by Kyle Johnson

Now that Donald Trump is back in office, economists have returned to the common definition of a recession: two consecutive quarters of negative GDP.

With the Bureau of Economic Analysis reporting that real Gross Domestic Product fell by 0.3% in Q1, we’re halfway there.

Trump’s current tariff strategy might lead to a recession or prolonged anemic growth.

 

Recession Calls Go Mainstream

Even before the Q1 data release, many Wall Street firms and executives were forecasting a recession.

According to one survey, 60% expect a recession in the next six months.

Bond king Jeff Gundlach is in the 60% camp.

Torsten Slok, chief economist of Apollo Global Management (a private equity firm), says the US will “absolutely” have a recession in 2025 if high tariffs stay.

BlackRock’s Larry Fink says we might already be in a recession, stating that many business leaders he’s spoken to agree.

Hedge fund manager Ray Dalio worries that something worse than a recession is coming—a breakdown of the monetary order.

Federal Reserve employers rarely hint that a recession may be coming. But New York Fed President John Williams says a recession is possible. Jerome Powell warned that the US could be in for significant trouble, calling in to question the Fed’s ability to fight it off.

A recession this year might be the consensus opinion. I can’t tell you what the future holds, but I can tell you a few things that deserve more attention.

 

Regime Uncertainty

Historian Robert Higgs coined the phrase “regime uncertainty” to describe a time of “pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.”

Higgs argues that regime uncertainty prolonged the Great Depression. He explains that Franklin Delano Roosevelt’s hostility toward private enterprise rightly frightened investors and entrepreneurs. Why invest in a company if the president can nationalize or otherwise disrupt your business with the stroke of a pen?

Even though Trump isn’t threatening to nationalize industries, he introduced high uncertainty into the markets.

The tariff rollout was sloppy. Members of the administration contradicted one another. Some even managed to contradict themselves within a matter of days.

At first, it was announced there would be no pause. At present, we’re amid a 90-day pause while countries negotiate individualized rates.

Some countries have offered to slash their tariffs to zero, and as of this writing, there are still no new trade deals.

Virtually every physical product has parts from multiple countries. What is Trump’s plan to avoid “double counting” or otherwise misapplying the agreed rates? Nobody knows.

There are some things that just don’t grow in or have no US production at all. Will US consumers have to pay 10% more for these things no matter what? Again, nobody knows.

Don’t worry if you find the whole situation confusing. You’re not alone.

Piggybacking on Higgs’ work, economists Scott Baker, Nick Bloom, and Stephen J. Davis have attempted to quantify uncertainty in the economy.

By their calculation, now is the second-most confusing time on record (going back to 1985).

 

 

The Myth of the Rule of Law

As you’ve probably noticed, Trump is implementing tariffs unilaterally. And a dozen states are suing Trump for doing so.

Last month, Trump invoked his authority under the International Emergency Economic Act of 1977 to:

“… address the national emergency posed by the large and persistent trade deficit that is driven by the absence of reciprocity in our trade relationships and other harmful policies like currency manipulation and exorbitant value-added taxes (VAT) perpetuated by other countries.”

Andrew Napolitano, former judge and legal commentator, notes that the statute relied on by Trump defines “emergency” as a sudden and/or unexpected event.

Are trade imbalances, currency manipulation, and VATs sudden and/or unexpected?

The answer is less clear than you might imagine. John Hasnas, a law professor at Georgetown, explains why in his brilliant essay, The Myth of the Rule of Law.

His arguments are simple but devastating. For example, the First Amendment reads, “Congress shall make no law … abridging the freedom of speech.”

This is a clear and unequivocal prohibition. And yet, courts have routinely permitted the government to limit or restrict speech. Anti-perjury statutes (like 18 US Code § 1621) are an uncontroversial example of restricted speech.

Hasnas doesn’t suggest we allow people to commit perjury. But he argues that we must consider the practical implications of enforcing anti-perjury laws. To do so, judges necessarily interpret “shall make no law” to mean “may make some.”

Hasnas argues that if “no” can be interpreted to mean “yes,” then every word in every law is open to interpretation. Consequently, there are no guarantees.

 

Hasnas + Higgs

In a speech explaining regime uncertainty, Higgs stresses that his argument is about much more than “policy uncertainty.” Private property rights are central to his thesis. Higgs explicitly states that it’s not merely the letter of the law, but the character of those enforcing it that is important (seemingly alluding to their temperament, sense of fairness, etc.).

Judges often pretend to be dispassionate arbiters of facts and law. But they’re all human. And having preferences is a fundamental part of human nature.

Trump is one of the most polarizing presidents in US history. He already faces several hostile judges—and he’s just getting started. Given judges’ broad ability to interpret words, we could see creative justifications behind future rulings.

Until the dust has settled, the property rights of entrepreneurs and investors will remain uncertain. By continuing to sell products in America, they effectively agree to surrender a portion of sales revenue. But they’re highly likely to make miscalculations and unforced errors by committing to a business model before tariff agreements have been finalized and legal challenges dispatched.

 

A Trump Victory

For the sake of argument, let’s assume that Trump prevails in court every time.

Can he strong-arm companies to invest in America?

Probably yes, at least some of them. We’ve already seen headlines regarding both foreign and domestic companies making plans to build in America.

But what happens after he leaves office?

Nobody knows.

Who will win the next election? Will the next president be more or less flexible with tariff agreements?

Nobody knows.

A future president could unilaterally repeal the tariffs, claiming the emergency is over.

What then?

Instantly, the math for private businesses changes. They might prefer to have their facilities and offices elsewhere.

How can they make plans today to account for such a future? It’s rather costly for companies to move around. Many will choose to delay all but the most urgent decisions and plans until Trump is out of office.

 

This Might Be a Slog

Trump isn’t the first president to take unilateral action in an attempt to execute his vision for America. And he won’t be the last. My concerns aren’t about taking sides.

I understand Trump’s motivations, but his actions have introduced additional uncertainty to the global economy. Without Congress codifying his executive orders, that uncertainty won’t go away.

Miscalculations today by investors and entrepreneurs could lead to enterprise-ending costs down the road.

Higgs argues uncertainty prolonged the Great Depression. I’m arguing that the uncertainty surrounding Trump’s tariffs could lead to prolonged sluggish economic conditions.

Clarity cannot come soon enough.

Meanwhile, it’s best to stay rigged for stormy weather.

KJ

 

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