Economic lookahead: What to expect on the global, US and California stages

It’s go time for President Donald Trump’s ambitions for the U.S. economy. From steep tariffs on America’s largest trading partners to extending tax cuts made during his first administration and a crackdown on immigration, Trump’s policies are likely to have a big impact on the U.S. and global economies. Here, senior fellows at the Stanford Institute for Economic Policy Research (SIEPR) identify some of the potential impacts that often get overlooked in policy discussions.

A high-stakes ‘geoeconomics’ gamble

Matteo Maggiori, SIEPR Senior Fellow and Moghadam Family Professor of Finance, Stanford Graduate School of Business:

President Trump’s threat to impose 25 percent tariffs on Canada and Mexico is an example of a larger trend in geopolitics today: Countries, especially dominant powers like the U.S. and China, are leveraging their economic strength to achieve geopolitical and economic goals. In a new paper, my co-authors and I show that, in addition to leverage from its trading relationships, U.S. geopolitical power comes from control of the international financial system. China, meanwhile, derives its power almost solely from controlling manufacturing inputs. So we’re seeing both countries exert their respective economic strengths — with potentially far-reaching consequences for the global economy. We haven’t seen this level of “geoeconomics,” as the set of economic policies are known, since the Cold War.

A risk of exercising geoeconomic power too much is that the global economy fragments. Already, the so-called BRICS — a bloc that includes China, Russia, and India — are trying to create an alternative basic financial architecture so they don’t have to rely as much on the U.S. and its western allies to engage in global financial and goods trade. Even a weak alternative could significantly diminish America’s own power. Geoeconomic strength comes from controlling an activity almost entirely and leaving target countries with no alternative. A bit of an alternative means a lot less power.

In the short run, I don’t think the U.S. faces much risk of a drastic loss of financial power. The likelihood of a meaningful decline in U.S. geoeconomic power is much more realistic over the next five to 10 years — especially if the U.S. doesn’t get its fiscal house in order or U.S. policymaking gives other countries strong incentives to consider alternatives.

Uncertainty strikes back?

Nicholas Bloom, SIEPR Senior Fellow and the William D. Eberle Professor of Economics, School of Humanities and Sciences:

In economics, uncertainty is a bogeyman. The more uncertainty about an economy’s path forward, the higher the likelihood that companies will pull back on investing and hiring — which can lead to sharp and painful recessions. Economic uncertainty is tricky to measure, but I, along with my colleague Steven Davis and others, have developed an index based on newspaper coverage that shows that levels of uneasiness, which eased in 2024, are at twice their historical average (although they are well below an all-time high reached early in the pandemic).

There are several reasons why uncertainty may surge in 2025. First, the political situation in the U.S. and Europe is volatile. Second, the fiscal situation in the U.S. is increasingly concerning. If unaddressed, a fiscal reckoning is unavoidable — and it will be fast and painful. Third, there’s reason to worry about the future of U.S. monetary policy if the Federal Reserve is no longer allowed to make decisions independent of the federal government.

National Bureau of Economic Research data show that the U.S. experiences a recession every eight years. Any recession that can be foreseen can be averted with appropriate policy. So, recessions tend to spring from sudden unforeseen directions. Whether it’s a fiscal or monetary disaster — or some new unseen nasty — I’m certainly more uncertain than the markets, and suggest others should be, too.

Where’s the money? Spotlight on tax cuts

Rebecca Lester, SIEPR Senior Fellow and Associate Professor of Accounting, Stanford Graduate School of Business:

This is a big year for U.S. tax policy, largely because many of the massive tax cuts that were enacted during the first Trump administration are going to expire at the end of 2025, and Congress needs to figure out whether to extend all or some of them. There is a lot up for debate, including lowering the corporate tax rate further and making permanent the expanded Child Tax Credit, which is aimed at low-income families.

The big question is: With the U.S. deficit nearing $2 trillion, how does the government plan to pay for extending the cuts? There aren’t easy answers. For example, much of the business-friendly provisions in Trump’s 2017 tax reforms were paid for by a transition tax on foreign income of U.S. companies that hadn’t been taxed before. Because that was a one-time tax, that source of tax revenue isn’t available to the government now. Trump says tariffs will make up for the lost tax revenues, but it’s not clear that tariffs will be enough. 

So trade-offs will be necessary, and figuring out the optimal ones to make will be tricky. Will Congress allow companies once again to deduct 100 percent of their research and development costs each year? The 2017 reforms disallowed that, and my recent research shows that business innovation suffered as a result.

Here’s another example of a trade-off with potentially unintended consequences: During the Biden administration, Congress gave companies generous tax credits for their investments in green energy. Turns out, a lot of companies have been claiming those credits. If Congress under Trump repeals those tax credits, that’s going to raise corporate tax bills.

At risk: health insurance subsidies

Mark Duggan, SIEPR Senior Fellow and The Wayne and Jodi Cooperman Professor of Economics, School of Humanities and Sciences:

When it comes to extending Trump’s tax cuts without increasing the deficit, the government may quickly run out of revenue-raising options. Republicans understandably don’t want to touch Social Security. And they don’t want to touch Medicare or defense spending and can’t lower required interest payments on the federal debt. These are the four primary sources of spending in the federal budget.

So where else is there real money? Medicaid — specifically, the amount of federal government support for this state-run program for those with low incomes — and the private health insurance subsidies for low and middle-income individuals that were instituted under the Affordable Care Act (ACA) and then expanded in 2021 as part of government efforts to help people whose lives were disrupted by the pandemic. As a result of that expansion, about 24 million people were able to buy private health insurance through ACA’s state-run exchanges this year. That’s double the number in 2021.

Like the 2017 Trump tax cuts, these expanded subsidies are set to expire at the end of this year. But as policymakers think about these potential savings — estimated at nearly $300 billion from 2026 to 2035 — it’s worth flagging that changes to federal policy that are, on paper, uniform can have very different geographic effects. Data show that Trump won all 19 of the states with the largest fraction of their residents in ACA exchanges, with Florida, Georgia, and Texas ranked first, second, and third, respectively. This means that the unintended consequence of rolling back the expanded subsidies is that millions of people who voted for Trump will no longer be able to afford health insurance. It’s something for the president and his advisers to think about.

The Golden State’s gas-pricing strategy

Neale Mahoney, The Trione Director and George P. Shultz Fellow at SIEPR, and Professor of Economics, School of Humanities and Sciences:

California has long been at the forefront of energy policy and its impact on consumers. For drivers in California, chronically high gas prices are a source of frustration — with price spikes due to unexpected refinery shutdowns fueling even greater anguish. While high prices partially reflect environmental priorities, the California gasoline market is also highly concentrated. Today, just five refiners control 100 percent of gasoline production in the state. 

This kind of market power, combined with consumers’ continued reliance on gasoline, is receiving increasing attention from policymakers. In response to this, the California legislature last year passed ABX2-1, which authorized the California Energy Commission to explore policy levers the commission could use to prevent price spikes. 

The bill set up an Independent Consumer Fuels Advisory Committee, which I was appointed to and voted to chair. Over the coming months, I will be working together with committee members representing the refining industry, labor unions, and environmental groups to help build consensus around approaches that are grounded in good economics, help address price spikes, and make gas more affordable for everyday Californians.