Tariffs, the Relentless Assault on the U.S. Consumer, and Impacts on Nonprofits
We are witnessing an onerous combination of tariff hikes and federal spending curtailment that creates inflation and great uncertainty. These developments impact the outlook for market returns and economic performance, and they could compromise the ability of nonprofit organizations dependent on their investments to continue their level of spending.
This discussion is intended to take an Economist’s look at these developments and to avoid any political commentary. I will take the perspective of a “sovereign country economist,” which best describes my early work in the Economics division at the Federal Reserve Bank of New York. In that role, I analyzed the economies of about 20 other countries over three years, and from that perspective I am sharing my view of the U.S. economy today.
Background of Unsustainable Deficits and Debt Burdens
Context is critical for this discussion. The U.S. has been producing federal budget deficits for decads, and deficits have been very high under both political parties. Even before considering the extension of tax breaks upon their 2025 expiration, we are already facing very large fiscal deficits of 7% per annum on top of a federal debt in excess of 120% of our annual GDP. Moreover, not extending the 2017 tax cuts would not be a complete solution, because it would still leave the U.S. with a material fiscal deficit.
Our fiscal path is not sustainable and would likely lead to problems servicing our debt within the next five to ten years. The consequences of waiting for markets to challenge our ability to repay our debts include much higher interest rates, involuntary cuts to spending, higher taxes, and other developments that would have severe adverse impacts on our economy. Moreover, a catalyst for a market reaction could happen suddenly, leaving little or no time to prepare for a sharp economic contraction and a market crisis.
While it is tempting to address the question of discussing what the best path forward might be, I will focus instead on what’s happening now, how it impacts the economy, and why I advocate great caution in planning for future commitments by nonprofits.
Spending Curtailments
The Trump Administration has conducted unexpected spending curtailments across multiple agencies. These curtailments will act as a contractionary impulse to the economy, depending on the scale of the curtailments. From what I have been reading, very little waste from fraud has been found, and most of the cuts in spending are likely to reduce the effectiveness of important government functions, raise the long-term costs of hiring employees into the U.S. government, and potentially cut benefits. In the long term however, the benefits to future GDP of cutting government expenditures now may be greater than the costs, keeping in mind that any widespread reductions in benefits today could have severe and immediate ramifications for families today.
Tariffs
While I find the linkage of tariff policy with other strategic policies both interesting and actually not at all novel, I see the excessive applications of tariffs as the greatest immediate threat to our economy. Roughly 80% of our GDP is spent on consumption activities, and consumers rely heavily on the free trade of goods for their consumption basket. Currently goods imports represent 14% of our GDP, and tariffs announced so far apply at least 20% in additional tariffs to more than half of our imports. These figures imply that consumer price shock from these tariffs is at least 2.8% of wholesale prices, or about 2% at the retail level. A growing tariff war could lead price impacts even higher.
There are reasons to expect that calculation to be off in both directions. It could overstate the actual price impact, as exporters to the U.S. absorb some of the price impact of the tariffs because they cannot fully redirect their exports to other markets at comparable prices. But the estimate of the consumer price impact could also understate the actual tariff impact for the following reason. Some sectors like automobiles will be hit especially hard, because of the “turnover tax” aspect of tariffs. Manufacturing supply chains today involve parts traveling across borders multiple times, and each time parts cross, another tariff is levied, so the actual effective tariff could far exceed 25%. Untying the knots in the supply chain will reduce economic efficiency and take years to accomplish. Reciprocal tariffs by importers of our exports will accelerate that process, damaging our export industries.
My greatest concern with the tariff war is that the global benefits of trade start to unwind. Such a development would land a very large negative shock to the global economy.
The “Wealth Impact” of Tariffs on U.S. Consumers
Looking beyond the supply chain to the consumer, it’s important to point out how inflation from tariffs differs from “normal” inflation. Under the latter, wages tend to rise with price inflation, with some lag, but the end result is that consumers’ real purchasing power is usually not hit, much. With tariff inflation, there is a real loss of perceived wealth—everything is 2% to 3% more expensive–cars may be 20% more expensive—and wages have not risen. Consumers will be inclined to follow behavioral paths predicted by economics: greater saving to compensate for their perceived loss of wealth, and less spending particularly in the short term [and particularly in autos]. The net result could be consumption falling by much more than 2%, and since consumption represents about 80% of our GDP, that implies a GDP impact of at least 1.6%, partially offset by an increase in national investment associated with having narrower trade deficits.
Combining Two Negative Shocks—Spending Curtailments and Tariffs at the Same Time–Creates a Difficult Situation
Looking at the combination of spending curtailments and tariff impacts, it is easy to see that there is a high likelihood of a recession. The U.S. economy has been growing at about 2% per annum, and our estimate of the combined impact of tariffs and curtailed government spending already exceeds that.
I wish to clarify that I am not voicing or seeking to critique any political opinion nor weigh in on any political debates, and I recognize that pain today may be better or worse than pain years from now.
Nonetheless, conducting “structural adjustments” to both fiscal policy and economic policy is fraught with many hazards. One hazard is overlooking unexpected ramifications of these actions. For example, using a “shock therapy” approach to implement spending curtailments and tariffs is in my view applying a “small country solution” to a very big country, and overlooking the significance of that distinction is dangerous. With a small country, increases in taxes on consumers [like tariffs, or VATs] cause savings to increase, and both fiscal and trade deficits to narrow. Curtailments of government spending may hurt consumers, but they will lead to smaller fiscal deficits and higher national saving. Small-country consumers are generally less happy from their increased costs of living and lower benefits, but the international impact of these policies is de minimis.
With a large country, the same is true except that we will face three important boomerang factors. First, as consumers consume less in a large economy, there is a negative feedback effect, where much of the impact of reduced consumer demand does not get exported, but feeds through to reduced business activity and further reductions in employment. Second, other countries will also apply reciprocal tariffs, further degrading the quantity of goods originating from countries with true efficiencies in their production. The global amount of “dead weight loss” [as Economists like to say] will have a material negative impact on the global economy. Third, reduced economic activity, and in the case of tariffs, reduced trade, lead to lower tax receipts. The net result may be that the tariffs don’t raise much tax revenue compared to the ancillary economic damage, and we find ourselves with a weaker overall economy for little benefit.
How Does This Situation Affect Nonprofits?
The most immediate impact on nonprofits is in their endowments. U.S. Equity markets were broadly down about 10% to 20% in March 2025, but have since recovered fully. It may be tempting to de-risk by selling equities, but the problem with that approach is that equities have a tendency to advance in value quickly upon positive news, as they had done in May 2025, with the partial reversal of the tariff policy. We recommend that nonprofits stay with their long term asset allocation policy.
However, the downside scenario still remains, and nonprofits should be ready for it. Markets offer diminished returns in a less-efficient economy. Moreover, donations often decrease when equity market returns are weak, and some may face introduction of endowment taxes on their returns.
Those nonprofits that think they can spend far above the UPMIFA-designated target of 5% per annum should revisit their spending programs. Nonprofits should also ensure that they are not seeking to expand their activities without meaningful, offsetting additional donations. The risk of overextending includes degradation of their ability to provide future benefits, and disappointing or damaging the constituents who rely on them fulfilling their mission.
