Is the Next Trump Recession About to Begin?

I talk to economist Jesse Rothstein, who warns that huge federal layoffs could trigger a nationwide economic downturn

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Amid the daily horrors emanating from the Trump/Musk White House, you may not have given much thought to the possibility of a rapid, nationwide economic downturn fed by hundreds of thousands of layoffs of federal workers. Jesse Rothstein has, and he has a warning. Rothstein, a UC-Berkeley economist who was a top economic advisor in the Obama administration, says we could see the signs of a new recession in a matter of weeks.

I interviewed him this week about what’s happening to the federal workforce and what could be coming for all of us; the audio is below, and you can also listen to it by subscribing to The Cross Section podcast. I’ve also included a transcript.

TRANSCRIPT:

Paul Waldman: One of the extraordinary mysteries of American politics is the way that for most voters, the default assumption is that Republicans are good for the economy. They're the party of shrewd and pragmatic businessmen. Whatever else you might say about them, they know how to make the economy hum. This belief persists despite a mountain of evidence to the contrary. And the last three decades have been characterized by a repeated cycle.

A Republican president oversees a crippling recession. A Democratic president follows and cleans up the mess, producing growth and jobs and wage increases. And then a Republican comes in and screws it up all over again. And the cycle continues. And that may now be happening again. But as with everything about the new Trump administration, it could happen much faster than anyone imagined.

So this Tuesday, a post went viral on Bluesky by Jesse Rothstein, a professor of public policy and economics at the University of California, Berkeley, who also served on the Council of Economic Advisors and as chief economist in the Department of Labor during the Obama administration. I will read it to you:

“It seems almost unavoidable at this point that we are headed for a deep, deep recession. Just based on 200K+ federal firings & pullback of contracts, the March employment report (to be released April 4) seems certain to show bigger job losses than any month ever outside of a few in 2008-9 and 2020.”

Thousands of people reposted that, I think because as much as we've all been overwhelmed by the destruction being caused by Donald Trump and Elon Musk, we haven't really been thinking about the possibility of a dramatic economic downturn that will affect everyone. I know I haven't been thinking about it. So I thought it would be good to talk to Jesse Rothstein about what he is seeing in these policy changes and why he thinks we could be headed for a recession. So Jesse, thank you for joining me.

Jesse Rothstein: Thanks for having me.

Waldman: I want to establish the context here. So there's kind of a standard menu of Republican policies that they will enact when they have control of the executive branch and Congress. They're going to cut taxes. They're going to decrease regulation on corporations. That isn't necessarily going to have a huge immediate effect. So what do you see that is distinct that the Trump administration is pursuing now? And what is it about the national economic context and maybe the global economic context that makes it more likely as you look out at the world that there may be a recession looming sometime soon?

Rothstein: Yeah. So I think there are two aspects of the administration's initial wave of activities that are real risks for recession. One, which was the focus of the post that you quoted, is the just massive firings of federal workers. Now it's a little bit unclear yet how many they've laid off. It's all happened in the last four or five days, but what they've said is that they basically plan to reduce the workforce by 10% by getting rid of all probationary workers, by 200,000 workers. All of what seems to be coming out seems consistent with that. Reducing the federal workforce by 200,000 workers is just enormous. If the entire economy loses 200,000 workers, that's a pretty bad month, but not on its own a recession. But then that's just the federal piece, if the private sector also loses jobs, which I expect it will, then then that pushes you into deep, deep job losses that are the kind of thing you only see in very serious recessions.

So if you if we take them seriously, they're going to get rid of 200,000 federal workers. That's the first half of the impact. Another piece will come from all the contracts that they've cancelled or impeded or stopped payments on. Those are all workers who work for private companies that contract with the federal government. And those companies can't keep workers on for very long if they're not getting paid. And so there'll be enormous layoffs there that won't show up on the federal ledger, but are effectively federal policy.

And then all of those workers, the people who lost jobs are going to cut back their spending. They're going to cancel their home remodels. They're going to cancel their vacations. They're going to stop going out to dinner. All of that reduces demand for the businesses that would otherwise be selling them home remodels and vacations and meals out. And so those businesses will have to cut back their workers. That's the standard cycle by which initial job losses in one sector kind of bleed out into the rest of the economy. And I expect that will have a large effect in addition. And all of that is without even getting to the tariffs, which are going to create their own set of huge negative effects on manufacturing companies that rely on cross-border trade.

Waldman: I do want to talk about the tariffs, but I want to point to something that you mentioned that I think is maybe getting less attention, a lot of people don't understand. I've certainly been seeing in my social media feeds and articles I've been reading, these horror stories from government workers who are saying, this was my dream job. I've been preparing for this and I've been in it for 11 months – and that's what a probationary worker is, usually somebody who has not been on the job for a year yet – and I just got laid off.

And it does show you just how completely indiscriminate this is. They talk about this as being efficiency, but they're not even looking at who's doing a good job, who's doing a bad job. They're just saying anybody who's been here less than a year, you're going to be fired. But the other part of it is the contractors. And I think people don't realize just how many people work on federal contracts. I mean, it's in the millions. It is, everything from somebody who works at a Head Start that gets funded by the government, to somebody who's working at Raytheon building missiles, to a researcher at a university whose job is funded by a federal grant, to somebody who's like a custodian at a government building or on a military base. So many of those, especially those kind of blue collar jobs have in the last couple of decades just been contracted out. They're no longer federal employees who serve the food in the Capitol building or whatever it is.

So those people are all under threat when you start to cut back these jobs too. And as you say, there's this kind of multiplier effect. Like if you're the guy who has a food truck and two employees who sits outside the Department of Interior, and all of a sudden there's nobody there to come buy their lunch, then you're out of a job too, basically.

I want to ask you about the tariffs. So I know this is kind of a moving target because Trump changes his mind on what exactly he's going to do. Is he going to put 25% tariffs on Canada, is he not going to do it. So maybe you could talk a bit about, as near as we can tell, what are the economic effects going to be? Is it that inflation is going to rise broadly? Is it that a few targeted industries are going to see layoffs? What can we expect out of these tariffs?

Rothstein: So for 30 years we've had the North American Free Trade Agreement, NAFTA, which for all its pluses and minuses, effectively made the border not a major barrier to trade in manufactured goods. And that means that companies have arranged their production processes so that the intermediate products go back and forth across the border multiple times. A car that's made in Detroit will have parts that are made in Canada that are made from other parts that are made in the US and they go back and forth on the way through that process. That's called integrated manufacturing. Once you integrate that, that means if we now announce a tariff, that means you're going to be paying the tariff every time this stuff goes back and forth across the border. And that makes it basically infeasible to continue to operate that way.

And so you're going to have all of these supply chains that are set up, assuming that it's free to send things back and forth, all of a sudden finding out it's enormously costly and they're going to have to radically remake their supply chains very quickly. That's going to mean layoffs on both sides of the border as the old model becomes infeasible.

And I think that's true in the auto industry around Detroit. It's also true in lots of other sectors around the Mexican border. Those areas of our country are dependent on cross-border trade, and if you impose tariffs or even if you threaten tariffs, we're to have to make pretty drastic changes to the way that the business is done in those areas.

Waldman: Is my impression correct that the sort of consensus about tariffs is that they can be an effective tool if they're targeted at, say there's a particular industry and you want to allow it to kind of stand up a particular good that you want to manufacture in the United States and a tariff can kind of give it some time to be competitive on price with foreign goods, and then that industry can mature and then you have a mature industry making that good and then it can compete even without the tariff? But it seems like if you're just going to impose tariffs on, you know, 10 percent on everything we get from China, it's not like we're going to start making tube socks in the United States again. Right? I mean, that's just going to be a higher price. It's not going to help any particular American industry if the global economics of it is that we're just not going to make that stuff here no matter what. Right?

Rothstein: Right. There's a lot of debate about whether those kind of targeted tariffs are a good idea. But if they are a good idea, it's not this way. Again, you pick specific sectors that you're hoping to grow in the United States, and you don't announce these tariffs overnight and impose them that weekend. You phase them in, you build up time to allow everybody to plan ahead for their impacts and move their production to align.

But as you say, we're not interested in building a tube stock manufacturing business in the United States. That's not a high enough wage sector for it to be worth our while. And so if we impose tariffs on those coming from China, that just makes tube stocks more expensive for Americans.

Waldman: Trump had tariffs in his first term. How did those work out as far as you know?

Rothstein: I think the evidence is that they had negative effects. They produced some profits for American companies that were competing with foreign producers that were facing the tariffs, but they also meant higher costs for the buyers of all of those products and that reduced jobs at the consumers of those goods.

Waldman: And also there's the whole question of the waivers. And this is something I think didn't get a lot of attention from the average person. Let's say you produce something, your company, that needs aluminum and there's an aluminum tariff. You can go to the government and say, can I get a waiver? I want to import some aluminum to help make my gears that I'm making for a bicycle or something. But I don't want to pay this tariff. Can you give me a waiver? And there are lots of waivers. There was a whole system set up to get these requests, and I don't think any of us thinks that in the Trump administration, whether or not you get those waivers is going to be determined by anything other than like, does Donald Trump like you? Have you given money to his campaign? Have you, you know, gotten a Mar-a-Lago membership or something? It seems like it's a nice channel for some kind of low-level corruption where at least everybody has to go and bend the knee to him. And then you can get your waivers and that's going to be a whole new pathway for people to curry favor with him.

Rothstein: I think that's right. It's a huge opening for corruption. It also though is a huge source of uncertainty. Because you don't know when you're planning to build your factory, whether you're going to get those waivers are not. And so if your business plan is only viable if you get one of those waivers, then you're probably not going to pursue that business because you just can't be confident that you'll get it. And so that uncertainty leads you not to invest. Beyond that, the waivers are also a source of unevenness and favoritism within an industry. If one of the manufacturers of whatever this widget is that uses aluminum gets a waiver and its competitors don't get a waiver, then the one that got the waiver now faces lower costs, but its competitors don't. And so it's going to charge the high price anyway, as if it faced the tariff and it'll just pocket that as profit. And that doesn't help consumers. You still have consumers paying higher prices because the tariff is in place. So I don't think the waivers offset the negative consequences of these kinds of tariffs.

Waldman: I’m wondering what you what you feel and what other economists you talk to feel about what Trump really believes about tariffs. This is this is kind of a mystery. I have this gig where I go on Canadian radio and talk to local radio hosts in Canada about American politics from time to time and they often ask me, does he really not know how tariffs work? Because you know, he'll say oh, the foreign countries pay us when in fact, it's whoever's importing the good. They're puzzled by this and I don't really know what to tell them. And my usual answer is, well, surely by now someone has explained this to him. He must know, but he just thinks it's politically advantageous to say that the foreign countries will pay the tariffs because that makes them sound good. But I wonder, there's certainly no question that he really thinks that tariffs are great and is determined to impose them at the same time as I would imagine there are people around him saying, you know, this is a bad idea, or can we just modify them, can we delay them. Do you have any sense of what kinds of conversations might be happening in the White House about this and what he really thinks he will accomplish through the use of tariffs?

Rothstein: Ultimately, I have no idea. I think it's a fool's game to try to figure out what Trump really believes. I think in most areas, he doesn't know enough or doesn't care to know enough to have any beliefs at all. It's just random reaction rather than any kind of fundamental belief driving it. But I don't know what his advisers are telling him. He has a couple of economists working for him. If they ever get to talk to him, I'm sure they're telling him these are bad ideas. But there's no sense in which the kind of predicted impacts of our policy enter into the calculations about what this administration will do.

Waldman: Well, that's not very encouraging. But let's talk about the big economic picture. One question I have is, if we're going to get this and are already getting this huge wage of layoffs that could be hundreds of thousands of people, how quickly does that kind of move through the economy in terms of having some kind of a national effect? When are we going to start to see whether this really is sort of pushing us toward a recession?

Rothstein: We probably won't see the actual layoffs themselves showing up in the official government statistics until the employment situation report comes out in April. There'll be a few hints of it earlier, but mostly you won't see it until the beginning of April. But those workers who got laid off this weekend, they probably canceled, canceled their dinner reservations this week. They called their own contractor and said, actually, we're not going to do that renovation.

And not just the ones who got fired, but also the ones who haven't been fired but are worried they might be. There's an awful lot of workers who are a lot less certain about their futures. And so those are already going to be having an impact on the demand for goods and services that they consume. How long that will take to play out is unclear. I think we've never had a recession caused as intentionally as this before. We don't have great senses of the timing, but I would expect that there's already quite a bit of private sector pullback happening in the next couple of weeks. And then we'll see some hint of it in the February employment report that comes out in March and more of it in the April report that comes up -- sorry, the March report that comes out in April.

Waldman: What is your sense of, with the federal workers who are going to be losing their jobs, how easily they'll be able to find other employment? Are a lot of them going to be underemployed because the federal government is the only one that is doing whatever it is you're doing if your job is to monitor soil quality for the Agriculture Department and there's not like there's a private company that you can go do that same thing for? What's your sense of what's going to happen to those people in terms of getting new jobs?

Rothstein: Yeah, there's lots of specialized technical workers for the federal government for whom there's not much of a private sector market and they’re going to have trouble. But even for the ones who are doing jobs that exist widely in the private sector, you never want to be looking for a job in an economy where there are hundreds of thousands of people being laid off and where everybody is worried about the future. So I expect that everybody who's laid off is going to have trouble finding work. And it will be worse for the ones who have really trained themselves and built up specific skills for federal work where there doesn't exist as much in the private sector: the geoscientists, the medical researchers, the oceanographers, all of the different scientists and engineers and land specialists and agriculture specialists who are working jobs that just don't really exist outside the federal government. They're going to have to find new careers and they're probably not going to find jobs that they like as much or that pay as well.

Waldman: Yeah, that's something that I'm concerned about is not only the human cost of what happens to these people, but the federal government's ability to recruit people in the future. I think that even conservatives should want that if we're going to have people working for the federal government, they ought to be the most skilled and educated and capable people we can find. I can remember telling people younger than me in earlier times, you should think about working for the government. It's stable employment. You're not going to get rich, but it's you can make a reasonably good salary and the benefits are good. And the idea that that would really be dependent on who the president is, for most of the things that people do, it doesn't really matter all that much. But now, after this, there's going to be an effect of the sort of the spectacle of this.

Even if four years from now, let's say a Democrat gets elected and they come in and say, I'm committed to rebuilding the federal workforce. Are you going to tell somebody who just got a master's degree in some relevant field, you should go work for the government? Are they going to trust that if they do that, that that's going to be a viable career path for them? I feel like we're going to lose a couple of generations of talented people who are just not going to want to do civil service.

Rothstein: I think you're right. I'm really worried about that also. And this actually ties into something you said earlier about the probationary workers. The probationary workers, as you said, if you get hired into a federal job, you're typically on probation for your first year. But it's worse than that. Because if you work for the federal government for 20 years, and then you get a promotion, you're on probation for the first year in your new role. And we're hearing about a lot of people who got fired as probationary workers in the last week, who were actually long-time civil servants who just happened to have gotten a promotion recently.

So what we've said is not only is this job that you used to take because it might not pay that much, but it was secure, not only is it just wildly insecure because some president can decide he just wants to slash the workforce for no reason at all and you might lose your job. But even if you were there for a while and you do a great job and you get promoted, that opens you up to risk. So who's going to want to accept a promotion under these circumstances anytime when there might be a Republican in office in the next year? I think this is going to have very, very negative long term consequences for the ability to hire into the civil service.

Waldman: Now, are there other kinds of economic effects that are sort of the second order? I'm thinking, a lot of people have been waiting for interest rates to come down in order to sell their houses or to be able to buy a house. And they haven't yet, even though inflation has come down. We're all sort of waiting on the Fed to see when they're going to lower interest rates.

Rothstein: Well, a big spike in unemployment would generally lead the Fed to cut interest rates. So maybe that will lead rates to come down lower. But I think the bigger issue is going to be just that this is going to create uncertainty in every aspect of economic life. And if there's uncertainty, you just put off decisions if you can, you're better off waiting. And so you're going to have businesses just deciding not to invest, even if they haven't been directly affected yet. They just don't know what the world's going to look like six months from now. And so why don't we hold off and not sink our money into a unrecoverable investment in the meantime? And I suspect there'll be something similar with the Fed. Even if we have economic conditions that might have led them to cut rates, they might say, well, look, it's so uncertain what's going on. Let's just hold off. Let's do nothing and wait and see what happens. So I have no idea what it'll do to interest rates, but uncertainty is not good for anybody.

Waldman: Is there anything that you're seeing in what Republicans in Congress are now talking about doing with their budget that we should be thinking about or watching out for? I know they haven't settled on anything yet, but they're starting to get it together.

Rothstein: They're promising big cuts, which Donald Trump has already implemented a lot of them, despite it not being legal for him to do that without congressional action. So I think there's some of that, but also they’re promising cuts that would require cuts to Social Security and Medicare and Medicaid. And that's going to have its own set of consequences if people's retirement pensions and healthcare is impacted, even beyond the effects it's going to have on the medical system of all the chaos at NIH.

Waldman: Right. If you kick a million people off Medicaid, I don't know what the number of people who are on Medicaid now is. It's 70 million or something. It's very, very large. And Republicans are not happy about that; they're talking about doing instituting work requirements in as many places as possible, which is basically just a way of putting up kind of bureaucratic impediments to people getting insurance. And you set up a kind of an obstacle course of red tape. And if you make a mistake in filling out your weekly hours, then they kick you off your insurance, and that's a way of reducing the rolls. But they also, I think, are looking at maybe rolling back the Obamacare subsidies that have made it possible for a lot of people to get private insurance for nothing or next to nothing. They're not happy about that. They'd like to roll that back.

And I would not be surprised, and I don't know if you have a feeling or a prediction about this, that they're going to get spooked about cuts to Medicare and Social Security because that's very dangerous. But Medicaid, I think Republicans believe that they can go a little farther there without the political blowback, but that may not be true. They tried to do that in 2017 when Trump was president the first time. And yes, it was only because John McCain voted against it that the Affordable Care Act survived, but there were protests, there was a lot of public pressure about the Medicaid cuts. And it turns out that Medicaid, even though I think a lot of people feel like, oh, it's a program for poor people, it must be widely maligned, In fact, people really like Medicaid. People who are on Medicaid are very, very happy with it. So there may be political blowback to that too.

Rothstein: As you say, tens of millions of Americans rely on it for their health care. There's never been a suggestion that they were going to replace it with something else. They were just going to take healthcare away from those tens of millions of people. Again, I think they're still a little bit worried about it, but they're building themselves up to cut it. I don't see how they're going to follow through on all the promises they've made unless they cut it. They need that money to pay for tax cuts for the 1%.

Waldman: And do you think that in terms of the funding freeze that's happened now, which – it’s been complicated, they froze it, they unfroze it, they said it's not frozen, it's still frozen, but they unfroze the memo. It's very unclear, but I get the impression that in a lot of cases, nobody really knows whether the funds are there and the people down the chain who rely on it, there's some program somewhere that's being funded by something that got frozen, and either they can't access the money or nobody is really sure at the local level. Do you think that that stuff is just going to kind of wither on the vine? Is it going to be able to be restored if a month from now, some judge says, yes, you have to unfreeze this program? How is that going to work?

Rothstein: It's so much harder to build organizations than it is to destroy them. I really worry that a lot of organizations that have been built up over a long time, once they've kind of cut everything loose and kind of created all this chaos, it's going to be very, very hard to put them back. The Head Start Center is going to have to lay off its teachers. And if a month later it finds out that it has money, then it can go try to rehire them. But the kids have had to go find other care, or the parents who had to find other care for their kids and the teachers have found other jobs and you can't just create that again. So I think that this is going to really dramatically reduce the quality of public services for a long time to come.

Waldman: All right, what should we be watching out for if now we're all freaked out about the possibility of a recession? What should we keep our eye on to see whether it looks like it's starting to happen?

Rothstein: So think what we want to be looking for is evidence that the federal job cuts are spilling over into private sector job cuts. Things to look out for there is in the medium term, you get to see monthly employment reports that come out. And so we'll learn about employment this week or last week when the report comes out in the first week of March. I think it's a little bit too soon to start to see serious impacts now, but a month from now, I think there will be private sector impacts and we'll be able to see that in the report that comes out in early April. Prior to that, the kinds of things we can look for is spikes in unemployment insurance claims. The program for unemployment insurance for federal workers is different from the one for private workers. So we'll be able to tell whether we're seeing increases in layoffs in the private sector, declines in job openings, which are privately collected data that show up pretty quickly when firms stop hiring. And the kind of business confidence and consumer confidence surveys that are done by various organizations, I think will all give us an indication that businesses are as spooked as I am about what's going on right now.

Waldman: Well, I wish I could end on an optimistic note, but alas, I feel like we're not going to have many of these for the near future. Jesse Rothstein, thank you so much for joining me.

Rothstein: You too, thanks for having me.