Donald Trump Has a Master Plan to Bring Back Inflation
If you miss the high inflation of 2022-23, don’t worry. Donald Trump has proposed a set of policies that are guaranteed to bring inflation roaring back…and wreak havoc on the U.S. economy, too.
Many voters “trust” Trump more than Kamala Harris on managing the economy, the #1 issue in this election. That’s because inflation was relatively low during Trump’s tenure and economic growth was solid. Trump has convinced many voters that the Biden Administration’s spending policies caused inflation. But the main causes were Covid-related supply disruptions and the war in Ukraine. Biden’s Covid relief bill contributed only modestly to inflation, but it set the U.S. on the path to a strong recovery.
The Federal Reserve has finally succeeded in lowering inflation close to its target rate of about 2%. It would be ironic, and tragic, if American voters put Trump back in the White House because they think he will “fix” inflation. If Trump can put his proposals into effect, inflation will probably skyrocket, and interest rates will rise.
Four Inflationary Proposals
On the campaign trail Trump has relentlessly promoted four very bad ideas:
Imposing 10-20% tariffs on all imports and 60% on imports from China
Deporting a total of 20-25 million supposedly undocumented immigrants
Eliminating the Federal Reserve’s independence
Extending and expanding his previous tax cuts
This article will focus on the first three, which are the most extreme. I will also touch on the ramifications of enacting additional tax cuts.
If we take the maximum case for Trump’s first three proposals, inflation could run at 6-9% for about 10 years, and the economy would not grow between 2024 and 2028. That’s according to estimates from The Peterson Institute for International Economics (How much would Trump's plans for deportations, tariffs, and the Fed damage the US economy?).
Tariffs: The Grand Illusion
Although Trump is a businessman and a Wharton graduate, he has never understood how tariffs work. Trump constantly brags about the “billions of dollars” that “China paid” to the U.S. Treasury because of his tariffs. Trump has even recently floated the idea of scrapping the income tax and replacing it with tariffs as the main source of government revenue.
Here is the basic problem: Trump thinks that foreign companies or countries, like China, pay the tariffs. But they don’t.
Instead, exporters to the U.S., or U.S. companies importing the goods, raise their prices to cover the cost of the tariffs and protect their profit margins. American companies and American consumers end up footing the bill, by paying the higher prices. When Kamala Harris says that Trump’s proposed tariffs would levy a “national sales tax” on Americans, she is essentially correct.
A Big Hit for American Consumers
If Trump had his way, you would have to pay 10-20% more for the Colombian coffee or French wine you like. If you buy a new iPhone, made in China, it could cost you 60% more. And when GM imports parts from Germany or Canada, it would have to raise its car prices to offset the increased costs from tariffs.
Harris has suggested that the average American family might face $3,900 in higher prices because of the tariffs. That might be a bit high—Harris is quoting an estimate by a progressive group—but the impact would certainly be large. The Peterson Institute has estimated that a middle-income family would incur additional costs of $1,700 or $2,600, depending on whether Trump imposed across-the-board tariffs of 10% or 20%.
Those are just the direct costs on consumers. If the U.S. hit trading partners and allies such as France and Japan with tariffs, they would probably retaliate and impose tariffs on American products. U.S. exports would decline; American companies that export to other countries would have to lay off employees.
This downward spiral is what happened when the United States imposed 20% tariffs in 1930, under the Smoot-Hawley Act. Twenty-five countries retaliated by raising their tariffs, and global trade plummeted. That trade war was a major factor in deepening the Great Depression.
Besides inflicting harm on its economy, the U.S. would damage its strategic and military alliances, at a time when it needs to shore them up.
The Final Solution to the Immigration Question
Trump and his running mate, J.D. Vance, conjure up horrific images of illegal immigrants running amok and committing crimes, when they are not snacking on their neighbors’ pets. They also claim, without any evidence, that undocumented aliens are taking jobs from native-born Americans and driving up housing prices.
Their solution: mass deportations of 20 to 25 million people. Since the estimated population of undocumented immigrants is 11 to 13 million, it is not clear how they get to 20 to 25 million. Trump wants to end birthright citizenship, so perhaps he intends to deport undocumented immigrants’ children, even if they were born in the US and are therefore American citizens.
In any event, Trump proposes to deport 5-8% of the people living in the U.S…and huge numbers of workers in key industries. The deportations would cause enormous disruptions in the economy and would drive up inflation. The Peterson Institute assumed that Trump deported about 8 million workers in estimating the effects on the U.S. economy.
Donald J. Trump/Getty Images
The American Economy Depends on Immigrants
Without immigrants, the mighty U.S. economy would grind to a halt, at least for a while. That’s a bit of hyperbole, to be honest, but not much. One out of five workers in sectors such as construction, agriculture, and hospitality is foreign-born. The U.S. has a stronger growth rate than other developed nations, and a better demographic profile than most, in large part because of immigration. We have a younger and more productive workforce.
How many workers are foreign-born and illegal? Most are legal, of course, but in some industry segments the proportion of illegal workers is very significant.
Mass deportation would remove “more than 30% of the workers in major construction trades, almost “28% of graders and sorters of agricultural products, and “a fourth of all housekeeping cleaners”. That’s according to a report by the American Immigration Council, as quoted by Jamelle Bouie in The New York Times (“The One Thing Not Named Trump That Trump Cares About”, Oct. 4, 2024).
Fewer Workers Would Mean Higher Inflation
Since the U.S. is essentially at full employment, home builders would have to pay higher wages to rebuild their crews. They would also have to raise their prices to reflect those costs. And even if developers increased wages significantly, they could not replace one-third of their workforce quickly. So fewer houses would be built, making the affordability crisis worse.
Similarly, the wages for employees who are processing foods or cleaning houses would have to jump sharply. All these trends would contribute to higher inflation.
Furthermore, this grim scenario assumes that Trump’s dragnet only sweeps up undocumented immigrants. What if overzealous officials, looking to hit their quota, arrest Latinos or Black people who simply don’t have their papers in order? What will happen if an American citizen, who is working, is married to an undocumented immigrant? Will he or she stay here…or leave the country with their partner?
Ending the Federal Reserve’s Independence
While he was President, Donald Trump frequently called upon the Federal Reserve to cut interest rates, in order to spur economic growth. Trump was furious that Chair Jay Powell and the other Fed Board members ignored his demands. They were, of course, simply honoring the decades-old tradition that the Fed makes its decisions independently of the White House.
If he wins a second term, Trump wants to eliminate the Fed’s independence and dictate the decisions on interest rates. It’s not clear how Trump would accomplish this, but let’s leave the logistics aside.
There are two basic problems with Trump’s desire to dictate the Fed’s decisions.
First, investors want central banks to be independent. Investors are reassured when a group of professionals makes decisions based on economic trends, not political concerns. Interest rates on U.S. Treasuries are relatively low for several reasons, but investors’ confidence in the Federal Reserve is a key factor. Investors demand much higher interest rates on Turkish and Argentine bonds for many reasons, but partly because politicians in those countries have interfered with their central banks’ decisions…with bad outcomes.
Second, the Federal Reserve can only control short-term interest rates, that is, the rates on U.S. notes that mature in up to two years. Beyond that time frame, market forces determine the level of interest rates on government securities, such as 10-year bonds. And many debts, like mortgages, are keyed to rates on those longer-term bonds, not short-term notes.
If Trump put the Fed under his thumb, the Peterson Institute estimates that investors would force U.S. interest rates to rise at least 3% above their normal rates, as compensation for the additional risk they would face. That “risk premium” would have ripple effects, increasing the rates on mortgages, credit cards and other consumer loans.
Expanding Tax Cuts
Trump wants to extend the tax cuts he achieved in 2017, which increased the annual deficit by hundreds of billions of dollars. As he woos voters, Trump has proposed new tax breaks, such as cutting corporate taxes again and exempting tips and Social Security benefits from taxation. If enacted, those measures would further reduce government revenues and increase the deficit.
The 2017 cuts led to only a modest rise in interest rates on government securities, but the ratio of debt to GDP and the deficit were much lower. Now, Federal debt to GDP has risen to about 100%. The deficit has almost quadrupled, to $1.9 trillion from $500 billion in 2016. At some point, investors are likely to demand higher interest rates on government securities, especially if Trump’s plans ramp up the deficit and the debt quickly.
Politicians on both sides of the aisle seem to have forgotten that deficits and debt to GDP ratios matter, even for the land of the free and the home of the brave. But if Trump slashes tax revenues again, eventually the U.S. consumer will pay the tab, as interest rates climb on his or her debts.
Put it all together, and Trump’s economic proposals would probably cause inflation and interest rates to jump sharply. That does not seem like a winning platform, but many voters are falling for Trump’s promises.
You don’t have to.
The Wall Street Democrat