There have been multiple times now that Donald Trump has said that the late 1800s were a time of great economic prosperity. He has said this in defense of his proposals to dramatically increase tariffs because tariffs were a main source of “revenue” for the government in the 19th century.
Trump is correct that the late 1800s were a time of great economic prosperity. We are obviously wealthier now in many aspects because of technology and the compounding growth that has occurred over more than a century. So, I would not want to trade places with someone living in 1890. I want my smartphone, my air conditioning, and my electricity. But the economic growth and increases in living standards during that time was quite astounding.
The problem is that the late 1800s were not great because of tariffs. They were great in spite of tariffs. Do you know what else was the case in the late 1800s?
- There was no Federal Reserve.
- There was something of a gold standard for the dollar.
- There was no federal income tax.
- There was no Medicare, Medicaid, and Social Security.
- There was no vast empire with military bases all over the globe.
- The overall federal budget was a tiny fraction of what it is now.
Federal Spending is the Key
One thing that Elon Musk has gotten completely right is his comments on federal spending. He has pointed out that all spending is a tax of some sort. All of the money spent has to be obtained by taxing, running up debt, or inflation.
In 1940, total federal spending was approximately $9.5 billion. This was for an entire year. If you go back to 1901, spending was about $525 million. In 2025, the U.S. government is running a deficit of well over $5 billion in ONE SINGLE DAY.
There has been a lot of inflation during that time, which has robbed us of our purchasing power. But let’s look at things with inflation-adjusted dollars.
In constant FY 2017 dollars, total outlays in 1940 were $155.2 billion. Using that same metric, today’s spending is over $5 trillion. Spending in 1940 was vastly greater than in 1900.
In today’s dollars, the federal government is spending well over $6 trillion per year. It could easily hit $7 trillion this year or next year.
It is hard to get a really accurate comparison because of inflation, but the overall federal budget around 1890 was probably around 1% of what it is now. The same could be said for regulations and the overall footprint of the federal government.
Tariffs With Spending Cuts
If Trump wants to cut 99% of the federal budget, then I will accept his higher tariffs. In fact, I’m in a good mood today. I’ll take a total cut of 80% in federal spending. We can just go back to the beginning days of Bill Clinton’s presidency when the federal budget was just over $1.4 trillion.
If that happened, we would see a real economic boom like nothing in our lifetimes. The tariffs would still have an impact, but there would be so much business flocking to the United States it would more than offset taxes on foreign goods, and we could get rid of just about every other federal tax.
Trump is severely confusing cause and effect with correlation. The tariffs in the 19th century aren’t what made America great. It was the very tiny footprint of the federal government as compared to now. There was no massive welfare/ warfare state. We didn’t have all of these so-called intelligence agencies and all of these departments in place that now make our lives worse.
The Mistake of Tariffs
Tariffs are taxes on imported goods and services. They will make consumers poorer than they otherwise would have been.
Trump says that other countries are ripping us off, but he doesn’t really specify how. They are ripping us off by selling us inexpensive consumer goods?
Trump thinks his threat of tariffs will bring people to the negotiating table. This may be true. You can also threaten to hurt someone physically and it might get them to negotiate. It doesn’t make it right.
If Trump is so concerned about fairness, why doesn’t he offer to reduce all tariffs to zero for any country that agrees to do the same for U.S. goods?
Where exactly does Trump get the constitutional authority to arbitrarily make tariffs whatever he wants them to be for whatever country he wants to threaten?
This has the potential to backfire in a big way for Trump. We had an inverted yield curve for almost 2 years. It is now starting to normalize. This is a major warning signal for a recession ahead. And although the Federal Reserve is cutting rates, it is also continuing to reduce the size of its balance sheet.
The timing might be that Trump hikes tariffs while a massive recession starts. Tariffs are bad economic policy, but the recession is baked in anyway. We will get one with or without new tariffs.
But the optics will be quite bad for Trump and his tariffs. He hikes tariffs and then we get a massive recession. How will he react? Will he repeal the tariffs in shame? Will he double down on them?
I believe that Trump actually does want to make America great again. But he is going down the wrong path with tariffs. It has the potential to really backfire on him.
Trump does not understand economics, and neither do many of his supporters. They understand that outright socialism is bad, but they don’t understand the harms of protectionism.