For many, the pain of the COVID-induced global economic downturn is still a vivid memory. The pandemic contributed to roughly 181,000 more establishments exiting the economy than would have otherwise occurred at pre-pandemic rates. More than 20 million jobs were lost during the second quarter of 2020, including more than 450,000 jobs in Wisconsin, before COVID-19 vaccines were widely available. The economy was further upended as inflation far outpaced income growth for many households during the subsequent post-vaccine recovery. The pandemic and associated economic fallout were events largely out of our control, but now the global economy is facing predictable headwinds and turmoil as a result of short-sighted, yet intentional, policy choices at the federal level. In particular: 1) President Trump’s tariff wars with our trading partners act as headwinds to income and economic growth; 2) the United States’ war with Iran has left the Strait of Hormuz effectively closed to most commercial shipping, including the shipping of oil, gas, and fertilizer, which has put upward pressure on energy and food prices; and 3) growing levels of federal debt have reduced the space for fiscal stimulus in the event of a crisis. These intentional policy choices have left the economy vulnerable to future shocks and could amplify a moderate financial shock into a broader economic recession.

Tariffs and the U.S. War With Iran

President Trump initiated a trade war at the beginning of his second term that has recently expanded to Canada. Tariffs of up to 50% were levied on certain Canadian-produced goods, including a 10% tariff on energy sources from Canada at a time when increasing energy prices are driving inflation. Trade between Wisconsin and Canada totaled approximately $13.2 billion in 2025, making Canada Wisconsin’s largest international trading partner. In 2025 Wisconsin had a $1.8 billion trade surplus with Canada, meaning Wisconsin exports $1.8 billion more to Canada than it imports from Canada. Tariffs often invite retaliatory tariffs, and Canada’s retaliation to President Trump’s tariffs included levying its own tariffs on American-made cheese and dairy products, steel and aluminum products, and wood products. Furthermore, Wisconsin’s major exports include industrial and electrical machinery, and medical and scientific instruments, and President Trump’s actions have exposed these industries to Canadian counter-tariffs and other trade restrictions that create additional risks for Wisconsin manufacturers that depend on the Canadian market.

In addition to the pointless tariff schemes, the U.S. war with Iran continues and leaves the global economy even more vulnerable to adverse shocks. The effective closure of the Strait of Hormuz to most commercial shipping has restricted the transit of energy and fertilizer products, putting upward pressure on oil, gas, and food prices. A secondary consequence of the U.S. war with Iran is that investment originating from Gulf Cooperation Council (GCC) countries could be redirected away from the U.S. technology and AI sectors in order to finance the rebuilding of infrastructure damaged in attacks. AI development is heavily dependent on financing, and a sustained contraction in available capital could slow AI development and impact the value of AI firms. A reduction in the value of AI firms, accompanied by deterioration in credit and equity markets, could cause an AI investment bubble to burst, with financial contagion spreading beyond the technology sector and potentially triggering a widespread financial crisis.

Federal Government Support During a Potential 2027 Financial Crisis

During periods of economic and financial crisis, state and local government revenues often decline and the federal government issues debt in the bond market to finance fiscal support to help offset state and local funding losses. For instance, during the Global Financial Crisis, the federal government provided $275 billion in stimulus to state and local governments through the 2009 American Recovery and Reinvestment Act (ARRA). Wisconsin state revenues were approximately $1 billion lower in 2009 and 2010 than they had been in 2008. However, Wisconsin received $1.5 billion in federal assistance to help fill funding gaps in Medicaid, education, and unemployment benefits. If the economy does suffer an economic or financial crisis in 2027, the federal government is in a weaker position to help states, local governments, and households. Prior to the Global Financial Crisis, the total federal debt-to-GDP ratio was approximately 60%, and prior to the COVID-19 pandemic it was just above 105%. Under President Trump and the Republican-controlled Congress, total federal debt has surpassed $40 trillion, or approximately 120% of GDP. The total federal deficit has increased to nearly $1.8 trillion in fiscal year 2025, and the One Big Beautiful Bill Act (OBBBA) has been estimated to increase the federal deficit by between $3.7 and $5.1 trillion over the next decade. These higher levels of federal debt and deficits could shrink the government’s fiscal space to respond and aid states, local governments, and households during the next economic or financial crisis, and one way states can prepare for this is by using a portion of any budget surpluses to enhance their own ‘rainy day funds.’

Policy, Planning, and Leadership Matter

Intentional policy choices at the federal level have increased several risks to the economy, including weaker growth, higher inflation, and financial-market stress, all of which increase the risk of an economic downturn. The consequences of these policies could become apparent as early as next year, and the same policymakers who supported the trade wars, the U.S. war with Iran, and the One Big Beautiful Bill could make matters worse by promoting tax cuts for the rich, the selling of public assets, environmental deregulation, and the erosion of consumer and labor protections as “business friendly” ways to fix the economy. These solutions are part of the same approach to economic policy that could exacerbate the problems and pain the economy has been facing for decades. Wealth and income inequality have been worsening since the Reagan era, and analysis reported at MarketWatch and Quartz has found that inequality in America is worse now than on the TV show ‘Downton Abbey.’ Economic policy at the federal level is unlikely to change until 2029 at the earliest. With the increased possibility of a policy-induced economic downturn, or even a financial crisis, in 2027 or 2028, planning, leadership, and vision are needed to protect Wisconsin’s economy, and buffering Wisconsin from short-sighted policies at the federal level should be a top priority for state policymakers in 2026 and going forward.

Dr. Semmi T. PashaArticles

How Short-Sighted Public Policy Choices Can Reduce Economic Resilience