MW Goldman's top economist doubts Trump can make good on campaign promises
By Chris Matthews
Immigration rates will only drop 'a little below' pre-pandemic levels, Jan Hatzius predicts
Goldman Sachs chief economist Jan Hatzius is bullish on the outlook for the U.S. economy, in large part because he doubts Donald Trump's incoming administration will be able to make good on its promises to drastically reduce budget deficits or immigration into the U.S.
In a Thursday event staged by the Atlantic Council, Hatzius predicted that the U.S. economy would grow a robust 2.5% in 2025, well above the consensus estimate of 2.1%, in large part because he doesn't see the Trump administration following through with its efforts to clamp down on immigration.
"Ultimately we think that, yes, we will see further deceleration in net immigration to the U.S., probably a little below what it was pre-pandemic, but we don't see a deeply dramatic decline," Hatzius said.
The Wall Street economist also doesn't see Tesla $(TSLA)$ Chief Executive Elon Musk's so-called "Department of Government Efficiency" enacting anywhere near the $2.5 trillion in annual budget cuts promised in the wake of Trump's November election.
Read more: Opinion: Why Elon Musk had to drop his 'DOGE' pledge to cut $2 trillion from the federal budget
Hatzius predicts that Trump and congressional Republicans will succeed in scaling back some federal spending on Affordable Care Act subsidies and Inflation Reduction Act subsidies for electric cars, but that the cutbacks would be limited.
The federal budget deficit in 2024 was $1.8 trillion, or 6.4% of GDP, and Treasury secretary-nominee Scott Bessent has called for reducing the deficit to 3%, implying about $1 trillion in cuts.
"It's going to be very difficult to get down to 3%," Hatzius said, arguing that it's more likely the Trump administration can reduce it to 6% of GDP or a little less, implying a deficit reduction of roughly $250 billion.
Much of that reduction may come in the form of new tariff revenue, Hatzius argued, though he doesn't predict that Trump will roll out the full 10%-20% universal tariffs on all imports and 60% tariff on Chinese imports, as he promised in the campaign.
Estimates vary on what tariffs of that magnitude could raise, because there are few historical examples of such a ramp up, and it's difficult for economists to estimate how businesses and consumers will react to the changes.
The Committee for a Responsible Budget estimates that a 10% universal tariff on all imports would raise about $2 trillion over 10 years after accounting for slower economic growth caused by higher taxes. It estimates that a 60% tariff on Chinese goods could impact the federal budget anywhere from a $50 billion hit to federal revenue to raising $300 billion over a 10-year window.
"Such a large increase in tariffs would dramatically reduce trade with China (as intended) and thus lead to far less revenue" than a static analysis would show, the CFRB said last year.
Hatzius does not expect that Trump will actually implement tariffs at rates as high as those, but said that this is the policy area where he sees the most dramatic changes because "Congress has effectively ceded its authority on trade policy to the White House."
Tariffs are the most significant risk to U.S. growth coming from public policy, he argued.
"I do think it's a significant risk because it is clearly something that Trump feels very strongly about and has done for many decades," Hatzius said. "You can document this going back to the 1980s, and it's something he has to a large extent under his control, so you have to take it quite seriously."
He predicted that tariffs on Chinese goods will average 20% and that Trump will hit other trade partners with targeted tariffs, like levies on European automobiles and Mexican-made electric vehicles, all of which will combine to shave upward of 0.4 percentage points from GDP growth next year.
He also sees the tariffs raising inflation this year from about 2.1% to 2.4%, not significant enough to stop the Fed from lowering rates further this year.
A major reason Hatzius doubts Trump will follow through on his most radical proposals is that during his first administration, Trump appeared to watch stock-market reactions to his policies very closely, and reverse course on those that spooked investors too much.
"That's a broader insight that applies to the Federal Reserve, but also to tariffs," Hatzius said. "It's certainly possible we see a more significant tariff announcement than what we have in our baseline at some point, but then, if the reaction is negative, there also could be backtracking."
-Chris Matthews
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(END) Dow Jones Newswires
January 09, 2025 15:42 ET (20:42 GMT)
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