Trump’s economic plans would worsen inflation, experts say

2024-12-25 22:41:19 source:lotradecoin exclusive trading tools category:Invest

WASHINGTON (AP) — With characteristic bravado, Donald Trump has vowed that if voters return him to the White House, “inflation will vanish completely.”

It’s a message tailored for Americans who are still exasperated by the jump in consumer prices that began 3 1/2 years ago.

Yet most mainstream economists say Trump’s policy proposals wouldn’t vanquish inflation. They’d make it worse. They warn that his plans to impose huge tariffs on imported goods, deport millions of migrant workers and demand a voice in the Federal Reserve’s interest rate policies would likely send prices surging.

Sixteen Nobel Prize-winning economists signed a letter in June expressing fear that Trump’s proposals would “reignite’’ inflation, which has plummeted since peaking at 9.1% in 2022 and is nearly back to the Fed’s 2% target.

The Nobel economists noted that they aren’t alone in sounding the alarm.

“Nonpartisan researchers,” they said, “predict that if Donald Trump successfully enacts his agenda, it will increase inflation.”

Last month, the Peterson Institute for International Economics predicted that Trump’s policies — the deportations, import taxes and efforts to erode the Fed’s independence — would drive consumer prices sharply higher two years into his second term. Peterson’s analysis concluded that inflation, which would otherwise register 1.9% in 2026, would instead jump to between 6% and 9.3% if Trump’s economic proposals were adopted.

More election coverage Harris slams Trump for suggesting military handle ‘enemy from within’ as they vie for Pennsylvania   This could have been a year of a federal court reckoning for Trump. Judges had other ideas   Harris announces a new plan to empower Black men as she tries to energize them to vote for her  

Many economists aren’t thrilled with Vice President Kamala Harris’ economic agenda, either. They dismiss, for example, her proposal to combat price gouging as an ineffective tool against high grocery prices. But they don’t regard her policies as particularly inflationary.

Mark Zandi, chief economist at Moody’s Analytics, and two colleagues have estimated that Harris’ policies would leave the inflation outlook virtually unchanged, even if she enjoyed a Democratic majority in both chambers of Congress. An unfettered Trump, by contrast, would leave prices higher by 1.1 percentage points in 2025 and 0.8 percentage points in 2026, they concluded.

Consumers end up paying for tariffs

Taxes on imports — tariffs — are Trump’s go-to economic policy. He argues that tariffs protect American factory jobs from foreign competition and deliver a host of other benefits.

While in office, Trump started a trade war with China, imposing high tariffs on most Chinese goods. He also raised import taxes on foreign steel and aluminum, washing machines and solar panels. He has still grander plans for a second term: Trump wants to impose a 60% tariff on all Chinese goods and a “universal’’ tariff of 10% or 20% on everything else that enters the United States.

Trump insists that the cost of taxing imported goods is absorbed by the foreign countries that produce those goods. The truth, though, is that U.S. importers pay the tariff — and then typically pass along that cost to consumers in the form of higher prices, which is how Americans themselves end up bearing the cost of tariffs.

What’s more, as tariffs raise the cost of imports, the weakened competition from foreign products makes it easier for U.S. producers to raise their own prices.

“There’s no question that tariffs are inflationary,’’ said Kent Smetters of the University of Pennsylvania’s Penn Wharton Budget Model, which studies the costs of government policies. “Exactly how much – that’s where economists can debate it.”

What to know about the 2024 Election

  • Today’s news: Follow live updates from the campaign trail from the AP.
  • Ground Game: Sign up for AP’s weekly politics newsletter to get it in your inbox every Monday.
  • AP’s Role: The Associated Press is the most trusted source of information on election night, with a history of accuracy dating to 1848. Learn more.

The inflationary impact of tariffs can depend on how consumers react to higher import prices: Do they keep buying the costlier foreign stuff — whether a coffeemaker from China, a box of Swiss chocolates or car made in Mexico? Or do they shift to an American-made alternative product? Or stop buying such goods altogether?

Kimberly Clausing and Mary Lovely of the Peterson Institute have calculated that Trump’s proposed 60% tax on Chinese imports and his high-end 20% tariff on everything else would, in combination, impose an after-tax loss on a typical American household of $2,600 a year.

Trump has made some implausible claims for protectionist policies. Asked how he would lower grocery prices — a particular irritant to many Americans — Trump has said the nation should limit the importation of food because America’s farmers are “being decimated’’ by foreign competition.

“It’s sort of nonsensical to say that I am worried about high food prices, so I want to put a tax on food imports,” said Clausing, who is also a UCLA economist specializing in tax policy. “As you tax them, the food in the grocery store absolutely gets more expensive.”

A huge proportion of food consumed in the United States — about 60% of fresh fruit and 38% of vegetables — are imported, according to Department of Agriculture data. Less than 1% of the bananas Americans eat are grown domestically. The vast majority are imported. The United States grows less than 1% of the coffee it consumes. It imports more than 70% of its seafood.

“Trump is using tariffs as a political device to signal his strong skepticism around globalization broadly — ‘America First,’ ” said Zandi of Moody’s Analytics. “That this policy stance is inflationary is very difficult for most voters to grasp, especially when they are being told the opposite.’’

The Trump campaign points out that U.S. inflation remained low even as Trump aggressively imposed tariffs as president. Consumer prices rose just 1.9% in 2018, 2.3% in 2019 and 1.4% in 2020. And they note that, once in office, the Biden-Harris administration retained most of Trump’s tariffs, though Harris has criticized his plans to vastly expand their use.

“In his first term, President Trump instituted tariffs against China that created jobs, spurred investment and resulted in no inflation,’’ Anna Kelly, a spokeswoman for the Republican National Committee, has said.

But Zandi of Moody’s Analytics noted that the sheer magnitude of Trump’s new tariff proposals has vastly changed the calculations.

“The Trump tariffs in 2018-19 didn’t have as large an impact as the tariffs were only just over $300 billion in mostly Chinese imports,’’ he said. “The former president is now talking about tariffs on over $3 trillion in imported goods across all countries.’’

And the inflationary backdrop was radically different during Trump’s first term. Back then, the Fed worried mainly about raising inflation up, not down, to its 2% target. The economy’s unexpectedly high-octane rebound from the COVID-19 recession of 2020 caused severe shortages of parts and labor and unleashed inflationary pressures that had lain dormant for decades.

Trump Would Reverse an Immigration Surge That Helped Ease Inflation

Trump, who has invoked incendiary rhetoric and spread falsehoods demonizing immigrants, has promised the “largest deportation operation in the history of our country.” He says it would target the millions of foreigners living in the United States illegally.

A surge in immigrants, like the one the United States has experienced the past few years, tends to make it easier for businesses to hire workers. The result is that can help cool inflation by easing the pressure on employers to sharply raise pay and to pass on their higher labor costs to their customers by increasing prices.

New immigrants also spend money, notably on housing, and so, at least in theory, can fuel upward pressure on prices and rents. But many economists say they doubt that that’s happening now. Paul Ashworth of Capital Economics notes that today’s immigrants are highly likely to work and less likely to spend than native-born Americans, in part because they typically send money back to relatives in their home countries. Many economists, in fact, say the overall effect of increased immigration has been to help tame inflation while avoiding a painful recession — in other words, to achieve an economic “soft landing.”

The Congressional Budget Office reported in January that net immigration — arrivals minus departures — reached 3.3 million in 2023, more than triple what it had expected. Employers needed the new arrivals. With the economy having roared out of the pandemic recession, companies were struggling to hire enough workers to keep up with customer orders, especially because so many native-born baby boomers were entering or nearing retirement.

Immigrants filled the gap. Over the past four years, the number of people in the United States who either have a job or are looking for one rose by nearly 8.5 million. Roughly 72% of them were foreign born.

Economists Wendy Edelberg and Tara Watson of the Brookings Institution’s Hamilton Project found that by raising the supply of workers. the influx of immigrants allowed the United States to generate jobs without overheating and accelerating inflation.

In the past, economists generally estimated that America’s employers could add no more than 100,000 jobs a month without overheating the economy and igniting inflation. But when Edelberg and Watson included the immigration surge in their calculations, they found that monthly job growth could reach 160,000 to 200,000 without exerting upward pressure on inflation.

Trump’s mass deportations, if carried out, would change everything. The Peterson Institute calculates that the U.S. inflation rate would be 3.5 percentage points higher in 2026 if a second Trump administration managed to deport all 8.3 million undocumented immigrant workers who are thought to be working in the United States.

A politicized Fed would make inflation-fighting harder

Trump alarmed many economists in August by saying he would seek to have “a say” in the Fed’s interest rate decisions.

The Fed is the government’s chief inflation-fighter. It attacks high inflation by raising interest rates to try to restrain borrowing and spending, slow the economy and cool the rate of price increases. In March 2022, the Fed initiated an aggressive series of rate hikes to combat the worst bout of inflation in four decades. From a peak of 9.1%, inflation has dropped back close to the Fed’s 2% target.

Economic research has found that the Fed and other central banks can effectively manage inflation only if they’re kept independent of political pressure. That’s because raising rates to fight inflation typically slows the economy and sometimes causes a recession. Politicians generally prefer that the Fed not raise rates, the result of which could imperil their re-elections.

As president, Trump frequently hounded Jerome Powell, the Fed chair he had chosen, to lower rates to try to juice the economy. For many economists, Trump’s public pressure on Powell exceeded even the attempts that Presidents Lyndon Johnson and Richard Nixon made to push previous Fed chairs to keep rates low — moves that were widely blamed for helping spur the chronic inflation of the late 1960s and ’70s.

“The perception that the central bank was dancing to a president’s preferred tune ... would compromise its ability to raise interest rates when it believed that to be necessary in order to combat inflation,” said Samuel Gregg, a political economist at the free-market think tank American Institute for Economic Research.

The Peterson Institute report found that upending the Fed’s independence would persistently increase inflation by 2 percentage points a year.

“While Trump promises to ‘make the foreigners pay,’ ‘’ the researchers concluded in their Peterson report, ”our analysis shows his policies will end up making Americans pay the most.”

More:Invest

Recommend

Gen Z is 'doom spending' its way through the holidays. What does that mean?

You’ve heard of doomscrolling, now get ready for doom spending.A new report published by consulting

Al Pacino Clarifies Relationship Status With Noor Alfallah

Al Pacino only needs one for the money. The Oscar winner set the record straight on the nature of hi

The Latest: Harris continues media blitz with 3 more national interviews

Vice President Kamala Harris is continuing her media tour Tuesday with three more interviews for nat