For years, economic theories have lingered safely in the pages of textbooks and the echo chambers of academia. Some are brilliant, others half-baked, and many haven’t faced the reality of real-world implementation. That’s changing. And in some sectors, fast.
Take Modern Monetary Theory (MMT), for instance. It argued that governments that issue their own currency could spend freely to stimulate the economy without triggering inflation. In 2020, that theory got its trial by fire. Massive pandemic-era spending flooded the economy with cash. What followed wasn’t the utopia MMT proponents promised—it was inflation. Relentless, persistent inflation. By 2022, inflation had spiked to 40-year highs, real wages were squeezed, and central banks scrambled to slam the brakes. MMT? It disappeared from serious policy discourse almost overnight.
Now, another textbook idea is stepping into the ring: tariffs.
Standard economic theory asserts that tariffs on imported goods raise prices for consumers, slow growth, and hurt international trade— a classic inefficient and inflationary policy. However, proponents of tariffs point to other factors at play when tariffs are applied to imported goods. For example, higher prices can be deflationary because less money would be left over to buy other goods and services, resulting in less demand. As the old saying goes, “The remedy for higher prices is higher prices.” On the other hand, tariffs can encourage onshore manufacturing and result in more U.S. jobs and lower unemployment, which is inflationary. And so, the debate goes round and round.
Recently, in his April 2nd speech in honor of Liberation Day, President Trump levied sweeping tariffs on friend and foe countries.
The rationale? Tariffs would protect U.S. industry, create domestic jobs, and reduce dependence on foreign supply chains, particularly in strategic sectors like semiconductors and medicine.
Will this cause inflation, as many economists predict? That’s yet unknown. The stock market has definitely taken it personally, reacting with a ~19% correction in the U.S. large-cap S&P 500 at its lowest point.
Early signs point to significant disruptions in trade activity. The most recent GDP report released on April 30th showed that imports surged by 41.3%, led by a 50.9% increase in goods. This spike was largely attributed to importers rushing to bring in goods ahead of the newly announced tariffs — essentially front-running the policy shift.
At the same time, we’re hearing increasing reports that many importers have since canceled upcoming orders, hoping that the tariffs will eventually be reduced and aiming, in the interim, to avoid the added costs.
While these developments caused immediate distortions in trade flows, the long-term impact remains to be seen. Much will depend on how businesses adapt and how tariff policies evolve in the coming months.
Meanwhile, broader economic ideas are also being tested in real time. Will government spending keep GDP buoyant, or will looming debt and deficit concerns start dragging down growth? Are proposed budget cuts a prudent move or a politically motivated gambit triggering economic fallout?
Some analysts even argue that Trump-aligned policymakers are intentionally trying to induce a mild recession, betting that it would force the Fed to cut rates and relieve pressure on government interest payments. That might sound clever in theory, but recessions don’t come with warning labels—and they don’t stay mild for long. Lower tax revenue, job losses, and confidence shock could make that strategy backfire badly.
This is no longer an academic exercise. The ideas scribbled on whiteboards in Economics 101 are being tested in real time, on real people, with real consequences. We’re no longer in the classroom. We’re in the lab, and the machines are set to high.
Let’s just hope someone’s watching the temperature.
This material has been prepared for informational purposes only and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
