Harvard economist and former Treasury Secretary Larry Summers worries that Trump’s economic proposals and penchant for trade wars could lead to a serious bout of stagflation, the toxic combination of high inflation and low growth that crippled the U.S. economy in the 1970s.
The Federal Reserve has been hoping to prevent this scenario with its policies for years, but that work can be undone with a few strokes of the pen, at least according to Summers.
“Trump’s tax proposal to replace a significant portion of income tax revenue with tariffs is a recipe from the mother of all stagflation,” the economist wrote in a June 15 article. tweet. “This burdens the middle class and the poor who buy goods in international markets. This will also lead to a global economic war.”
Trump has said that if he is re-elected this November, he will impose a 10% tariff on all goods imported into the US and will also reduce the corporate tax rate from 21% to just 15%.
Summers stopped short of criticizing the economic agenda last week, warning that Trump’s tariff proposals would likely cause a significant U.S. supply shock as foreign goods suppliers pull back from shipping products to the U.S. or raise prices amid the economic crisis. A trade war is brewing.
All of this will worsen inflation and could force the Fed to raise rates even more aggressively. The federal funds rate is already at its highest level in 23 years. Summers even said he could foresee a scenario in which mortgage rates would rise above 10% for the first time since the 1980s if Trump’s tariffs were to pass.
“I don’t think there has been a more inflationary presidential economic policy in my lifetime,” he said. told Bloomberg TV. “It’s a really dangerous thing.”
According to Summers, the nonpartisan Peterson Institute for International Economics found that Trump’s 10 percent tariffs on all imported goods, combined with the larger 60 percent tariffs proposed on Chinese imports, would cost the typical middle-class household approximately 1700 dollars per year of 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 a plentiful labor supply has helped prevent significant wage pressures that could worsen inflation.
“And he advocates cutting subsidies for renewable energy, raising electricity prices,” Summers added. “So look at it from the demand side, look at it from the supply side. This is a recipe for a significant increase in inflation.”
But Bob Elliott, a former Bridgewater executive who now runs Unlimited Funds, says he believes only part of Summers’ forecast appears reasonable. “Tariffs are inherently a regressive tax that causes inflation,” Elliott said. Luck. “But they also provide modest support for economic conditions in the United States.”
Elliott argued that the tariffs would bring some production back to the U.S. to some extent and slightly increase tax revenues. He also noted that Trump’s tax cuts would have a similar stimulating effect on economic growth by boosting asset prices.
However, while Elliott doesn’t foresee anything like the “mother of all stagflation” that Summers predicts, he doesn’t believe Trump’s policies are the right choice in the current economic climate.
“This would have been a more appropriate set of policies when we were dealing with low growth and concerns about long-term deflation,” the Wall Street veteran said. Luck. “Today we are in the opposite circumstances: economic growth is quite good, but inflation is too high. So these policies are simply not consistent with the macroeconomic dynamics that are actually being seen today.”