2025 Economic Thoughts & Predictions

🍐 This is an economic and economic policy article - not an article on politics. All the predictions here are based on economic principles and math, not partisan politics or anything else.

Additionally, please read the full article (including the links / additional resources) to fully get a grasp on the impacts here and before any knee jerk reactions!

The main two policies I’d like to examine are these:

• Large scale tariffs
• Mass deportation

Tariffs

While I have written about tariffs before, in a multipart series (which I am not done with, by the way) - I will summarize my thoughts.

🍐 For a more detailed set of thoughts on the situation that these will present, read through these (especially the second one):

1. Tariffs Part 1: An Introduction.
2. Tariffs Part 2: An Impossible Balance.

Of course, we have no clue if Trump will even attempt to actually do these tariffs he is threatening. We do know American companies and consumers are already preparing for the negative effects of them:

• ‘It’s going to be hard’: US firms race to get ahead of Trump tariffs
• Americans stocking up on foreign goods before Trump tariffs: ‘a sense of urgency’

As we enter into this next presidential term - unemployment stands at a very good 4.1%. Inflation is cooling overall, although trending upwards since The Federal Reserve has begun cutting interest rates.

As we know, American importers (and therefore, American consumers at the end of the day) pay tariffs on goods from other countries (and not other countries or their governments), and so any broad set of tariffs will cause a large upwards pressure on inflation.

This won’t only affect foreign goods, any significant tariffs will cause even goods made here more expensive, as over half of the things the United States imports are components of things we make here (intermediary good). Making our own supply chains less efficient will cause upwards price pressure in every single good regardless of where it is from.

Of course, with increased prices - comes reduced demand. The aggregate demand in an economy is a primary north star metric. As demand weakens, it is very possible to fall into a recession; how likely a recession is and how deep it is depends really how rough the tariffs are. Expect job losses if we add tariffs to imports at the levels that have been talked about.

Some additional points:

• There may be some shift of demands to American goods (although typically this effect is limited/non-existent)
  • The overall price of the American good is not going to be less than the foreign good was. If we could make the good for less and more efficiently, the market likely would already have been doing that.
  • Unless we increase our labor force, in order to reallocate labor to making these goods - they have to not be doing something else. We’d much rather labor creating computer chips, software, etc vs the lowest quality possible socks, for example.
• What is particularly scary is the thought of increased inflation and rising unemployment, which large scale tariffs will almost certainly cause.
  • This is the situation I predict in Tariffs Part 2: An Impossible Balance

Mass Deportation

There’s a lot with this topic that is not economics - morality especially, however I will not focus on these here and will primarily focus on the economic effects.

A primary economic argument for deporting people is that it will open up jobs. However, this is incorrect, and is a fallacy. The more new laborers that you add to an economy, the more total jobs the economy has in it.

This fallacy is called The Lump of Labor Fallacy. You can read more about it and how jobs are actually created and destroyed there.

In reality, the more laborers you take out of the economy - the less work there is for others.

Additional points:

• Do mass deportations cause job losses for American citizens?
  • Lots of good sources that are listed here that you should dig into
• Deportations reduce tax revenue
  • “Undocumented immigrants paid $96.7 billion in federal, state, and local taxes in 2022.” Source
• Removing this labor increases prices
  • Creating a labor shortage in the sectors primarily affected will raise prices and hamper production.

Ideally, I’d like to include details about a possible tax bill, however there’s just no detail on what it would actually be.

If it’s just another bill to cut taxes on the rich, that will increase the budget deficit even further. A profoundly bad idea if implemented but again we just have no idea.

Similarly, the new not-actually-a-real-department to reduce government spending - DOGE - will likely not have much success. It is going to be a large lift to get essentially any significant spending cuts through Congress, so I won’t even discuss the likely significant negative effects of cutting government spending at the moment. Musk has already reduced his estimate for what is likely to actually be cut — I’d look for that number to be cut to essentially 0.

By the way, there is already a department that does this function (GAO), a new duplicated “department” seems like the very government waste they claim to care about.

Overall

We are looking for a very rough year if these things are even half implemented — something, by the way, Elon Musk has already said: Elon Musk Warns Of ‘Hardship’ For Americans If Trump Puts Him In Charge Of Cutting $33 Trillion Debt.

I feel confident that this year, unless something else major counteracts these policies (again, if implemented):

• Unemployment is likely going to tick up over 5% (from 4.1% now).
• Inflation is going to grow substantially.
• Growth slows or the economy contracts.

This combination is called stagflation and, again, I covered it in my article Tariffs Part 2: An Impossible Balance. I believe The Federal Reserve may be forced to raise interest rates - depending how much inflation these policies cause - being forced to throw us further into a recession - either in late 2025 or early 2026.

Of course, no matter how disastrous these policies prove to be - it is likely the President will blame Biden.

Alternatively, the new administration could simply not implement these policies and not purposefully throw the economy into recession

I’d like to talk about some other things I see happening this year, such as effects of AI on the economy, so I may make a part 2 followup at some point soon.

I’ll be following up on these thoughts & predictions periodically, right or wrong, with more analysis as things happen.

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Lump Of Labor Fallacy

While it is not a prerequisite - information from the following article will be useful to more fully grasp the concepts here: Paradox of Thrift, Fallacy of Composition, Austerity, and Second-Order Thinking

Note: As always, economies are hard to 100% accurately predict when including every possible disaster or wild situation. Here we will focus on one variable, in isolation, that has an effect on employment, but its a massive one. This outlines the pattern and relationship in the majority of cases. There is always nuance, especially in the short term, especially in times of recession or depression.

Where do jobs come from?

Job growth primarily stems from an increase in demand for goods and services, although factors like innovation and investment also contribute.

When considering the impact of someone new entering the workforce who was previously not working, demand becomes the key variable to examine, as innovation and investment are less directly relevant in this context.

How does demand increase jobs?

Job growth is driven by rising demand, as businesses respond by hiring more workers to meet the needs of consumers. This creates a ripple effect, generating additional jobs across various sectors—a phenomenon known as an economic multiplier.

Effect of adding additional labor

When thinking of a new participant entering the workforce, it can feel correct to assume that if this person gets a job, someone else must miss out on a chance to secure employment.

However, this assumption relies on the flawed idea that the number of jobs in the economy is fixed - a notion known as the lump of labor fallacy. In reality, adding new workers to the economy inevitably increases the overall need for workers, as their employment drives further demand and job creation.

How could this possibly be?

Through a few primary mechanisms:

1. Laborers spend their earnings
   • Once someone is employed for the first time in an economy, they have significantly more money to spend. This increases demand in many sectors such as food, housing, transportation, etc.
   • Local economies typically benefit from this increased demand, as much of the spending stays local - restaurants, bars, shops, utilities, etc.
2. Economic multiplier
   • This spending does not stop with its initial use. Each time money changes hands, it fuels new demand, creating jobs in that sector. This cycle amplifies with each repetition, creating a cascading effect that multiplies its impact across the economy.
3. Indirect productivity gains
   • A new laborer can allow a business to expand its operations to serve more customers. When this happens, the business needs to purchase more supplies, increasing demand for those supplies — which, in turn, drives job creation in supply chains and related industries.
   • Similarly, a specialized laborer entering a labor-constrained industry, such as healthcare, increases the capacity to serve more people. This expanded service availability leads to higher demand for medical supplies, equipment, and support services, further fueling job growth.
4. Longer term / higher level effects
   • Increased employment leads to overall consumer confidence, spurring increased demand.
   • Over time, their contributions may lead to investments in infrastructure, new technologies, or workforce training, all of which further increase demand.
     • For example, as new laborers contribute to business expansion in a specific area, the resulting economic growth may lead to road upgrades or improved traffic systems to accommodate the increased activity.

This is to say, the so-called economic pie is not one size with everyone trying to get a slice - the pie itself grows as more people go to grab a slice.

For a very simple example - imagine a young worker about to enter the workforce for the first time. This worker is 21 and has been living at home with no or very limited income to themselves their whole life so far. In this case, the worker is joining a construction crew - primarily helping to fix, lets say, pipes under the streets in NYC. The location itself does not matter, but I will include these details to give you a geographical reference point and to give it the sense of being more visually real.

This worker, upon accepting the new job, does a few things:

• Moves to a new location closer to the job site
  • The local community that this person moves to, now benefits from this workers spending due to their new income.
• Buys new clothes for work
  • Including specialized work boots.
• Sets up their new place
  • Purchases new or used dishes, furniture, TV, etc from local stores and/or online

While working, this worker:

• Freed up the time of another worker who had been there longer and was more experienced
  • This allows this other worker to focus on things that more experienced workers can
  • The efficiency of the group increases, allowing the business to complete more jobs per year. In turn, they used the additional revenue to hire another person just like this worker in the upcoming year.
• Consumption near the job site
  • 2 days of the week, the crew gets lunch out together at a local spot near the job site.
  • 1 day a week, the crew grabs drinks after work at a bar near the train station that folks take to go back home.

While off work, this worker:

• Has income to spend
  • Every weekend they go out with their friends and go out to the bar or clubs in the city.
  • This person now can visit restaurants on their time off for dinners or lunch on the weekend.
  • Can buy more and nicer things to improve their life.

Just from this one new entry into the labor force, in this one job, you can see clearly how demand is increasing in almost every sector, especially when you extrapolate each of the above points.

And so, it is not correct to assume that for one worker to win (get a job) others must miss out on employment. The economy does not have a fixed number of jobs; it is dynamic and increases when productivity and demand grow driven by these new laborers.

🍐 By the way, this can work in reverse — so if you take people out of the workforce it reduces demand and can kill jobs for other people.

Some other great articles that touch on The Lump of Labor Fallacy:

• Lump of Labor Fallacy: Definition and How It Works
• The Lump of Labor Fallacy
• Countering the “Lump of Labor” Fallacy: Two Lessons