Harvard economist and former Treasury Secretary Larry Summers fears that Trump’s economic policy proposals and his penchant for trade wars could lead on to a severe period of stagflation – the toxic combination of high inflation and low growth that had devastating effects on the U.S. economy within the Nineteen Seventies.
The Federal Reserve has been hoping for years to stop this scenario through its policies, but that work could – at the very least in keeping with Summers – be undone with just a couple of strokes of the pen.
“Trump’s tax proposal to replace much of income tax revenue with tariffs is a recipe for the mother of all stagflations,” the economist wrote in a report on June 15. tweet“It puts a strain on the middle class and the poor who buy goods on international markets. It would also trigger a global economic war.”
Trump has announced that if re-elected in November this 12 months, he’ll impose a ten percent tariff on all products imported into the United States while reducing the company tax rate from 21 percent to as little as 15 percent.
Summers was blunt in his criticism of that economic agenda last week, warning that Trump’s tariff proposals would likely trigger a major supply shock within the U.S. as foreign suppliers of products in the reduction of on shipments to the U.S. or raise prices amid a looming trade war.
All of this can exacerbate inflation and will force the Fed to lift rates of interest much more aggressively. The benchmark rate of interest is already at its highest level in 23 years. Summers even said he could envision a scenario during which mortgage rates rise above 10% for the primary time because the Nineteen Eighties if Trump’s tariffs undergo.
“I don’t think there has ever been a more inflationary economic program by a president in my lifetime,” he said. said Bloomberg TV“This is really dangerous stuff.”
To support Summers’ argument, the nonpartisan Peterson Institute for International Economics found that Trump’s 10% tariffs on all imported goods, when coupled with the even heftier 60% levy on Chinese imports, would cost the everyday middle-class household. about 1,700 US dollars one 12 months of additional costs resulting from inflation.
Beyond the specter of aggressive tariffs and trade wars, Summers also criticized Trump’s efforts to drastically restrict immigration at a time when a big labor supply has helped prevent significant wage pressures that would exacerbate inflation.
“And he’s in favor of cutting subsidies for renewable energy, which drives up energy costs,” Summers added. “So you have to look at it from a demand and supply perspective. That’s a recipe for a big rise in inflation.”
However, Bob Elliott, a former Bridgewater executive who now heads Unlimited Funds, argued that he believes only a part of Summers’ prediction is valid. “Tariffs are essentially a regressive tax that is inflationary,” Elliott said Assets“But they also represent modest support for the U.S. economy.”
Elliott argued that the tariffs will bring at the very least some production of products back to the U.S. and barely increase tax revenues. He also noted that Trump’s tax cuts may have an analogous stimulatory effect on economic growth by pushing up asset prices.
Although Elliott doesn’t expect the “mother of all stagflations” predicted by Summers, he doesn’t imagine that Trump’s policies are the proper selection in the present economic environment.
“It would have been a more appropriate package of measures when we were faced with a low growth environment and concerns about longer-term deflation,” said the Wall Street veteran. Assets“Today we are in the opposite situation: growth is quite good, but inflation is too high. So policies are simply not in line with the macroeconomic dynamics that are really at play today.”
