The four Trump policies most likely to impact economic growth

By Kristina Hooper and Andy Blocker

As the US heads toward a second Trump administration, the world is watching to see who will be part of the new administration and which campaign promises will come to fruition. We’ve both received many questions on this topic, and so in this short piece, we endeavor to cut through this noise and focus on the policies that could have the biggest impact on the economy and markets.

It’s helpful to think about these issues in terms of a ledger: One column for policies likely to have a positive impact, and one column for policies likely to have a negative impact. It’s important to note that the actual impact will depend on both the timing and scope of the policy. This is a complex and nuanced calculation; therefore, this is a rough estimate.

Potential growth opportunities: Deregulation and tax cuts

Deregulation. Businesses are more likely to invest when the political environment favors deregulation. The Trump administration’s goal of removing 10 regulatory rules for each new regulatory rule is likely to create an environment of hyper deregulation. This is likely to be positive for economic growth.  

For example, a study on regulation and investment found that the stricter regulation of markets in Europe relative to the US in the 1990s, during a period of rapid technological innovation, resulted in faster growth in the US than Europe. (1) The study found that regulatory reforms – in particular those that liberalize entry into markets – are likely to spur investment while tighter regulation of industry deters investment. In addition, an environment of deregulation could have a psychological impact, unleashing ‘animal spirits’ in not just the economy but markets. We may already be seeing evidence of those animal spirits in recent market moves.

• Timing: Traditional deregulation — the reduction of regulatory policies — especially, removal of “extra-regulatory” guidance can be implemented quickly because it doesn’t require the approval of Congress. But the reversal of major regulations and elimination of entire government agencies would take more time; recommendations from the newly formed Department of Governmental Efficiency (DOGE) are not expected until mid-2026 and would then likely need Congressional approval to implement. However, eliminating agencies isn’t necessary to achieving an environment of significant deregulation – it seems geared more toward cost reduction and a philosophical reduction in the size of government.
• Market impact: This is likely to encourage a ‘risk on’ environment for investing in general. Financial stocks and cryptocurrencies could especially benefit.

Tax cuts. The Trump administration will likely focus on extending and expanding the Tax Cuts and Jobs Act (TJCA) from Trump’s first term. This would likely be positive for the economy, heading off a potential fiscal drag on growth if the TCJA were allowed to expire. It’s important to note that some tax cuts are likely to have a more positive impact than others due to differences in their fiscal multipliers. (The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation’s economic output). For example, the Congressional Budget Office estimated the multiplier effect for two-year tax cuts for lower- and middle-income people ranges from 0.3 to 1.5, significantly more than the estimated multiplier effect of a one-year tax cut for higher-income people, which is estimated to be 0.1 to 0.6. (2)

The Trump platform also included plans to cut the top tax rate on corporate profits from 21% to 15% for domestic manufacturers, which would make the US one of the lowest corporate tax jurisdictions of any large wealthy country. However, we believe this proposal would be more difficult to achieve than extending the TCJA, given the latter’s direct effect on voting households’ budgets, the already large federal deficit, and pressures to raise spending on defense, for example. But even just a renewal of the TJCA would create an environment in which taxes are being reduced — and that, as with deregulation, could also unleash ‘animal spirits’ for the economy and markets.  

We also have to factor in the impact that tax cuts will have on the fiscal deficit. The original TCJA was not fully funded (i.e., policymakers did not entirely offset the loss of tax revenue through spending cuts or other tax revenue). Therefore, it increased the fiscal deficit and added to overall government debt. As the Brookings Institution explains, “The financing of tax cuts significantly affects its impact on long-term growth. Tax cuts financed by immediate cuts in unproductive government spending could raise output, but tax cuts financed by reductions in government investment could reduce output. If they are not financed by spending cuts, tax cuts will lead to an increase in federal borrowing, which in turn, will reduce long-term growth.” (3) However, Trump’s economic advisers have argued that lower taxes (and deregulation) will spur investment, productivity and economic growth, eventually paying for the tax cuts indirectly. Time will tell which view is more correct, but tax-cut related exuberance could continue to buoy US markets in the short term.

• Timing: Extending and expanding the TCJA would take more time to be implemented because it requires the approval of Congress, which historically acts close to a deadline, which in this case is December 31, 2025. We anticipate that the earliest this would go into effect is January 1, 2026.
• Market impact: This could unleash ‘animal spirits’ that encourage a ‘risk on’ environment for investing. Real estate investment trusts (REITs) could be a likely beneficiary. If the special 20% pass-through tax deduction from the TCJA is extended, REIT shareholders would be able to deduct 20% of taxable REIT dividend income they receive, not including dividends that qualify for the capital gains rates.

Potential growth challenges: Tariffs and immigration restrictions

Tariffs. President-elect Trump has promised to increase tariffs on Chinese goods to 60% or more and to implement a universal baseline tariff of 10% on goods from other countries. Scott Bessent, Trump’s choice to lead the Treasury Department, has said that not only are tariffs a tool for raising revenue and protecting strategically important US industries, but he also called them a negotiating tool for achieving Trump’s foreign policy objectives.

It’s uncertain whether the tariffs are just threats or if they will actually be implemented — and for how long (which in turn would determine their economic impact).

In general, protectionist measures have tended to result in less optimal economic growth but have not necessarily served as a long-term hurdle for the stock market. We anticipate that these tariffs would be inflationary in the short term and, if maintained over the longer term, would likely dampen aggregate demand. In December 2018, during the US-China trade war, the Federal Reserve Beige Book noted that “Reports of tariff-induced cost increases have spread more broadly from manufacturers and contractors to retailers and restaurants.” And tariff wars — or even just tariff threats — can create policy uncertainty that deters business investment. For example, the uncertainty caused by the 2018 trade war stalled US business investment.

• Timing: It seems that tariffs could be implemented in relative short order (~3 months) against China by invoking Section 301 of the Trade Act of 1974, which allows the US to impose trade sanctions on foreign countries that violate US trade agreements or engage in acts that are “unjustifiable” or “unreasonable,” and/or invoking Section 232 of the Trade Expansion Act of 1962, which relates to the effects of specific industry imports on the national security of the United States.  Universal tariffs for other imports might also be implemented by invoking Section 301, although some experts believe a 10% universal tariff would need to rely on the International Emergency Economic Powers Act of 1977 in order to be implemented quickly; otherwise the new Trump administration would need Congressional approval, which would take more time to come to fruition.
• Market impact: Tariffs applied during the first Trump administration led to stock market volatility and a negative return for the S&P 500 Index in 2018, although it didn’t have a material impact over the longer term. (4) Chinese stocks were even more negatively impacted, posting double-digit losses in 2018, but were not affected over the longer term. (5) The tariff wars also led to a flight to quality globally, with the US dollar strengthening by 4.3% over the course of 2018. (6) Once a resolution was reached, the US economy and financial markets normalized.

Restrictive immigration policy. The incoming Trump administration’s articulated immigration policy has two key components: securing and essentially closing the US’ southern border, and deporting undocumented people already living in the United States.

• The threat to close the border is intended to spur action from Mexico to help end migration caravans and to disincentivize illegal crossings into the US. Any impact on industries that hire migrant labor may eventually be seen in US economic data.
• While Trump has said his administration will take action to deport the 15-20 million undocumented individuals within the United States, near-term actions may center on the roughly 1.4 million individuals that have  been court-ordered to leave the US, as well as the backlog of 3.7 million immigration cases. (7) Mass deportations could prove very negative for economic growth — and they could also be inflationary, given that the US labor market is already very tight, with current unemployment at 4.2%. (8) Certain industries, primarily in the services sector, have been experiencing more acute labor shortages. And there could be a very substantial increase in pricing in some industries, such as agriculture, if laborers are deported. This could in turn reduce the economy’s speed limit for growth and push up inflation, which could cause the US Federal Reserve (Fed) to pause — or even reverse — monetary policy easing.

A worst-case scenario would be mass deportations leading to a ‘stagflationary’ environment. In this scenario, a smaller labor force, or slower labor force growth, could reduce the economy’s level of activity as well as its potential growth rate, likely causing a slowdown or recession, while also pushing up inflation through higher wage costs for businesses.

However, less aggressive deportation measures and/or a pivot to new immigration rules that would allow for legal temporary worker status once the border is deemed secure could mitigate the impacts of these policies.

• Timing: A border closing could be implemented quickly, and Congress is likely to provide the additional resources to support that effort. Neighboring countries would likely cooperate with the effort as a result of tariff threats. However, deportation could take far longer and would be extremely expensive. As a practical matter, it may also be difficult if not impossible to round up and deport many millions within the four years of the second Trump administration. It would perhaps require sizeable, long-running and expensive deployment of the National Guard and military on US soil – which would probably require the approval of many state governors as well as Congressional fiscal authorization and be subject to numerous court challenges. This may not come to fruition, at least not on at the scale promised by the incoming administration.
• Market impact: Closing the border could have a very modest impact on markets through possibly lower bond yields and somewhat reduced corporate and small-business profit margins. If deportations were to drive up inflation and in turn stall (or worse, reverse) Fed easing, that would likely reduce stock market returns. If deportation were to negatively impact growth and create a stagflationary environment, that would likely result in a significant stock market downturn.

Policies don’t occur in a vacuum

In conclusion, we have to recognize that some Trump administration policies will likely act as countervailing forces to other Trump administration policies. And so, while we analyzed these four issues in a vacuum, the reality is that they could all be occurring simultaneously, resulting in different effects on the economy. In short, we’re optimistic about the potential for some of Trump’s key policies to positively impact economic growth and markets, but we’re wary of policies that could negatively impact economic growth and markets. We will be following the situation closely and provide regular updates.

With contributions from Arnab Das

1. Source: National Bureau of Economic Research Paper, “Regulation and Investment,” Alesina, Ardagna, Nicoletti and Schiantarelli, 2003
2. Source: Congressional Budget Office, 2015
3. Source: The Brookings Institution, “Effects of Income Tax Changes on Economic Growth,” Feb. 1, 2016
4. Source: Bloomberg, L.P. The S&P 500 Index lost 4.4% in the one-year time period starting January 2018 but gained 17.6% in annualized returns in the three years starting January 2018.
5. Source: MSCI. MSCI China Index lost 18.75% in calendar year 2018. However, it gained 23.66% in calendar year 2019 and 29.67% in calendar year 2020.
6. Source: Bloomberg, L.P.
7. Source of immigration data: Axios, “Trump's mass deportation plan could clog immigration courts for years,” Nov. 24, 2024
8. Source: US Bureau of Labor Statistics, Dec. 6, 2024

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