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Your guide to what Trump’s second term means for Washington, business and the world
Ambiguity is an affliction of economics. Will Donald Trump’s new $100,000 application fee for skilled temporary workers on H-1B visas help or harm the US economy?
The White House is not wrong to say that newly qualified US computer science graduates will find the job market easier if companies must pay to hire overseas. But this effect will be offset by damage to the prospects of US companies that used the H-1B visa and their workers, those companies that locate abroad following the new fees, the companies that do not launch or expand for lack of suitable staff and those that benefit from the spending power of workers with H-1B visas. Overall, evidence suggests that the visas improved US living standards, while also slightly lowering wages for those who found new competition in their areas of expertise.
When you add the new visa fees to Trump’s economic canon, however, ambiguity disappears. The president’s second term has so far been an assault on US economic dynamism, with few of the deregulatory or tax-cutting benefits of his first term.
Much of the focus of the tariffs discussion has been on inflationary and revenue-generative effects, but the real damage to the US economy stems from their ability to curtail profitable business, just like a constantly changing set of damaging regulations. Can new manufacturers guarantee they can secure steel and other components at a reasonable price or is it too risky to start a production line? Is it profitable for a retailer to sign a long-term contract for imports if they cannot have any idea of their margin or final selling price?
Similarly, the clampdown on migration and undocumented workers may address the fear some Americans feel of others, but it hurts labour supply and economic growth. Some of the weakness in US housing starts and new building permits might be the result of restrictive interest rates, but it is just as likely to be caused by shortages of labourers.
When the president demands a 15 per cent kickback in return for granting export licences to Nvidia and AMD for semiconductor sales to China, there is no doubt this damages corporate investment across the US economy. Any business leader failing to ask who will be next should not be in their position. The same is true for law firms doing pro bono work for Trump’s favoured causes. This will neither help their company’s productivity nor that of the wider legal sector. The sheer time and effort business leaders now have to devote to sucking up to Trump undermines their companies competitiveness. Just ask Elon Musk.
These are all large negative supply shocks with few sectors escaping their clutches. They limit labour supply at a time when US-born workers are retiring in greater numbers and decrease the monthly jobs growth that is consistent with stable unemployment to practically zero. A few months ago, Federal Reserve chair Jay Powell thought the US economy could sustain monthly jobs growth of 150,000 to 200,000 without inflation. Ensuring only US-born people do low value-added jobs is not the route to higher productivity or living standards.
These hits to the US supply side also affect prices, adding further pressure to stubbornly above-target inflation. In the short term, the Fed has been helped by demand weakening as much as supply, but this phase could easily prove transitory. The Fed’s quarter point cut in interest rates last week was justified as a recalibration of the balance of risks between unemployment and inflation. But with consumers buoyed by record-breaking equity prices and loose financial conditions, companies are likely to seek to pass on higher costs in the months ahead.
This is all different from Trump’s first administration. Then, the supply shocks were minuscule in comparison and considerable residual slack from the global financial crisis enabled economic growth to roar ahead on the back of his 2017 tax cuts. Although the budget bill passed over the summer extended these cuts, they are now offset by sizeable new taxes in the form of tariffs. The Congressional Budget Office expects the fiscal tightening from these to be at least as large as the loosening from the One Big Beautiful Bill Act.
This means that unless the president is rescued from his policy errors by an artificial intelligence-driven improvement in economy-wide productivity, US businesses need to prepare for weaker growth ahead and households should expect lower improvements in living standards. For other countries, a weaker US economy should sharpen incentives for domestic reform to enhance their own supply sides, allowing more spending without inflation.
Although financial markets have not noticed, the business and economic environment in the US has turned decisively for the worse. Trump has not crashed the American economy because it is remarkably resilient. We should be thankful for that, but its success came from years of business dynamism built upon favourable supply side policies. These are now under severe threat.
It leaves us with a terrible paradox. The less that goes immediately wrong, the worse Trump’s economic policies become.
