San Francisco Fed economists misrepresent Trump’s escalating tariff policy
It seems that if you want to frame tariffs as a total failure, you might be onto something. A group at the San Francisco Federal Reserve Bank has taken a rather simplistic approach: they assume every trading partner reacts aggressively while the U.S. just stands by and takes it.
This is essentially the premise of a recent Economy letter from the bank that warns about lower wages, increased unemployment, and diminished GDP following Trump’s tariffs. But if you dig into the details of the model they’re using, it quickly unravels. The most ironic part? The model suggests maintaining tariffs rather than dropping them.
The trade war that the U.S. capitulates in
The San Francisco Fed’s baseline scenario assumes complete retaliation from foreign countries as if Canada, Europe, and China would all counter U.S. tariffs aggressively, yet it assumes the U.S. would not retaliate at all. This isn’t just unrealistic; it directly contradicts the Trump administration’s actual stance.
Recently, Trump made a clear statement to the European Union: if they retaliate by increasing tariffs, their new rates would simply be added to an already hefty 30%. That sentiment echoed through multiple letters he sent out regarding tariff fees.
In essence, escalation follows retaliation. Yet, the San Francisco Fed’s model completely disregards this. It depicts a trade war where the U.S. initiates action but refuses to respond as its partners retaliate.
Quantifying the worst-case scenario
In the Economy letter, backed by a deeper Working Paper from economists at UC Berkeley, the San Francisco Fed, and the London School of Economics, the authors stress the “worst-case” impacts. Though the paper is more nuanced than the letter suggests.
The model estimates a complete foreign retaliation scenario, zero U.S. countermeasures, and a rapid end to tariffs after four years. Under these conditions, it predicts a roughly 1% drop in U.S. real incomes. Wages in the agriculture and service sectors may see slight declines, while manufacturing jobs could rise during the tariff period before sharply dropping afterwards. Unemployment remains low in the short term but is expected to spike as the economy readjusts.
Workforce participation shows a decline—not due to layoffs, but rather because some workers choose to step away from lower-wage jobs to focus on domestic responsibilities like unpaid housework and family care. Prices are expected to rise most in agriculture, then services, with manufacturing seeing only gradual increases. Overall welfare remains stagnant for nearly half of the population.
The metrics highlighted in the Fed’s Economy letter rely heavily on scenarios where the U.S. enforces tariffs yet fails to retaliate, thereby ignoring the likely structural changes that such policies might introduce.
This isn’t a forecast; it almost feels like fan fiction for proponents of free trade.
The actual outlook is different
However, the same model also offers alternative scenarios that consider partial retaliation or even no retaliation at all. In those scenarios, the negative impacts are significantly mitigated. The modified forecast indicates that real income could drop by only 0.5% over four years. Unemployment remains stable, and manufacturing jobs boost, with real wages rising in sectors engaged in trade.
A crucial point in the paper admits that tariffs might actually enhance U.S. trade terms—making imports cheaper and increasing the value of exports. Despite acknowledging some disruption in global specialization, the favorable trade advantage often outweighs these efficiency losses.
This implies that tariffs could benefit Americans financially, even if the global marketplace becomes a bit less efficient. Such a perspective deviates significantly from traditional free-trade thinking.
Moreover, the supposed loss in efficiency is predicated on the mistaken assumption that the current production distribution is optimal. Economists frequently overlook the various distortions in global manufacturing due to trade policies. Instead of being made in competitive markets, many products are shaped by government-directed industrial strategies.
In reality, production has been drawn into the U.S. through policy. This counters the notion that applying tariffs necessarily leads to inefficiencies. Instead, seeking to relocate production could enhance overall efficiency.
Tariffs and household economics
One of the more politically charged findings lies within the labor market response. Unemployment rates stay low across models, but workforce participation dips slightly. Why is that? Some Americans are opting out of the formal job market to engage in what economists describe as “home production.”
This term refers to uncompensated household work: caring for children, tending to elderly relatives, and maintaining household management. These individuals aren’t losing jobs; they’re choosing to leave low-paying service roles to focus more on home life.
Essentially, the model reveals that tariffs enable Americans to prioritize family life. The economy favors manufacturing, where wages tend to rise, while areas like services and agriculture may see slight contractions. The result is a subtle shift in incentives, allowing lower-income households the possibility of managing on a single salary without risking poverty.
If there’s a policy aimed at nurturing family stability, this might just be it. This model inadvertently creates an argument for a conservative viewpoint. A resilient industrial sector provides families with the economic leeway to grow.
Another interesting takeaway from the model is the shift of capital from services to manufacturing. Investment isn’t disappearing; it’s relocating. The country sees fewer industries, but those that remain are more productive. This transition has the potential to enhance wages for middle-class workers, as manufacturing typically yields better output per worker.
Growth may not be the end goal here, but rather a new focal point of economic regeneration.
Challenges arise when tariffs cease
What the Fed refers to as “damage” is largely due to policy instability. Every model version indicates that the U.S. will impose tariffs starting in 2025, but then abruptly eliminate them by 2029. This termination creates sharp contractions, particularly in manufacturing, as the economy struggles to revert to its former state. The challenge? Wages won’t adjust quickly enough to facilitate that change. The model incorporates wage stickiness, which means employees often remain at their current wage levels when demand declines. That’s when unemployment can surge and GDP contracts.
But the issue isn’t the tariffs themselves; it’s the abrupt lifting of them. A four-year tariff plan without any follow-through becomes a recipe for confusion and hardship. The critical takeaway is that consistent protection is needed. If you reverse tariffs after the economy has adjusted, it results in turmoil.
Lastly, it’s worth mentioning that the model overlooks tariff revenue. The study treats tariffs as solely a loss, failing to account for the funds they generate. Those proceeds could help lower workers’ taxes, facilitate public investments, or address national debt. This oversight fosters an inherent bias against tariffs, underrepresenting their potential financial and growth benefits.
Assessing the model’s true implications
If you strip away the artificial assumptions and replace total retaliation with partial responses—removing any sunset clauses—what do you get from the model?
Real income might drop by under half a percent over a four-year span—not annually but cumulatively. Unemployment should stay below 10%. Manufacturing thrives. Real wages increase in relevant sectors. Prices stabilize. Capital flows to more productive industries. Plus, some Americans might find more fulfillment at home, opting to care for children or family instead of sticking with formal employment.
This isn’t a dire economic collapse. It’s a reconfiguration of the economy.
The core message: consistency is key
The fundamental logic of the model is straightforward. If you implement tariffs, you need to uphold them. Avoid temporary measures and don’t create uncertainty by withdrawing them after four years. This approach allows the economy to adapt and foster an environment that supports production and gives families flexibility.
The San Francisco Fed did not accurately model Trump’s policies; instead, they presented a flawed version filled with worst-case retaliation scenarios and abrupt reversals that lead to disruption. Yet, even within their own findings, a compelling conclusion emerges: durable tariffs can be not only manageable but advantageous.
They encourage manufacturing, stabilize wages, and allow some Americans to prioritize home life once again. Ultimately, the findings suggest potential for a nation that can support families and encourage childbearing.
The economists behind this study likely didn’t intend to inadvertently validate Trump’s trade strategy. Rather, it may just illuminate a path toward enhancing America’s wealth and fostering a family-friendly society.
