Donald Trump says sweeping tariffs and draconian immigration curbs wouldn’t rekindle inflation across the US economy. I almost — almost — believe him. Not because he has a plausible explanation for why textbook economics is wrong about his policies (he doesn’t), but rather because I distrust textbook economics.
To be clear, huge levies on imports are a de facto consumption tax and if you close the doors to cheap labor and deport the cheap labor that’s already here, you shouldn’t be surprised if the result is more expensive labor and, most probably, labor shortages in some sectors.
The trouble is that economics isn’t a hard science. There are no rules or axioms. Anyone who speaks about the “laws” of economics is trafficking in nonsense. Maybe economics has a better claim on being a hard science than political science or sociology, but I’m not sure it’s a continuum. It’s either a hard science or it isn’t, and economics isn’t.
If you slap a massive tariff on everything the US imports from other nations, prices for a lot of the impacted imports will almost surely rise, but not in the same way that an apple will almost surely hit the ground if it becomes detached from its stem on a tree. I suppose you could argue that the constellation of factors which determine the prices US consumers ultimately pay for taxed imports are akin to the factors which determine how quickly the apple reaches the ground. Or that any intervening forces which keep prices on taxed imports from rising are akin to a hand catching the apple and preventing it from hitting the ground. But that seems like a stretch to me.
Bottom line: Definitive statements about what will or won’t happen in very large economies under this or that policy proposal are an example of academic hubris. And in the context of Trump, that isn’t helpful because it stokes additional distrust among the former president’s notoriously paranoid support base. How many people were sure the stock market would crash if Trump was elected in 2016? How many people were sure his trade war with China would result in higher inflation? And on and on.
Yes, you and I and people like us can point to specific examples of cases where Trump’s antics plainly had a negative impact on financial assets and economists can show you all sorts of evidence to support the contention that in fact, Trump lost the trade war and that the tariffs did, in fact, put upward pressure on prices. And God knows the math on Trump’s tax cuts admits of exactly no ambiguity: The benefits accrued disproportionately to the rich and corporations.
But for people on Main Street, none of that’s obvious. Even if you could make it obvious to them, the experiential economic reality of the Trump years was low inflation, a decent jobs market and solid growth. The experiential reality of the Biden years was very high (generationally high) inflation, and… well, and the rest is irrelevant. If we’ve learned nothing else over the last four years, it’s that in the presence of high prices, it’s very difficult to get Americans to focus on anything else.
I read an article this morning by Matthew Winkler, the gist of which was that not only does America no longer have an inflation problem, the country may be on the way to solving its high prices problem. He cited, among other things, grocery store steaks that are cheaper now than they were during the GFC and falling prices for online groceries.
With apologies to Winkler, that’s a whole lot of bullsh-t. Maybe a Porterhouse at a Weis in Dingmans Ferry is in fact cheaper today than it was after Lehman collapsed, and I have no doubt that you can secure a lot of good deals if you spend all day shopping online for discount bulk food (cue a joke about Mark Cuban’s toothpaste), but to suggest — or even to nod vaguely in the direction of suggesting — that economy-wide prices are going to recede sustainably such that an appreciable amount of the pandemic-era increases will be rolled back, is mind bogglingly irresponsible in my opinion.
The question isn’t whether either candidate for the US presidency will preside over a broad-based decline in prices — neither will unless there’s a literal depression — but rather which candidate would keep the economy on a disinflationary track, which is to say on a path back to price stability as defined by the Fed. The easy answer’s Kamala Harris, notwithstanding sundry “communist” accusations and forgetting she was vice president during the worst bout of inflation since the 1970s. Betting odds aside, gridlock’s the base case. And divided government means neither Trump nor Harris would be able to implement their fiscal agenda. So it’s really about trade and immigration. Let’s focus on trade.
“[B]oth candidates would implement expansive fiscal policies in case of support from Congress [which] would likely lead to stronger GDP growth, lower unemployment rates and higher inflation rates [but] purely based on the trade policies of the two candidates, simulations clearly show the adverse impact of Trump’s universal tariff: Inflation rises and GDP growth slows down,” Rabobank’s Philip Marey wrote, in his latest election special.
The table on the left, above, is just a side-by-side of the candidates’ policy proposals. The tables on the right are Marey’s model-based projections (click to enlarge, as always).
Marey ran a sensitivity analysis which showed that even in a relatively benign case where Trump goes small on his universal tariff idea, the projected impact on inflation could be enough to “stop the Fed’s cutting cycle in its tracks.” In Marey’s “more extreme Trump scenario,” the inflation bump’s huge: Headline price growth would be 5.4% in 2026.
Do note: Some of the increase in bond yields since the September FOMC meeting is attributable to election front-running, and the backup in long-end yields suggests some market participants are concerned about a scenario where the Fed isn’t able to cut rates as much as previously anticipated. Marey spoke to that.
“We think that if Trump becomes President, we are going to see a rebound in inflation once he imposes a universal tariff,” he went on. “For the Fed, this will mean that they will have to pause the cutting cycle… much earlier and at a higher level than they now expect.”
Marey even suggested Jerome Powell “could be forced to start hiking again if inflation gets out of control.” Trump, you’re gently reminded, has variously promised to bring rates down (and by a lot) if reelected. Shades of Erdogan.
And yet, coming full circle, we’ve heard all of this — the Erdogan parallel included — before. Trump’s supporters will thus be forgiven for any skepticism they might harbor. Or anyway for not buying the worst case. After all, when it comes to inflation, we’ve just seen and lived the worst case and Trump wasn’t president for it.
My contention, though, is that America was just lucky from 2017 up through the pandemic. The country elected a demagogue and things worked out ok, right up until a plague hit. I’ve said this repeatedly, and I’ll say it again: Regardless of your political views, it’s generally the case that if you roll the dice too many times on an inherently risky proposition, you’ll crap out eventually. And Trump in the White House is an inherently risky proposition.
The mass deportation of somewhere around 20 million people is an incredibly impactful economic event. Not only do you create a cheap labor shortage but you also reduce the number of consumers impacting overall demand. That would probably create a deflationary effect early which of course Trump will brag about and use to troll anyone who opposed this plan. However the deflationary impact would eventually crush small business reducing competition across markets. That reduction in competitors compounded with offshore tariffs would then bullwhip inflation much higher, now crushing medium sized businesses dependent on now more expensive supply chains. Unemployment skyrockets as firms close, demand further drops due to lack of economic mobility for lower and middle classes and by the time the man dies, so too has the peak of American economic superiority.
But hey, at least we got rid of a bunch of brown skinned people and women’s rights, right?
Trump could no more deport 20 million people than he could organize the security at one of his rallies. Starting with the Conference at Wannsee, where the outline for the “Final Solution to the Jewish Question” was created, Hitler’s plan for concentrating and killing all the Jews in occupied Europe was finalized and implemented. Although Hitler did succeed in murdering millions, it took a period longer than Trump’s term would last and only involved moving a third of the people Trump says he would move. Can’t happen, won’t happen. Decades ago I watched while ICE tried to round up all the illegals in Iowa’s meat packing companies. It took dozens of busses, cops, etc, just to put a few thousand people in an old arena in Waterloo. Then they had to bring in the law, sort everyone out, try to figure out where to send them, etc. After several months the thousands were whittled down to a few hundred. Where could we find, transport, concentrate, and erase 20 million? How can this be taken seriously? One transcript and notes from Wannsee managed to avoid destruction. There was a movie and the material has been published. Check it out. It is fascinating. They had to lie even to themselves for three days. It seems there were several folks on the committee with previously unreported Jewish roots.
20M is the goal, even if they don’t achieve that goal it will still cause significant disruption to the economy. Considering the volume of people enthusiastically supporting this notion, I imagine government funds will be limitless in fulfilling this objective, meaning high paying jobs for people eager to complete the work.
You don’t need to look overseas to find parallels, the Mexican Repatriation from 1929 – 1935 followed a similar playbook. This followed the Native American forced removals, migrations, and death marches. The US has a history of successfully executing these types of initiatives typically with broad support from the electorate. It’s not so unthinkable that in this modern era the volume of deportation could escalate into the 10’s of millions and when you’re shooting for such a lofty target I doubt you’re going to be doing a whole lot of validation that the people you are deporting are not actually US citizens. shrug emoji
Buses? Too small. Out where you live they’ll likely be loading up box cars on the Kansas City Southern rail lines which go right through Texas into Mexico.
“Load ’em up and ship ’em out!”
(Will the Canadian government stand idly by and watch the new owner, Canadian Pacific, carry human traffic? Has Stephen Miller already drawn up plans to seize the Kansas City Southern lines citing a national emergency? Hopefully we won’t find out.)
“Republican” voters having selective memories and their leaders leaving huge messes for Democrats to clean up, are the hallmarks of our time.
Yes ‘facism’ is risky. the article discusses that nobody knows the et of tariffs. That’s only partially true. It really depends on the “incidence” of the tariffs. Trump’s proposal is broad based. Items we manufacture here as well as import face one outcome. Items we only import and don’t make face a different outcome. But to a greater or lesser degree prices will go up. Exporters to the US will absorb some of the increase depending on this fact and how elastic demand is for the particular good. The result will almost surely be higher prices and lower investors in the US. Someone somewhere will pay and some of it will surely be US consumers.
Trump inherited a solid economy from Obama and juiced it with tax cuts and $7 trillion in deficit spending. Works every time.
I’d be curious to hear your perspective on what happens if Trump installs puppets at the Fed to force rates down? I know it’s all speculation at this point and Erdogan is an example albeit a poor one since Turkey obviously doesn’t issue the world’s reserve currency.
Well, remember, his Judy Shelton and Stephen Moore idea(s) failed miserably.
Trump was still running for re-election that time. Wait until his supporters personally blame Jerome Powell and the rest of the Federal Reserve for being the reason they can’t afford houses, and being reminded that if Trump himself controlled interest rates they could get 2% mortgages, and maybe it’s time to take up arms against the elitists on the Fed board…
Surely Trump would never agitate his supporters to do anything violent in the service of his personal goals, right? And surely Congress would stand up to him again and not let him instill his puppets on the board, right? Ha, Ha!
The bankruptcy king can make a pile out of gold. His candidacy is a good example of that. The only thing he has is hate and division, which he has doubled down on. Journalists, Democrat politicians and others would all be best advised to leave with the immigrants to avoid incarceration or worse. With 80,000 deputies, suggested by Mike Flynn and supporters, all enforcing their version of the law we would become lawless and ungovernable. I have faith that there are enough good people left amongst the MAGAT’s to provide a landslide for Harris.
Don’t forget the less likely but, perhaps, more meaningful threat of a loss of foreign confidence in the US Dollar and US assets. Specifically, US Treasury bonds. They’d have to call the Tidy Bowl Man out of retirement to clean up the mess this would make.
This was one I was thinking as well.
Assuming we do see tariffs , then inflation , then higher interest rates, will that not send the dollar on a rager?( nod to brett kavanaugh)
More meaningful indeed. I take umbrage with your less likely assessment.
Talib’s russian roulette
I’ve spoken with thousands of non-Republican registered voters in Southeastern PA. My overall impression is that the great majority don’t understand the risks of this dice roll. While many have voted or will turn out because they feel strongly about an issue in particular, and in some cases the fate of the Republic is the stated issue, I speak to scores of registered voters who definitely do not feel a sense of urgency and may not vote.
Harris has a great day in Philadelphia yesterday. She needs more of them, in my estimation, to win unless Trump’s turnout underperforms, which is not something I’m comfortable gambling on.
I think in a prospective second term, when something finally does go wrong it’ll be something random that has nothing to do with all the risks people have flagged.
What if everything feared does go wrong and more?
Like say a pandemic?
I think it’ll get really interesting once Trump starts having serious health issues. I’d be willing to bet that he has a medical emergency in office given his weight, stress, and dietary habits.
Jr will try to take over.
I just hope I don’t find out whatever it is.
I think the broader problem you are highlighting is the “Expansive fiscal policies” – because at this point we are asking for it whether its Harris or Trump in terms of inflationary effects.
Which is the broader risk wih Trump as well – if something does go completely askew as a financial risk how would he respond?
He will find someone else to blame. He will not take ownership of anything.
To quote Trump directly, “I take no responsibility”.
I just can’t understand why “the market” even tolerates Trump, especially when democracy is at stake. Didn’t democracy provide a sufficiently fertile environment for capitalism to thrive? Was it not good enough for investors, even when participants generally ended up on the upside of inequality? Would the market prefer a purer form of kleptocracy or oligarchy (maybe so – moats are prized)? Sometimes I wonder.
I think it is because the losers are losing again. Polls are structured and run by the greatest beneficiaries of our political system, the media. These people profit handsomely from tight races. So they prop up the losers either by slanting polls or giving them favorable airtime. In this way the most extreme candidates can gain oxygen. The net result is philosophical polarization for profit.
The people hankering for oppression and exhaultation of the wealthy over the populace lost in the 1960’s, 1920’s, 1950’s and we are witnessing a redux in 2024.
I could be wrong but this feels so much like the losers lose again. However the philosophical damage has been done, setting in motion a repeat profit potential in our future. What will it take to stop the groundhog day nightmare we seem to live in?
first loss was 1860’s, not 1960’s