Will Trump’s economic policies really cause ‘the mother of all stagflation’? This is what the experts say

Harvard economist and former Treasury Secretary Larry Summers fears that Trump’s economic proposals and his penchant for trade wars could lead to a serious episode of stagflation, the toxic combination of high inflation and low growth that wreaked havoc on the economy. American in the 1970s.

The Federal Reserve has been hoping to avoid this scenario with its policies for years, but that job could be undone with a few strokes of the pen, at least according to Summers.

“Trump’s tax proposal to replace a significant amount of income tax revenue with tariffs is a recipe for the mother of all stagflation,” the economist wrote in a June 15 tweet. “It is a burden for the middle class and the poor who buy goods in international markets. It would also create a global economic war.”

Trump has said that if he is re-elected in November, he will impose a 10% tariff on all goods imported into the United States, while reducing the corporate tax rate from 21% to just 15%.

Summers pulled no punches in his criticism of that economic agenda last week, warning that Trump’s tariff proposals will likely cause a significant supply shock in the U.S. as suppliers of foreign goods pull back from shipping products to US or increase prices in the middle of a trade war is brewing.

All of that will exacerbate inflation and could force the Federal Reserve to raise rates even more aggressively. The federal funds rate is already at the highest level in 23 years. Summers even said he could see a scenario in which mortgage rates exceed 10% for the first time since the 1980s if Trump’s tariffs go through.

“I don’t think there has ever been a more inflationary presidential economic policy platform in my lifetime,” he told Bloomberg TV. “This is a really dangerous thing.”

To Summers’ point, the independent Peterson Institute for International Economics found that Trump’s 10% tariffs on all imported goods, when combined with the proposed higher 60% tax on Chinese imports, would cost the typical household middle class approximately $1,700 a year. year in additional costs due to inflation.

Beyond the threat of aggressive tariffs and trade wars, Summers criticized Trump’s desire to sharply curb immigration at a time when an abundant labor supply has helped prevent significant wage pressures that can exacerbate inflation.

“And he is in favor of reducing subsidies for renewable energy, raising energy costs,” Summers added. “So look at it from demand, look at it from supply. This is a recipe for a significant increase in inflation.”

However, Bob Elliott, a former Bridgewater executive who now runs Unlimited Funds, argued that, in his view, only part of Summers’ forecast seems valid. “Tariffs, at their core, are a regressive tax that is inflationary,” Elliott said. Fortune. “But they are also a modest support for the economic conditions of the United States.”

Elliott argued that the tariffs will marginally bring some production of goods to the United States and slightly increase tax revenue. He also noted that Trump’s tax cuts will have a similar stimulating effect on economic growth by boosting asset prices.

Still, while Elliott doesn’t foresee anything like the “mother of all stagflations” that Summers predicts, he doesn’t believe Trump’s policies are the right choice in the current economic environment.

“It would have been a more appropriate set of policies when we were facing a low-growth environment, with concerns about long-term deflation,” the Wall Street veteran said. Fortune. “Today we find ourselves in opposite circumstances, where growth is quite good and inflation is too high. So the policy is simply not consistent with the macroeconomic dynamics that are really at play today.”

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