SCOTUS Whacks POTUS: The Political Economy Therein

A bad day for Trump is a good day for America.

There are a million nuanced ways to dig into the Trump admin’s loss in the high court of the land, and I’ll get into a bunch in a moment. But like they say on the putting green, “don’t lose the hole,” meaning don’t analyze the path to the hole so intensely that you miss the goal of the putt. As many, myself included, have argued, given the other means by which Trump can continue to raise tariff havoc, this is a greater rule-of-law victory than an economic one, though it’s partly that too, as I’ll stress.

But man, did we need a rule-of-law victory, especially on this case, which was so clear cut that even the SCOTUS conservative majority could not, at least as a block, give Trump a win. And a firm rule-of-thumb to live by these days is: a bad day for Trump is a good day for America.

Now, let’s tick through some of the substance. Here are two good reads, btw, if you want to go into the weeds (after you read my link above and the rest of this post, of course).

—A simple way to understand what happened is that Trump’s genius team chose the worst possible statute, in terms of their legal authority, to apply sweeping tariffs. Many have pointed out that IEEPA doesn’t include the word tariff, but I’m more moved by the ridiculous claim that the trade deficit is an emergency. The chart shows that we’ve run trade deficits since the mid-1970s, and, as Mark Zandi pointed out on this Inside Economics podcast we recorded the day of the decision (I’ll soon highlight some things that came up there), last year’s trade deficit share of GDP is the same as it has been for over a decade. And that’s after all this %*#$!! crazy noise and nonsense!

To be clear, I don’t think, as many economists do, that trade deficits are always and everywhere benign. They can be very costly to communities that have lost factories and commerce, especially when there are too few replacements for the lost demand. In fact, ignoring this simple fact helped deliver the orange scourge currently assailing our nation.

But it ain’t no emergency.

—Trump is, of course, already busy replacing the IEEPA tariffs using more allowable statutes, which you can read all about in the links above. The question becomes how does this change the effective tariff rate? It lowers it, but probably not by that much, and it’s possible some countries face higher tariffs, at least for a while.

The figure below, from GS Research, shows that a) not all tariffs were IEEPA-driven (though they’re the biggest share), b) that red bar from the SCOTUS ruling represents a big cut, but c) if you believe Trump’s most recent claim that he’s going to replace the lost tariffs with new ones using the max 15% allowable under Section 122, that damages most of the repairs, such that we’re just below where we were.

The result of swapping out IEEPA reciprocal tariffs for 122 at 15% raises the effective rate on Europe (our largest trading partner in aggregate) but lowers it significantly with China, which could lead to more imports directly from mainland China in coming months (and fewer Chinese transshipments through Vietnam and Mexico).

—All told, I don’t expect to see a big impact on inflation. I can’t imagine any firm lowering prices based on what just happened, especially given the forthcoming replacement tariffs. So inflation will probably remain elevated due to tariffs through most of this year, adding somewhere between 0.5-1 ppt (more now, less later), though we’ll have to see. Trump can only keep the 122’s on until late July, at which point he needs Congress to approve them, and I don’t see them doing so that close to the midterms. Of course, between now and then, he can find other tariffs to take their place.

In other words, tariff uncertainty isn’t over. As long as Trump is in charge, it may never be so. That said, taking away his IEEPA powers will eventually make it harder for him to, as Greg Ip evocatively put it, “spray the world” with arbitrary tariffs.

—Two other two big points this decision raises is what happens to the tariff revenues and how the gov’t doles out refunds to the U.S. companies that have been illegally taxed to the tune of ~$175 billion! The technical term for the latter is clusterf***; note that the high court said nothing on this point, meaning there will be lawyers. Re the former, if the effective rate doesn’t change much, in theory, neither should revenue flows, though this isn’t that simple, as it depends on the import flows from different countries and the rate changes like those in the table above. My intuition is that revs could fall a bit more than the small rate decline would predict.

—I don’t want to sound ungrateful, and good for the three conservatives that joined the liberal justices in the majority, but can we please not act like they’re blazingly insightful jurists, eloquently defending the Constitution. For e.g., this NYT article worked my nerves a bit.

This is the passage in Gorsuch’s concurring opinion that everybody’s getting all gaga over:

Yes, legislating can be hard and take time. And yes, it can be tempting to bypass Congress when some pressing problem arises. But the deliberative nature of the legislative process was the whole point of its design. Through that process, the nation can tap the combined wisdom of the people’s elected representatives, not just that of one faction or man.

It’s true and well said, but I learned this in high-school civics. It’s not a great insight that the whole structure of our gov’t is to avoid a unitary leader by creating checks and balances. And while he, Roberts, and Coney Barrett made the right call in this regard in the IEEPA case, their block has been undermining this function and in so doing, upholding and supporting the spineless, do-nothing Congressional Rs for far too long.

—Finally, recall my theme in many posts up here that resistance is far from futile. I admit to possibly getting over my skis a bit, but Trump isn’t just having a bad week. He’s in political trouble. Just as we thought he would, he’s aggressively doubling on tariffs, which are foundationally unpopular and correctly viewed by people as counterproductive to their most prominent affordability concerns.

Of course, there’s a still a lot of time between now and the midterms, and he and his team can and will create endless trouble over the rest of their term. But just in terms of the raw politics of the moment, he’s in trouble and he’s hurting his party.

And like I said, a bad day for Trump…etc.