First up is the results of off cycle elections last week. In short, they are are warning to Mr. Trump and the Republicans. While the outcomes were not surprising (as NJ and VA are very blue) the magnitude of the victory was quite a statement. For sure the government shutdown helped pad the margins in VA, as heavily democratic government workers both had the day off and have a lot of animus to the administration from DOGE till now, yet we also see troubling data below. Mr. Trump made big gains among minorities in his last election, but these gains evaporated in the off-cycle, as seen in this chart from the WSJ:

Second up, exit polling confirmed my fears that Donald Trump’s focus on restructuring the global economy via industrial policy and tariffs rather than lowering costs would cost the Republicans. I really would not like to be saying I told you so, I’d rather we had more voters pulling the GOP lever (even if there were little likelihood of victories in VA and NJ), but we have repeatedly talked about Mr. Trump repeating Mr. Biden’s error of raising prices and then denying it. To be sure Mr. Trump’s tariff price increases are small thus far, but voters were clear in 2024 they wanted prices to come down, not go up by a small amount. And voters that are rationally ignorant about most political issues are nevertheless very aware of what their dollars are going to. Coffee is up, bananas are up, steaks are up, and even things which had been on a secular price decline (like TVs) have now inched up. And of course we heard that the average price of a new car is over $50k. You don’t have to be an economist to see your limited budget being stretched and feel you are falling further behind. It’s not just that you can’t buy a new house, as inflation has crept up since Mr. Trump has been elected. He can fire all the chief economists of the BLS he likes, but the numbers are the numbers and people can see what they can (and what they now cannot) buy in the grocery store. For sure all of this is not on Mr. Trump; indeed much of this is outside his control (like annualized 6.4% CPI contribution of energy services {primarily electricity but also natural gas}), but he is in charge and was elected to bring prices down. Even if his tariffs are only a small part, they are adding to the positive side of the price hike ledger and thus allow him to be blamed by rationally ignorant voters. More technical analysis suggests that tariffs are passing through at a much higher rate in durable goods (think cars which use foreign components), with the overall tariff contribution of ~.5% of the almost 3% inflation we have right now. I also agree with most economists that the impact of tariffs will rise with time as U.S. importers were eating a large part of the price increase earlier this year as Mr. Trump’s policy was all over the place and firms don’t want to unnecessarily antagonize customers if the tariffs were only a short term phenomenon. Customer acquisition costs are real and high for most firms; despite populist rhetoric most firms will not want to raise prices unless they need to and they can be confident that all their competitors will have to do the same. As we get more certainty about the end state, firms will pass more of the costs through to customers. In the long run, consumers will end up paying almost all the tariffs (as they do with any other tax).

Mr. Trump did not have a good day with the Supreme Court last week with his claim that he can via emergency declaration unilaterally run tariff policy on behalf of the U.S. as part of his exclusive role in foreign policy.* I expect him to lose on this, but not be deterred and resort to less flexible and shorter term legal authorities to try and keep the tariffs in place. My only hope is that the administration will look at the election results and the data and refocus. Even if he truly believes this is the right thing to do in the long term, he needs to exercise sound political judgment. Republicans rightfully like to talk about the Democrats being on the wrong side of easy “80/20” issues (like transgender “women” in female locker spaces), but Americans have been solidly against his tariffs from the beginning, with 65% opposed to how he is handling tariffs. While the results are highly shaped by partisanship (96% of Democrats against, while “only” 29% of Republicans are against), independents oppose his policies at 72%. Trumpians seem to think you can win elections with only your base; well that’s never been the case and it wasn’t the case last week. If prices don’t come down, Mr. Trump will likely lose the house and he will be shortly impeached (but not convicted) and his agenda is over.

So why am I happy to be called a fool? Actually I’m not, because it says something about our president when he calls 65% of the population fools, including almost 30% of his own party:

Bonus unrelated praise of Mr. Trump, since I hate regularly having to criticize his bad policies which are only half the story. Mr. Putin attempted a few weeks ago to scare the U.S. with its test of a nuclear-capable missile that traveled 8700 miles, saying that this missile is a“unique product, unlike anything else in the world.”  Mr. Trump’s response was brilliant, coolly replying:

President Trump issued a chilling warning to Vladimir Putin Monday after the Russian tyrant boasted about testing his country’s new “invincible” nuclear missile. “They know we have a nuclear submarine, the greatest in the world, right off their shore,” Trump told reporters aboard Air Force One on Monday as he prepared to travel to Japan. President Trump was not impressed by Russia’s saber-rattling.”We test missiles all the time, but you know, we do have a submarine, a nuclear submarine. We don’t need to go 8,000 miles,” he said. “They’re not playing games with us. We’re not playing games with them either,” President Trump continued, before repeating his demand that Putin end the war in Ukraine. “I don’t think it’s an appropriate thing for Putin to be saying. By the way, he ought to get the war ended. A war that should have taken one week is now in its, soon, fourth year. That’s what he ought to do instead of testing missiles,” Trump said.

That was an absolutely perfect response. Well done, Mr. President.

* I was happy to be a signatory of an Amicus brief of economists opposing the Administration’s view on tariffs before the Supreme Court.