Key Point: “If elected, Trump would inherit an economy that has proved surprisingly strong but still remains vulnerable to new shocks… many analysts fear that Trump’s approach — intensifying the impulsive and chaotic management of his first term — could further unsettle an economy still finding its footing after the disruptions of the pandemic.”

Washington Post: Trump is promising to reduce inflation. His plans may reignite it.

[Jeff Stein, 1/07/24]

• Donald Trump is vowing sweeping changes to the nation’s economy that threaten to reignite inflation — even as the former president blames President Biden for higher prices and says he’ll bring the problem under control.

• With a substantial lead in the 2024 GOP presidential primary days before the Iowa caucuses, Trump has proposed imposing unprecedented new tariffs on trillions of dollars worth of imports and deporting undocumented workers on a vast scale. Both campaign pledges risk exacerbating the price spikes that have subsided over the last year, according to liberal and conservative economists alike, in addition to some estimates cited by the former president’s own advisers. If he’s elected, Trump could implement these policies at least in part without needing Congress to act.

• Trump’s enormously disruptive policy proposals come as he appears likely to jettison the more cautious and establishment-friendly economic advisers that restrained his most nationalist and confrontational impulses during his first term. 

• Trump’s exact intentions on the economy remain hard to predict, in part because his trade proposals as stated would likely prove so unwieldy and painful for U.S. consumers that even some of the former president’s allies say they are unlikely to ever fully go into effect. But they fit a broader pattern of Trump seeking to harness sweeping new executive powers to pursue what critics have termed an “authoritarian” agenda — even as attacking Biden over inflation remains one of his central campaign messages.

• If elected, Trump would inherit an economy that has proved surprisingly strong but still remains vulnerable to new shocks. Although voters give the former president higher marks for his economic stewardship than they do Biden, many analysts fear that Trump’s approach — intensifying the impulsive and chaotic management of his first term — could further unsettle an economy still finding its footing after the disruptions of the pandemic.

• Casey B. Mulligan, who served as chief economist for Trump’s White House Council of Economic Advisers, estimated in an interview that Trump’s 10 percent import tariff proposal would add an extra percentage point to inflation, or a quarter percent a year if spread out over four years. The Federal Reserve has been trying to wrestle inflation down from four-decade highs to the more normal level of 2 percent. While the Fed has made significant progress, they are far from declaring victory, and routinely caution that any number of threats could upend their fight. (A new policy that adds a quarter-point per year would be one such threat.)

• Some estimates are even higher. Adam Posen, president of the Peterson Institute for International Economics, a Washington-based think tank, estimates that Trump’s 10 percent tariff plan would increase the overall consumer price index by two to three percentage points, which would amount to roughly doubling the current pace of inflation.

• Speaking to a crowd in Iowa in September, Trump said that he is planning “the largest domestic deportation operation” in U.S. history if elected again. The former president has talked of wanting to forcibly deport millions of immigrants, echoing a 1950s enforcement campaign targeting Mexican field workers.

• “One of the major differences between now and 2017 is in 2017 he pulled together a coalition that included most of the folks on the right and the business community from New York, which acted as a moderating voice,” said Paul Winfree, an economist who served as director of budget policy during the Trump administration. “A lot of the folks who acted as moderating influences have distanced themselves from Trump.”

• This change in personnel could leave Trump free to pursue a mass deportation campaign regardless of its impact on businesses. Although economists are divided on whether restricting immigration would meaningfully increase inflation overall, many economists say mass deportations — beyond their devastating effect on individual lives and communities — would also almost certainly cause price spikes in particular sectors. Labor shortages would quickly emerge in residential construction, housekeeping, and agricultural work, particularly for fruit and other laborious forms of farm work, said Posen, the PIIE economist, driving up costs for consumers.

• “It would lead to very sudden spikes in prices of key goods like fresh produce, hotel rooms, and housing repairs,” Posen said.

• “This would severely impact the ability of the meat and poultry industry to be able to produce the amount of meat and poultry we’re used to in this country. We’d have shortages, which would increase prices,” said Debbie Berkowitz, a fellow at the Kalmanovitz Initiative for Labor and the Working Poor at Georgetown University.

• That’s when Trump fired off a scathing tweet: “My only question is, who is our bigger enemy, Jay Powell, or Chairman Xi?” The jab — which followed months of Trump practically demanding the Fed to lower interest rates — sent financial markets tanking.

• Even now, the story is a cautionary tale about what Trump’s reemergence could mean for the central bank. Officials have been laser-focused on wrestling inflation down to normal levels, staying steadfast in their pledge to bring down inflation at any cost. Policymakers routinely say that letting prices keep increasing rapidly would make households and businesses worse off in the long run than raising interest rates has.

• If Democrats retain control of the Senate, they could prevent Trump from stacking the Fed with his acolytes, as they did in rejecting Trump’s 2019 attempt to elevate the pizza magnate Herman Cain to the board. But if Republicans take the majority, Trump could remake the central bank, particularly because some of the GOP officials who resisted his previous picks, such as former senator Patrick J. Toomey (Pa.), have since retired.

• “The most successful economic institution in this country is the Fed; we have just seen how their independence and their credibility can work economic miracles,” said Jason Furman, a Harvard economist who served in the Obama administration and stressed Trump could only influence the Fed if he fired or replaced Powell. “If Trump undermined their independence and their credibility — which he has proven he is quite likely to try to do — that could make it very difficult to keep inflation under control.”

• But other economists caution that the Federal Reserve is supposed to be independent for a reason: The central bank must be willing to tackle inflation even if it causes short-term political pain for the nation’s elected leaders. Trump has demonstrated his priority is preserving his own power, regardless of the costs to the Federal Reserve’s credibility.

• “Trump has made it very clear he wants to literally run everything, and he doesn’t give a damn about central bank independence,” said Dean Baker, a White House ally and economist at the Center for Economic and Policy Research, a left-leaning think tank. “If Trump is in the White House, the Fed is very likely to not have a free hand to fight inflation if they need to.”