Meanwhile, the Federal Reserve’s response to all this—as it raised interest rates to deal with the inflation caused by the higher prices and wages brought on by the tariffs—would worsen the budget deficit further by increasing the cost of financing the federal debt. The combination of declining output and rising interest payments could add an additional $800 billion to the U.S. deficit, and that’s before factoring in the costs of rising unemployment payments and economic relief for state governments.
Granted, gaming out the effects of a tariff increase of this magnitude calls for some speculation. Such is the nature of economic forecasting. Yet one thing is absolutely clear: Imposing a tariff of 60% on Chinese goods would be an economic and fiscal disaster for the U.S.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.
This article was provided by Bloomberg News.