Assuming that conventional economics still has some validity and that economic history has some predictive value, Paul Krugman, who won his 2008 Nobel-prize in economics for his work on international trading patterns, has put some numbers on the likely effects of the higher tariffs proposed by President Donald Trump.
In his Substack (Krugman left the New York Times after 25 years at the end of 2024) he laid out this math.
Imports are about 11% of U.S. GDP.
A first-pass estimate would be that tariffs on the scale Trump is threatening would be a 25% sales tax on goods that account for 11% of consumer spending.
That would raise the cost of living by almost 3%–well over 3% if, as Trump has said he intends in some speeches, he puts much higher tariffs on imports from China.
Since median household income is more than $80,000, that’s around $2500 a year for the typical household.
My note: the core PCE, Personal Consumption Expenditures, inflation rate was 2.8% year-over-year as of November 2024. The Federal Reserve has set a target of reducing inflation to a 2% rate.
On the revenue side imports are around $3 trillion a year, so you might think, Krugman writes, that a 25% tariff would raise 25% of $3 trillion, or $750 billion. But this ignores the fact that a tariff would reduce imports—-which is the whole point from Trump’s point of view-—so the revenue raised would be much less. When Krugman plugs in estimates of the effect of import prices on demand, he gets Trump’s tariffs reducing imports by about a third, so they raise only around $500 billion.
This is less than the $1 trillion Trump has reportedly been telling Republican senators his tariffs will raise.
I’d note one disagreement, potentially, with Krugman. I’m not so sure that the point of Trump’s tariffs is cutting imports or raising revenue. Big point, in my view, in the effort is to give the administration bargaining chips tp get deals with other economies. In which case the inflationary cost of the tariffs could well be less than Krugman estimates.
Still these numbers are a good place to start in assessing the effects of the tariffs on GDP and the stock market.
You can read Krugman’s Substack for free or subscribe for $7 a month at PaulKrugman@substack.com.
