Why ‘Trumponomics’ could lead to inflation – 09/30/2024 – Paul Krugman

So, will we have a ribbon parade to celebrate the victory over inflation? I don’t think so, but it looks like we did it. The Fed’s preferred measure of consumer prices rose just 2.2% last year, very close to the 2% inflation target. And we got there without the recession that many economists predicted — in fact, the U.S. economy grew 6% over the past two years, even as inflation plummeted.

But this victory could be wasted. And it very likely will be if Donald Trump wins the presidential election.

True, we don’t know exactly what Trump would do in office. When pressed on policy issues, even the simplest ones, he often shuts down in a way that Kamala Harris and Joe Biden never could.

For example, on Friday, when an attendee at one of his campaign events asked what he would do to keep auto jobs in Michigan, Trump — who on Saturday referred to Biden and Harris as “mentally disabled”— began his response like this:

“So basically, as we’ve been saying and what I want to do is be able to — look, your business, years ago, in this area, I was honored as man of the year. It was maybe 20 years ago. Oh, and the fake news heard talk about it, they said it never happened.”

The claim doesn’t pass CNN’s fact check, but for Trump, this is nothing new. More importantly, his response to a sincere question from a concerned American was to ramble on about himself. (Also, I suppose, nothing new.)

But Trump has consistently advocated high taxes on imports — something that, contrary to his claims, would ultimately be passed on to consumers — mass deportation of illegal immigrant workers in the country and an end to the Fed’s independence, all of which would increase inflation.

Among economists recently surveyed by the Financial Times and the University of Chicago Booth School of Business, 70% thought Trump’s policies would be more inflationary than Harris’s; only 3% thought otherwise.

How inflationary would “Trumponomics” be? A new study from the Peterson Institute for International Economics attempts to quantify the likely effect and estimates that, depending on the degree to which Trump’s policies on tariffs, the Fed and, in particular, immigration are enacted, they would increase inflation by between about 4 and 7 percentage points above the baseline — an inflation of around 6% to 9%.

Should you believe these numbers? Economic models are not exactly known for their prediction accuracy. But there’s a way of thinking about this question that makes Peterson’s numbers quite plausible: “Trumponomics” could create economic disruptions similar to those caused by the coronavirus pandemic. So it makes sense that the result would be a rise in inflation comparable to what we saw in 2021 and 2022.

Here’s what I mean: Many economists now agree with Fed Chairman Jerome Powell’s analysis in August, which attributed much of the rise in inflation to the side effects of the pandemic. Public health concerns have led to a large, albeit temporary, drop in the labor force, which in turn has caused widespread labor shortages, with unfilled job vacancies far outnumbering the number of people looking for work.

A sudden shift in demand from services to goods has overwhelmed supply chains—remember all those cargo ships cruising up and down the coast, waiting for a chance to unload?—creating shortages of many items and skyrocketing prices. Inflation only fell after these disruptions subsided.

Now think about what Trump is contemplating. Capturing millions of foreign workers would cause an immediate and significant reduction in labor supply. Tariffs would increase the cost of imported goods just as surely as transportation costs and inadequate port capacity did in 2021 and 2022. “Trumponomics” would, we might say, be a plague on the economy.

In fact, I wonder if Peterson’s estimates are too low. They are based on the assumption that only immigrants without permanent legal status would be caught in a future deportation net. But given the ugly attacks we’ve seen against legal migrants in places like Springfield, Ohio, it seems plausible, if Trump gets his way, that many legal residents will also be detained.

One more thing: the post-coronavirus inflation spike turned out to be transitory, although it lasted longer than many people, including me, expected. But why did inflation fall without a recession? One important reason was that medium-term inflation expectations never rose much, at least in part because the Fed showed it was willing to raise interest rates sharply to avoid a repeat of the 1970s.

In fact, I didn’t argue against the Fed’s rate hikes, even though I thought inflation was mainly caused by the pandemic, precisely because I believed it was important to keep expectations anchored. And the Biden administration did not pressure the Fed to keep rates low, even though tight money risked causing a politically damaging recession.

Do you think Trump would show similar restraint if the Fed raised rates to combat the inflation his policies would cause? I am not. And the likelihood that he would politicize monetary policy means that “Trumpflation” could easily become entrenched in a way that “Covid-flation” never did, leading to long-term stagnant inflation.

Many voters still believe Trump would do a better job than Harris on the economy, even though his advantage on the inflation issue has largely disappeared. But people who have analyzed his actual policy ideas believe they are an inflationary disaster waiting to happen.

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