Donald Trump casts himself as a champion of American business. In many ways, he is. He has slashed corporate taxes. He is rolling back regulations and embracing industries like artificial intelligence. Yet the payoff is far smaller than many business leaders expected, and our economy is losing momentum.
The reason is simple. Mr. Trump’s constant policy swings are offsetting whatever benefits his business-friendly instincts might bring. There is some irony that a president who was elected in part because of his perceived business acumen is instead intensifying one of the most corrosive forces in the economy: the creeping of political dysfunction into capitalism itself.
Let’s start with what millions of businesses face today. Mr. Trump’s war on Iran has caused oil prices to soar and injected volatility into global markets. His administration imposed steep tariffs on nearly all of America’s trading partners a year ago, only to shift or reschedule duties depending on, among other things, how the trading partners have reacted (like Mexico and Japan); lobbying; stock market reaction; and court decisions, with the Supreme Court ruling his sweeping tariff plan illegal. Regulatory agencies have abruptly stopped pursuing cases or significantly altered their priorities. The twists and turns surrounding the appointment of the next chair of the Federal Reserve and the performance of its current leadership deserve its own reality show.
The Baker, Bloom and Davis Economic Policy Uncertainty Index, a widely watched measure of policy-related uncertainty, has surged to levels typically seen during situations like the 2008 financial crisis and the early months of the Covid-19 pandemic. A growing number of economists and executives describe this as a period of heightened hesitation, when businesses are delaying and canceling investments and hiring because they cannot predict the rules under which those decisions will play out.
The impact, dubbed “The Great Hesitation” to describe our cautious labor market, has already been felt by a generation of young job seekers. They face fewer entry-level opportunities, slower wage growth and a lasting hit to lifetime earnings as delayed hiring compounds over time.
Mr. Trump may be a primary contributor to this chaos, but he is not the only one.
For decades, American businesses competed and invested within a relatively stable framework of rules. Those rules were not perfect, but they were predictable enough that companies could confidently plan years into the future. That stability was possible because both political parties largely accepted a similar governing philosophy: Changes would generally be made gradually. That predictability helped fuel investment, innovation and rising living standards.
The rate of change began to accelerate after the 2008 crisis, when policymakers and regulators expanded oversight of banks and other financial firms, often in response to real failures and public backlash. But the fire was really lit with the arrival of Mr. Trump, who introduced a more erratic style of economic governance, especially through tariff threats, trade wars and abrupt policy changes. The economy in his first term stayed strong, but businesses increasingly had to factor in the risk that key policies could be upended quickly.
In some ways, Joe Biden’s administration goosed the cycle. His administration expanded industrial policy through semiconductor and clean-energy subsidies, pushed regulators to take a tougher stance on large technology companies and mergers and introduced new expectations on climate, D.E.I., and corporate behavior. Even when the underlying concerns were real, and the approach was more structured, the moves still expanded the scope of intervention. This may explain why many top executives favored Mr. Trump in his bid for a second term.
Now, Mr. Trump is drastically revving up the cycle, seizing new terrain and growing even more erratic. He has not simply reversed Biden-era policies but has done so abruptly, unevenly and often in public.
Look at the auto industry’s production of electric vehicles. Rules on electric-vehicle incentives, import tariffs and domestic production requirements have shifted so often that manufacturers have posted billions in losses and are left guessing where to build, what to produce and which technologies will be favored. Businesses are no longer just adapting to new rules. They are trying to guess which ones will survive.
There are already signs that Mr. Trump’s overreaching is seeding a backlash from the left that may further feed the cycle. Proposals such as wealth taxes and expanded corporate regulation are gaining traction, suggesting that Mr. Trump’s policies may be replaced by a different set of sweeping interventions. The risk is not a single shift, but repeated swings in different directions.
This is how political dysfunction is seeping into American capitalism: not through one sweeping reform, but through a steady erosion of stability. And that erosion hits hardest where the economy is most dynamic: among the smaller and midsize businesses that drive job creation and innovation.
Take mergers and acquisitions. The ability of companies to combine or be acquired is essential because it allows new ideas to be developed and take hold more widely, inefficient companies to be restructured and innovations to reach consumers through larger platforms.
Big corporations have continued to do deals, wielding large legal teams, access to financing and lobbying power to navigate shifting rules. But in the rest of the economy, activity is slowing. Medium-sized businesses are delaying deals, postponing expansion and holding back investment. And smaller businesses are freezing hiring and growth plans.
Innovation is a major driver of growth, and much of it originates in smaller companies and start-ups. When smaller deals stall, fewer new ideas receive funding, fewer businesses grow into major employers and fewer innovations reach consumers. Over time, that means slower productivity growth, fewer job opportunities and higher prices than would otherwise prevail.
This negative cycle is self-reinforcing. As an economy slows, companies increasingly look for more ways to insulate themselves from uncertainty, building cash reserves, focusing on established markets and avoiding riskier new ventures.
The result looks less like the dynamic capitalism America has long enjoyed and more like parts of Europe such as Italy, where growth has been slower, fewer new companies grow into large ones, innovation is lagging and businesses spend as much time navigating political rules as they do competing in markets. That comparison is even more apt given Mr. Trump’s recent moves to have the federal government take direct stakes in corporations, blurring the line between setting rules and picking winners.
Markets can adapt to change. What they cannot function under is constant chaos. Policymakers need to focus not just on what rules to adopt, but on making those rules durable, predictable and credible across political cycles. That requires restraint, not just from those in power, but also from those seeking to reverse course, so that policy changes do not set off equally destabilizing countershifts.
The deeper challenge facing American capitalism today is not choosing between shareholders and voters. It is restoring confidence in the rules of the game. There will be work to do once Mr. Trump leaves office, but perhaps the hardest task of all will be imposing the discipline required to ensure that policymakers not do too much all at once.
Amit Seru is a finance professor at Stanford Graduate School of Business and a senior fellow at the Hoover Institution.
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