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Paul Krugman
Why Trumponomics Could Lead to Trumpflation
Opinion Columnist
So, will we have a ticker-tape parade to celebrate V-I — victory over inflation — Day? I guess not, but we appear to have pulled it off. The Federal Reserve’s preferred measure of consumer prices rose only 2.2 percent over the past year, within a whisker of the Fed’s 2 percent inflation target. And we got there without the recession that quite a few economists predicted — in fact, the U.S. economy grew 6 percent over the past two years, even as inflation plunged.
But this victory could be squandered. 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 he’s pressed about policy issues, even very straightforward ones, he often zones out in a way that Kamala Harris and Joe Biden would never get away with. For example, on Friday, when an attendee at one of his campaign events asked what he would do to keep auto industry jobs in Michigan, Trump — who on Saturday referred to Biden and Harris as “mentally impaired” — began his response thus:
So, pretty much as we’ve been saying and what I want to do is I want to be able to — look, your business, years ago, in this area, I was honored as the man of the year. It was maybe 20 years ago. Oh, and the fake news heard about it, they said it never happened.
The claim doesn’t pass CNN’s fact check, but for Trump, that’s nothing new. More to the point is that his response to an earnest question from a concerned American was to ramble on about himself. (Also, I suppose, nothing new.)
But Trump has consistently pushed for high taxes on imports — something that, contrary to his claims, would ultimately get passed on to consumers — mass deportation of undocumented workers and ending the Fed’s independence, all of which would raise inflation. Among economists recently surveyed by The Financial Times and the University of Chicago Booth School of Business, 70 percent thought Trump’s policies would be more inflationary than Harris’s; only 3 percent thought the reverse.
How inflationary would Trumponomics be? A new study from the Peterson Institute for International Economics tries to put numbers to the likely effect. It estimates that depending on the extent to which Trump’s policies on tariffs, the Fed and, in particular, immigration are enacted, they would raise inflation between about four and seven percentage points above the base line, meaning inflation of about 6 percent to 9 percent.
Should you believe these numbers? Economic models aren’t exactly famed for the accuracy of their predictions. But there’s a way to think about this issue that makes the Peterson numbers quite plausible: Trumponomics could create economic disruptions similar to those caused by the Covid-19 pandemic. So it makes sense that the result would be a surge in inflation comparable to what we saw in 2021-22.
Here’s what I mean: Many economists now agree with the analysis laid out in August by Jerome Powell, the Fed chair, who attributed much of the inflation surge to side effects of the pandemic. Public health concerns led to a large, although temporary, drop in the labor force, which in turn caused widespread labor shortages, with unfilled job openings greatly exceeding the number of people seeking work. A sudden shift of demand away from services toward goods overloaded supply chains — remember all those freighters steaming back and forth off the coast, waiting for a chance to unload? — creating shortages of many items and soaring prices. Inflation came down only after these disruptions eased.
Now think about what Trump is contemplating. Rounding up millions of foreign-born workers would cause an immediate large reduction in labor supply. Tariffs would drive up the cost of imported goods as surely as shipping costs and inadequate port capacity did in 2021-22. Trumponomics would, you might say, be a plague on the economy.
Indeed, I wonder whether the Peterson estimates are too low. They’re based on the assumption that only undocumented immigrants would be caught up in a future deportation dragnet. But given the ugly attacks we’ve been seeing on legal migrants in places like Springfield, Ohio, it seems plausible, if Trump gets his way, that many legal residents would also be swept up and detained.
One more thing: The post-Covid inflation spike ended up being transitory, although it lasted longer than many people, myself included, expected. But why did inflation fall without a recession? An important reason was that medium-term inflation expectations never rose much, at least in part because the Fed showed that it was willing to raise interest rates sharply to avoid a replay of the 1970s.
By the way, 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 that it was important to keep expectations anchored. And the Biden administration didn’t put pressure on 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 don’t. And the likelihood that he would politicize monetary policy means that Trumpflation could easily become entrenched in a way Covidflation never did, leading to long-term stagflation.
Many voters still believe that Trump would do a better job than Harris on the economy, although his edge on the issue of inflation has largely vanished. But people who have looked at his actual policy ideas believe that they’re an inflation disaster waiting to happen.
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Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman
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