Next week, U.S. President Donald Trump will deliver the first State of the Union speech of his second term, having presided over an economy that grew 2.2 percent in the past year. Trump’s economic agenda, however, was far more ambitious than merely achieving growth, including a revamping of the country’s trade and immigration policy.

Has Trump’s immigration policy achieved its economic goals? Did economists accurately predict the effects of his tariffs? Could the Trump administration’s corruption impair the U.S. economy?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: The rate of inflation has recently been falling, but affordability remains the most popular buzzword of U.S. politics. Has the politics of inflation been overtaken by events?

Adam Tooze: First of all, the two things are not contradictory. Inflation is a measure of the rate of change of prices. When inflation stops, the rate of increase goes down. That’s what we mean when we say that inflation is under control. But of course, affordability is the description of a state, not a rate of change. So a surge in inflation, which then levels out and means that inflation falls to zero, can leave you feeling as though you can’t afford your life, because the prices don’t go down when inflation goes to zero—they stay stable.

Most economists will tell you that the real wage has actually slightly gone up, and especially for lower-income Americans, because of the particular nature of the labor market recovery after COVID, where a lot of people became unemployed and then shuffled back into jobs, and there were shortages of workers in key areas and so wages popped. The real puzzle is not that inflation has slowed down dramatically and that we have an affordability crisis, but that real wages appear to have gone up and that we have an affordability crisis. Now that’s a real puzzle, because in general, though prices have gone up, wages have gone up by more. So people should in fact feel better off than they do.

So what are ways of squaring this circle, of making sense of this? Well, one answer would be to say, there is an affordability issue, but it’s not new, and so really what these opinion polls are showing is just the decades-long concern of Americans, especially toward the bottom half of the income distribution, about the fact that they can’t afford a decent life. So when economists then say, “Well, actually, real wages are going up,” that doesn’t answer the question, because real wages were never high enough to allow people to really fulfill their aspirations.

And then we can get more granular on this and say, “Well, if you look at opinion polling, you see two things which are really interesting.” Across the board, people will say that their financial circumstances are actually OK, which is consistent with the economists’ statement that real wages are going up. People register the fact that their bank accounts aren’t in crisis. But then they’ll also insist, “I can’t afford a middle-class life.”

So how do you square those two things? Well, personal financial circumstances in the sense of whether your bank account is in balance and whether you can pay your bills are not the same thing as whether or not you can afford the down payment on an apartment, whether or not you can afford your college loans, whether or not you can afford decent health insurance, whether or not you can afford child care. Because those are lumpy, they’re one-off, they’re often credit based, and they’re decisions that you either make or you don’t make. And if you wisely don’t make choices you can’t afford, then your financial circumstances are OK, but are you suffering an affordability crisis? Yes, you are. And that’s what we seem to be seeing in the data.

And this is strongly supported by two other things about this. The first is that the sense of an affordability crisis in the U.S. is generational. So folks from the age of mid -50s, 60s upward don’t report feeling the affordability crises, because they have shuffled into the home that they’re basically OK with living with; they don’t most likely have children they’re taking care of; they haven’t yet hit, you know, crushing old age medical bills—they’re doing okay.

The people who experience the affordability crisis are overwhelmingly young Americans in their 20s, 30s, and 40s, who are facing these discrete choices of whether they should take on these burdens. If they don’t, their personal finances are OK, but of course, if you cannot buy an apartment, if you cannot pay insurance, you’re excluded from anything like a decent middle-class living.

CA: Trump’s immigration policy of mass deportation was partly framed as a way of combating inflation, by reducing the demand for housing. Are there signs of that actually working in the United States?

AT: There has been a dramatic shift in the balance of the American labor force. The foreign contribution to the American labor force was negative as people were deported, as people dropped out of the labor market, as migration was dramatically reduced. The impact of that on the labor market is not so far very dramatic. And the combined effects are quite difficult to estimate.

What’s clear is it puts the squeeze on sectors like agriculture and construction and certain sorts of low-end service employment, which all heavily rely on undocumented labor in the United States. But the shifting patterns of America’s overall economy are such that it’s quite hard to discern the specific impact of throttling the flow of migrants. And so far, in any case, the American labor market continues to bubble along at an undramatic level. There certainly hasn’t been some huge churn of American citizens into jobs that undocumented migrants have been squeezed out of.

The other big claim of the Trump administration was that deporting what they would call illegal migrants to the United States will reduce pressure on housing markets. And the White House, if you go on the White House website, has published this bizarre data which celebrates the fact that home values in Texas are declining, which you wouldn’t think on the face of it was a great political win for the Trump administration. Texas is one of the labor markets where you have a lot of undocumented migrant workers that ICE [Immigration and Customs Enforcement] is fiercely pursuing because it’s adjacent to Mexico. I do wonder how Austin homeowners feel about this effect. On the face of it, you’d think of this as a rather, sort of, a bit of an own goal for MAGA.

CA: Economists widely suggested that Trump’s tariffs would cause an uptick in inflation. Did economists misunderstand something about the effects of these tariffs?

AT: It’s not common for me to defend economists, but in this case, I think I probably would. I don’t think anyone is going to argue strongly that a one-off increase in tariffs is going to cause a sustained increase in inflation, because a one-off increase produces a one-off change. It doesn’t produce a sustained change. And what we’ve seen is, in fact, that this tax—which is not a tax on foreigners, it’s on American consumers of foreign goods—has hurt American consumers and American businesses who were in the business of importing foreign goods.

And the latest study by the New York Fed suggests that 90 percent of the cost has been absorbed by American businesses and American consumers, which is on the pessimistic side of what economists thought might happen, because the supposed idea of the Trump administration is that a tariff gives you bargaining power over foreigners. That’s what they imagine. In fact, it turns out that Americans want foreign stuff. And so, in the end, the cost is being paid by Americans.

To the extent that it’s borne by businesses, since American profit margins really increased dramatically after COVID, they may be able to absorb some of that into the bloated profit margins of that period. But otherwise, this is being passed on. And when we say consumers, we’re not just talking about households. We are talking about businesses above all.

And what we’ve seen, which is something that economists absolutely predicted, is that these tariffs will be terrible for manufacturing. And the idea of protectionism, of course, is that you close your domestic market, opening it up for domestic production. But that’s based on optimistic assumptions about the elasticity of domestic supply. In other words, how quickly can you scramble to actually replace foreign goods with affordable domestic production? And that just isn’t happening at scale in the U.S. The investment isn’t there. No one in their right mind would invest on the basis of tariffs, which are as unpredictable and higgledy-piggledy and clearly politicized as the Trump policies are.

And so, what’s happening instead is that Americans are forced to import foreign goods at higher prices. And since a lot of those goods are semi-manufactured inputs to American production—among other things, of houses—but all sorts of industrial production in the U.S. have just become much, much more expensive. Because aluminum, steel, two things which Trump is particularly keen on putting tariffs on, are imported to the American supply chain from Canada, for instance, and now cost more and put American producers at a significant competitive disadvantage.

And that’s what we’re seeing in the industrial production numbers. There just simply isn’t an uptick in industrial production. And outside the artificial intelligence area, which is shielding the Trump administration in many ways from the macroeconomic damage that it’s doing, across the rest of the U.S. economy, it’s exactly the kind of story of grinding cost pressure and loss of competitiveness that folks have predicted.

And it will take time. This is like Brexit. This kind of damage is not immediately felt. It’s felt over years as America just becomes an unattractive place to do complex networks, modern industrial production.

CA: Some allege that Trump has introduced new forms of corruption to the U.S. economy and politics. Would an erosion of the rule of law of that sort affect economic growth in the United States over time?

AT: The short answer is it’s too soon to tell. This is going to take time. In the long run, of course, one would expect inefficiencies to result from this. One would expect misallocation of capital. In the end, you would expect really bad effects like the increase in crony networks, the erosion of institutional trust, all that kind of thing. That will take time, and one would have to be convinced that the Trump virus, the MAGA virus has really seized hold completely of the American government, of the legal structure. All of this is completely conceivable at this point, but that worm takes a while to really dig that deeply into the body politic.

And in the short run, corruption can have an opposite effect, right? In the short run, corruption can be a way of facilitating and speeding up business, of getting things done, of getting markets built, of getting connections made, of rapidly moving through with contracts. So what happened in the corrupt deals in the Middle East that Trump’s family businesses have allegedly been part of? Well, one thing was, the removal of restrictions on Nvidia’s exports of chips. And I’m not making any suggestion that there’s a direct link here to Nvidia. But did relations between Trump and the Gulf states improve, and was Nvidia interested in the removal of Biden-era chip constraints? Of course it was. So in a sense, you could say that payments to Trump facilitated an expansion of markets and an expansion of demand.

And that’s what we’ve seen around the world, right? The biggest growth stories of East Asia, say, Japan, South Korea, China, they’re not notoriously clean stories of rapid growth. If you think about the great Gilded Age robber baron eras of American economic growth, they are not clean-hands type models.

So corruption can, in the short run, and even over the medium term, be a great way of easing rapid convergence of capital, technology, resources, removing restrictions, and removing planning restrictions. If you go anywhere in the Mediterranean and, you know, there’s some giant unsightly hotel built somewhere, well, that’s GDP. That’s GDP growth. And that was almost certainly the result of a corrupt land deal. So it’s complicated, but the really bad effects, we would expect to see in the long term.