Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared at Project Syndicate.
Jeffrey Frankel, January 9, 2025, Cambridge MA
Washington DC, January 11, 2026 — What a difference a year makes. When Donald Trump took the oath of office for the second time, almost 12 months ago, his supporters and opponents alike were expecting a set of policies very different from what actually unfolded.
After the November 2024 election, the mood of the American business community began to shift. Some businesspeople had all along harbored doubts about Trump’s anti-globalization campaign. But overall confidence began to fall early in the new year when they came face to face with some of the possible consequences of cutting the US economy off from international trade and migration — the prospects of sharply increased prices of imported products and worker shortages in some sectors.
Anxieties soon multiplied, as mysterious cyber-attacks resulted in a series of failures in the US power infrastructure and water/sanitation systems. Then came the return of some childhood diseases like measles. Conspiracy theories abounded. But from the day of the inauguration, social media no longer felt free to highlight attempts by public health and IT professionals to correct the corresponding misinformation.
- The crash of 2025
Most dramatic in the first half of the year was the correction in the US stock market, by some 35% as reflected in the S&P 500 index. It had already increased sevenfold between January 2009 and the 2024 election, extended by stronger than expected growth in US output and employment in 2021-24. But by the end of President Joe Biden’s term, it had launched into bubble territory. Whether evaluated in comparison to earnings, dividends, capital stock replacement value, or GDP, stock prices were at highs reminiscent of 1929 and other pre-crash years. The market was ripe for a fall.
- The debt meltdown
The immediate catalyst that apparently pricked the speculative bubble in the financial markets was a 2025 intra-Republican deadlock over the national debt. With Democrats having lost majorities in both the House and the Senate, the Republicans were left to confront the tyranny of budgetary arithmetic alone.
Congressional Republicans split broadly into two factions. Both believed that it was time for the country to deal with the unsustainable path of the national debt. (Neither faction followed President Trump’s claim that the path to fiscal virtue was further tariffs.) One faction, led by Speaker Mike Johnson, saw cutting taxes as the way forward, dismissing the “experts’ view” that this would worsen the budget deficit rather than improve it. The other faction was led by Elon Musk, especially after his falling out with President Trump) which followed a humor-motivated claim that he could draw the bigger crowds at rallies). This second group insisted that the only way to balance the budget was to cut spending, but failed to realize that it was now incumbent on them to propose specific spending cuts large enough to do the job. (Musk’s Department of Government Efficiency had achieved little in the way of savings.)
Each of the two Republican factions saw its role as refusing to raise the debt limit or pass a new budget until the others gave in. It was the familiar game of chicken, this time between these two factions, that led to a month-long government shutdown and downgrading of the US by all three credit-rating agencies. That in turn precipitated the crash in stock and bond markets.
As 2025 drew to a close, many observers were opining that a recession had already begun. Some declared a return to the stagflation that had characterized the late 1970s. They pointed out that inflation had risen during the year, spurred on by the tariffs and attacks on the Fed’s independence.
- The reversal
Trump predictably blamed the crash on his Democratic predecessors. Nevertheless, he responded with some unpredictable departures, far from what his election campaign had led voters to expect. For example, he re-reversed himself on Tik Tok. He fired his HHS Secretary Robert Kennedy, Jr., for seeking tougher regulation of pharmaceutical companies; further heavy turnover in his cabinet followed. In the end, he granted the wishes of business supporters that he call a halt to the deportation operation and even went on to allow more granting of H1-B visas and other legal immigration.
In the most surprising about-face of all, said to be an attempt to halt the slide in his poll ratings, Trump came out in support of state laws guaranteeing a woman’s right to abortion. He declared that his position had always been that the matter should be decided at the state level and that he hadn’t changed.
The abrupt changes were not limited to domestic policy, but featured also military actions, beginning with the first armed US incursion into Mexico in over 100 years.
- The foreign policy blow-up
Pundits were soon chastising each other for having taken Trump’s isolationist foreign policy to imply a renunciation of military intervention abroad. They suddenly remembered George W. Bush’s reversal, early in his presidency, of the very high bar that candidate Bush had set for military interventions, when rejecting “nation-building” [Oct. 11, 2000]. Some drew parallels with Argentine President Leopoldo Galtieri (said to make impulsive decisions resulting from a short attention span), who invaded the Falkland Islands in 1982 in an ill-fated attempt to divert the nation’s focus from domestic troubles.
Critics now charge that Trump’s effective surrender to Russia in early 2025, not only betrayed of Ukraine, but also fatefully set the stage by undermining US credibility in the eyes of potential adversaries, starting with Russian President Vladimir Putin himself. Russian troops moved into parts of Georgia and ominously popped up at places along its 1500-mile border with NATO, tying down their Western counterparts throughout the year.
Challenges in 2025 sprouted up in many other parts of the world as well. Countries sought to exploit the perceived American isolationism and domestic political gridlock. Iran finally took the last step to develop nuclear weapons, an outcome that had been feared ever since President Trump’s 2018 withdrawal from the deal that had previously limited Iran’s nuclear program in 2015. With the new precedent set in the Ukraine (and Mexico!), national borders were no longer considered sacrosanct. Venezuela invaded Guyana; Ethiopia invaded Somalia; Indonesia invaded Timor Leste.
Beijing became more aggressive, attributed by some to the role of Trump’s new tariffs in exacerbating China’s economic downturn and by others to American national security pre-occupations elsewhere. Throughout the year, the People’s Republic of China was active in the waters around Taiwan and on newly fortified islands that it claims in the South China Sea. Trump’s reputation as a tough guy was mocked. Two ships collided in the South China Sea, killing eight American sailors. Trump shocked everyone by sending a joint US-Philippine naval force to re-take Scarborough Shoal and the Spratly Islands. In a pattern familiar from modern history, the Trump Administration was carrying out a threat of military intervention that it had neglected to signal in advance.
Amid early reports of casualties among all three countries, China’s coast guard appears to be installing a blockade of Taiwan. Some see an invasion as imminent. The US is rushing to the area all the naval forces that it can spare from challenges in other parts of the world. The outcome is highly uncertain as of December 2025.
- A silver lining?
Throughout the year’s travails, some Americans thought they saw a potential silver lining. They reasoned that their fellow citizens would now at last be able to see the terrible real-world consequences of having Trump as president. The chickens were coming home to roost. The perceived consolation was that Trump’s influence in the Congress and among the electorate would plummet. Some rejoiced when Trump began to spend more of this time playing golf at Mar-a-Lago.
After all, the liberals reasoned, the 2020 Covid-19 virus had made clear the folly of a government that failed to prepare for or take seriously the danger of a pandemic that killed over one million Americans. Surely the public would similarly now see the origins of the economic and political calamities of Trump’s year in office? But the reasoning was wrong.
Trump supporters did not see the adverse developments of 2025 as his fault. Why should they, when they never had before? True, the MAGA faction showed an inability to distill the appropriate lessons from history. But in predicting a different response, his detractors did so as well.
This post written by Jeffrey Frankel.