This is the third in a series of 4 posts looking at the Trump administration’s goals for its first year and to what degree they have been accomplished — all with an eye toward investment. It has long been anticipated that the midterm elections would be decisive in determining whether President Trump’s radical revision of American politics will last. Now is the beginning of the midterm campaign season, and this raises the question of whether we are approaching Peak Trump. The first post considered foreign affairs and argued that many presidential actions abroad in 2025 were performances without a useful pattern, although a theory among his advisers of Western civilizational decline, which complements a similar theory about domestic US decline due to immigration, has had serious foreign-policy effects. The second post looked at the White House’s assault on various government departments, usually with the declared goal of eliminating “wokeness” and DEI programs, and argued that these efforts in 2025 did reduce government but not to the economic benefit of the white men who were seen as left behind by wokeness. This third post analyzes the domestic political economy, while the fourth will examine the implications of the arguments for investors.
The main fact of US political economy in 2025 was that, with low unemployment and strong GDP growth, federal debt increased to record highs. The main sources of growth in federal spending in 2025 were Medicaid, Medicare, and Social Security. Federal income also grew, due to increases in income and payroll tax payments (about two thirds of the growth) and tariff revenues (one third), but it was not enough to outpace spending. The resulting budget deficit of $1.7 trillion at the end of 2025 drove US debt to $37.9 trillion or 99.8% of GDP, a level reached only in the Covid-19 epidemic and the Second World War.
The Trump administration did make dramatic efforts to reduce government spending, such as at the Department of Education and the Environmental Protection Agency. The deficit declined significantly over the course of the year, even if it remained higher in December than at various points in the Biden administration. But the Trump administration also reduced corporate income taxes, increased spending on defense and immigration control, and continued many Biden-era projects.
The theory was that tax cuts and tariff income, combined with major foreign and domestic investments (often made in return for tariff or other explicit regulatory relief), would both replace lost tax income (with tariff revenues) and stimulate economic growth to “make the pie higher,” in former president George W. Bush’s famous phrase, thereby increasing tax receipts. The pie indeed got higher in 2025, which led to the growth in income and payroll tax revenues for the government. Tariff income has definitely made a fiscal difference as well, of $118 billion in revenue. From a White House perspective, the difficulties in 2025 arose with investment patterns and job creation. The quantities of investment advertised by the administration, whether from overseas or by US multinationals, have been on a giant scale. Actual investments have been dramatically lower, and fixed business investment apart from Artificial Intelligence and data centers was down in 2025. AI and data centers, if they operate as promised, are likely to reduce employment: the white-collar version of industrial robots. Meanwhile, employers added about a quarter the number of jobs in 2025 as they did in 2024, making last year the worst for job growth since the pandemic struck in 2020. Nonetheless, GDP growth has been strong and unemployment has stayed low, if not quite at the extraordinary 3.5% at the end of the first Trump administration.
Overall, the economy did very well in 2025, despite being five years into the business cycle. How much of this success was due to Trump administration policies? Probably very little. The year, in political-economic terms, seems to have been one more of performance than substance, much as with foreign policy. Most economists played the role of doomsayers as President Trump announced tariff after tariff on flimsy national-security grounds. The president triumphantly pronounced the consensus mind to be wrong as unemployment and inflation stayed reasonably low and the leaders of the UAE, Saudi Arabia, Qatar, India, Japan, South Korea, Apple, Meta, Nvidia, and others pledged investments on a scale that, if realized, would have rolled the New Deal, the railroad boom of the 1880s, and sundry other moments of investment-led optimism into one. It was all incredible theater. Meanwhile, an alarmed private sector battened down (except in AI) for year five of the cycle, with the twins of business investment and job creation lying flat. Neither the tariff-inflation apocalypse nor the MAGA investment boom (except in AI) actually took place, and optimistic forecasts for 2026 put the tariffs down as a temporary fad destined to fade into the past.
The real structural shifts were elsewhere and had to do with the redistribution of political power: from states to the federal government, from local police forces to federal security services, from the legislative and judicial branches to the executive. These shifts had economic effects, above all in the shrinkage of the domestic labor supply through reduced immigration and the brutal reinforcement of a zero-sum, post-globalization international order fixated on defensive self-sufficiency. But these shifts were much more political than economic. What the Trump administration aims at is more a cultural revolution than an economic renaissance, and even its economic policies have to be analyzed in that context because that is what is driving them.