Trump’s plans. He has enlisted Elon Musk and Vivek Ramaswamy to head what he’s calling the Department of Government Efficiency, which will find ways to save a lot of money, according to its charge, and do it quickly. What’s the scale of what Elon Musk and Vivek Ramaswamy think they can accomplish?

WESSEL: Their scale is pretty big. They think that they can reduce federal regulations in ways that save money. They think they can reduce the head count in federal agencies. And they think that the White House has more power to not spend money that Congress has appropriated than Congress and many lawyers think. So they’re very ambitious. Of course, remember, they don’t have any authority. This is an advisory group. We’ve had commissions like this before that we’re going to save all this money, and mostly, you can’t do it unless Congress goes along. But they have an ally at the Office of Management and Budget in the White House, Russ Vought, who has taken the unusual position from time to time that when Congress appropriates money, that’s kind of a ceiling on what the president can spend and they don’t have to spend it all. And this was an issue in the Nixon administration. There was a law passed in 1974 that said, no, the president can’t do that. But some of Trump’s advisers think that’s unconstitutional, and I think they’ll probably try and test it.

Look, there are clearly places that the government could save money if it has the will to do so. Most of the problems are that it’s – there are political obstacles to doing so. If there was a line item in the federal budget for waste, fraud and abuse, it would have been cut a long time ago. So we’ll see. But I think that Musk and Ramaswamy have the president’s ear. They’re going to be aggressive on this. They’re going to look for some big scalps early on. It may be on the regulatory side, where they can withdraw some regulations. They think there’s been executive overreach, and the Supreme Court has been sympathetic to that view. And they will say that we’re saving money by cutting regulation, and if we have fewer regulations, we can have fewer workers. It’s hard, in the way the federal government’s organized, to have mass layoffs, but they can certainly eliminate workers.

I mean, honestly, if the president declared that every federal employee in Washington, D.C., had to come to work five days a week in person, I think people would quit and they wouldn’t be replaced. So they will have influence. They don’t have any power, but they have substantial influence. Until the day, which I predict will come at some point, where Donald Trump decides that Elon Musk is just taking too much of the limelight and they’ll have a falling apart, ’cause I don’t think that Trump wants that much attention to somebody other than himself.

DAVIES: Yeah. Well, it’s been interesting to see the relationship so far. We’ll see how that develops.

WESSEL: And you mentioned earlier the conflicts. I mean, Musk has huge federal contracts, so how is this going to work?

DAVIES: Right. One of the things that they say they want to do is do away with a lot of regulations. And there are regulations which apply to, you know, businesses – things that they have to do, requirements they have to meet – environmental requirements, other ones. And – but there are also regulations that govern entitlement programs, who gets how much money, and they get really complicated. In a Wall Street Journal op-ed, Musk and Ramaswamy said that most government enforcement decisions and discretionary spending aren’t made by elected officials but by, quote, “millions of unelected, unappointed civil servants within the government – agencies who view themselves as immune from firing thanks to civil service protections,” unquote. And they say this is inherently undemocratic, that these, you know, unelected people are making all these regulations. And they say they’ll get rid of thousands of them. You know, people have complained about regulations for a long time. How easy or hard is it to change them?

WESSEL: Well, first of all, it is true that there are unelected people making decisions, but they are making them with authority that has been given to them from Congress. The Congress created the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Food and Drug Administration. And I don’t think we want a bunch of amateurs making decisions about things that expertise really matters. Now, expertise is out of favor now. The process for changing regulations is complicated. And what happened in the first Trump administration – they did a lot of stuff. They didn’t dot all the I’s and cross the T’s, and the courts undid them. I suspect they’ll be more careful this time.

But the Supreme Court has said that there are agencies that have done too much. And they’ve reversed an old doctrine known as Chevron deference, where the Supreme Court had said that, well, when things are not quite clear, it’s up to the agencies to figure out what they mean. And the court has said, no, if Congress wants something, they have to say it. So there will be a lot of regulations that are vulnerable to being undone, and I suspect some of them will be by the regulators who Donald Trump appoints. So that’s a fact.

They act as if they can do all this stuff quickly. And, for good reason, government doesn’t change rules quickly. And there will be businesses who say, like, you know, we didn’t really like that rule, but we’ve learned to live with it. And it’s going to really screw up our business if every time we have a new president, they change the regulation, so can we just stick with this one? And there are regulations that need to be modernized that are not right for the current times of AI and the internet and instant communications and trade across borders and stuff. So there’s plenty of room for that, as long as you’re not mindless and you don’t break the rules so the courts reverse you.

DAVIES: Getting back to where we started, this Department of Government Efficiency is not a department. It’s a prospective advisory group. It’s going to need staff, right? I mean, is it going to hire hundreds of people who can…

WESSEL: I have no idea. I mean, maybe. I mean, part of the thing that makes you uncomfortable here is – so it’s called the Department of Government Efficiency. Two problems with that. One is it’s not a department. And secondly, the acronym is DOGE. That happens to be a cryptocurrency in which Elon Musk has an interest.

DAVIES: Oh, yes.

WESSEL: And the price of which went up when this thing was named. So that’s an example of how you have to watch here. What’s – what is the real agenda for this group? But, you know, they will have influence, and they will have influence on what the president’s budget is. And they will egg on the people in the administration who want to say, we don’t have to spend all the money that Congress has appropriated. So I think they will – and, you know, a lot of this is PR in the sense – in the popular sense, like, getting people to be outraged about something so they can claim some victories, even if the budget wants, say, you know, that didn’t really save very much money.

DAVIES: Elon Musk and Vivek Ramaswamy are supposed to meet with House Republicans I believe this week. What would you expect from that meeting?

WESSEL: I think part of it’ll be a pep rally. Like, they’ll say, we want to cut spending. You want to cut spending. We’re all in this together. And part of it in private will be members of Congress explaining to Musk and Ramaswamy how Congress works. And by the way, guys, we got elected, and we’re the Appropriations Committee, and you’re not. So we’re going to call the shots here, and don’t think that you can dictate what it’ll be. That conversation may not – well, it certainly won’t happen in public. I expect it will happen behind closed doors at some point.

DAVIES: We’re speaking with David Wessel. He spent decades as a journalist covering economics. He is now an economist at the Brookings Institution. We’ll talk more after this break. This is FRESH AIR.

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DAVIES: This is FRESH AIR, and we’re speaking with David Wessel. He’s an economist at the Brookings Institution. Also spent many years as a journalist sharing in two Pulitzer Prizes. We’re talking about what to expect from the incoming Donald Trump administration and his economics team. So let’s talk about the team that Donald Trump has picked. I mean, two leading figures are Scott Bessent, and – who’s going to be the Treasury Secretary, assuming he’s confirmed, and Howard Lutnick would head the Commerce Department. Let’s talk about these two guys – like, first of all, just who they are and what their policy notions are to the extent that we know them. First of all, Scott Bessent.

WESSEL: So I think the most useful way to think about Scott Bessent is he could easily have been the Treasury Secretary in the George W. Bush administration. Unlike some of President Trump’s other nominees who are really outside the box, things that other Republican presidents – George Bush, or if Mitt Romney had been elected – would never have picked. Scott Bessent is a safe pair of hands at the Treasury, and I think that’s deliberate. We don’t know much about what really constrains President Trump from pursuing some of his more, shall we say, unusual or radical proposals. But we do know he cares about financial markets. He cares about the stock markets verdict on his performance, and he should care about what happens to interest rates in the bond market and the Fed, and I suspect he does. If you’re in the real estate business, you understand what interest rates are all about.

So by putting Scott Bessent there, he’s a money manager. Yeah, you know, he’s Ivy league. He went to Yale. He’s very – he got famous in his late 20s for helping George Soros make a huge billion-dollar bet against the British pound that paid off. He’s had his own money market fund – a money – a hedge fund. So he’s a finance guy. He’s a Wall Street guy. He doesn’t have any experience in Washington. I’m not sure he’s ever had a boss or a client like Donald Trump. And his challenge is to convince the markets and the business community that everything’s going to be all right.

DAVIES: Right. Right. He was known to say in an interview in October that Donald Trump is really a free-trader at heart. I mean, I guess we will see. Let’s talk about Howard Lutnick, the other guy, who runs the Commerce Department, which – now, the Commerce Department has significant influence over trade policy, right?

WESSEL: It does, but I think Howard Lutnick’s influence is probably maybe greater than other commerce secretaries because of his relationship with Donald Trump. Although, you never know whether his lobbying for the Treasury job, which he clearly wanted, annoyed the incoming president. Lutnick is a much more volatile figure. He’s done a lot of – I mean, he’s got just an incredible, heroic story. His parents died when he was in college. He happens to go into the same college I went to – Haverford College – and the college paid his way after his parents died, and he’s been very generous to the college. He ran Cantor Fitzgerald. Most of their employees, including his brother, were killed on 9/11. He was the model for the main character in the TV show “Billions” – the hedge fund guy who’d gotten little bit of bad press when he cut off the benefits to the families of people who’d been killed, and then he set up a nonprofit to benefit them.

So he’s very outspoken. He doesn’t have the same kind of moderate demeanor. He’s Trump-like in he’ll say sometimes things which seem outrageous. And we know that he is much more willing to be aggressive on tariffs than Bessent. And that’s going to be the interesting tension here. Because remember, yes, the Commerce Department has some say about tariffs, but basically, these are presidential decisions. Congress has given the president extraordinary authority to – on tariffs, and the president’s trade lawyers understand the authority they have, and they are willing to push it to the limit. They don’t need – unlike tax cuts, they don’t need Congress to approve them. And I think Lutnick will be egging the president on on this tariff stuff. And Bessent may be trying to say, oh, you didn’t really mean that. That was a negotiating tactic.

DAVIES: We should talk a little bit about the Federal Reserve, you know, the central bank that’s supposed to be independent from the White House. But Trump, like some other presidents, have had strong opinions. He appointed the current chairman of the Fed, Jerome Powell – Jay Powell – and has criticized him for not keeping interest rates low enough. What would you expect going forward between Donald Trump and the Fed?

WESSEL: Every president wants lower interest rates. Some presidents say that explicitly. Some say it only privately. Once upon a time, Fed chairmen were susceptible to this pressure. Arthur Burns in the Nixon era was. But in recent times, Fed chairs have been pretty resolute that their job is to deliver on their mandate of maximum employment and stable prices, even if it annoys the politicians. What do I expect? I expect President Trump will not keep his mouth shut. If the Fed stops cutting interest rates, he’ll complain, and the Fed will not pay attention to that. I mean, they have to hear him, but President Trump had very little support from Congress when he criticized the Fed in his first term because members of Congress kind of understand the game here. We give the Fed the power to do what’s unpopular. We reserve the right to criticize them, but we don’t really meddle.

The second thing the president will do is in 2026, he has a chance to replace one of the seven members of the Federal Reserve Board whose term is up. And, importantly, he has a chance to appoint a new chairman, and that will be a really important signal. Does he appoint somebody who the world expects will have a spine and will keep interest rates higher than Trump wants, if necessary? Or do – does the world, meaning markets, businesspeople, global investors – do they think he’s appointed someone who will bend to his preferences? And that’s going to be the real test. If the people think that he’s appointed Treasury – if markets and global investors think that the president has appointed a Fed chair who has no spine, who will tend to bend to what the president’s will is, that will lead to – them to build up the interest rates they demand when they lend money to the U.S. government. And that’ll ricochet through the economy.

DAVIES: By that explanation, it’s in Trump’s interest to appoint someone who will tell him no.

WESSEL: It is definitely in Trump’s interest to appoint somebody who the markets believe will be a politically independent Fed chairman, because if he doesn’t, interest rates will be higher. And that’s bad for the federal government, ’cause it’s a big borrower, and bad for the economy and bad politically because if he gets blamed for higher mortgage rates, that’s going to really not be good for him and his party.

DAVIES: Looking at the big picture here, you know, if Trump pursues all of the policies that he has advocated for – you know, high tariffs, tax cuts, mass deportations, business deregulation, expansion of energy production – do these pieces fit together, or will they be pulling the economy in different directions?

WESSEL: First of all, this’ll go back to the whole question I mentioned earlier about how much is bluff and negotiating tactics, and what do they actually do? I think that what the – what is the wise economic policy is to do things that we think have a good chance of increasing the rate of economic growth and sharing that prosperity broadly over the next generation. And there are some things – we don’t really know how to do that, but there are some things we know help that. So that means being careful not to cut federal R&D spending, not to punish companies for investing in R&D, investing in things like early childhood education or getting lead pipes out of the ground, having smart regulations so we get the benefits of new technologies like AI while guarding against some of the dangers and putting forward a plausible plan for restraining the growth of the federal debt over time – changes to benefit programs and taxes that will take effect slowly. I don’t see them pursuing that kind of a coherent strategy.

They do have a clear strategy of trying to protect manufacturing jobs in the United States, and so there may be some benefits to people who are in those businesses. But if you look across the country – and also, I should add, like, they don’t seem to think climate change is a – as an urgent issue. I think it is an urgent issue, and they don’t seem to see that as a high – high on their priority list. And so if you’re thinking about what you think is good for the next generation and you put that next to what the Trump agenda is, I don’t think it delivers on what I personally think would be in the interests of the country.

DAVIES: David Wessel, thank you so much for speaking with us again.

WESSEL: You’re welcome. I enjoyed it.

DAVIES: David Wessel is an economist, author and director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. We recorded our conversation yesterday. Coming up, Maureen Corrigan reviews “Time Of The Child, ” the latest novel from Niall Williams, set in a rural village in Western Ireland. This is FRESH AIR.

(SOUNDBITE OF WILLIE MITCHELL’S “SOUL SERENADE”)

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