Fear of serious consequences Would election winner Trump drag the US economy into the abyss?
High import tariffs, mass deportations of immigrants, a say in interest rate decisions for the Federal Reserve: Trump has big plans for a possible second term in office. But economists warn of serious consequences.
18.10.2024, 04:30
21.10.2024, 09:42
dpa
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- As always, Trump promises the moon when it comes to economic policy.
- He wants to introduce high tariffs on imported goods, deport millions of foreign workers and have a say in the Fed's interest rate policy.
- Economists, however, warn against his plans. Instead of the promised curbing of inflation, inflation would continue to rise.
- What's more, with Trump's boldly announced tariff plans, consumers would end up footing the bill.
With characteristic boldness, Republican US presidential candidate Donald Trump has promised that "inflation will totally disappear" if voters send him back to the White House. This message is tailored to Americans who remain upset about the steep rise in consumer prices that began three and a half years ago.
But most mainstream economists say Trump's economic plans would not wipe out inflation, but rather reignite it.
The economists mainly refer to three points in Trump's agenda: he says he wants to introduce high tariffs on imported goods, deport millions of foreign workers and have a say in the Fed's interest rate policy.
In June, 16 Nobel laureates in economics signed a letter warning of a "rekindling" of inflation if Trump's plans are realized. It had reached 9.1 percent in 2022 and has since fallen almost to the Fed's target of 2 percent. In September, the Peterson Institute for International Economics - a think tank in Washington - predicted that consumer prices would reach between 6 percent and 9.3 percent in 2026 if Trump's agenda were implemented, whereas they would otherwise only be 1.9 percent at that time.
Harris is not well received either
Many economists are not enthusiastic about what Democrat Kamala Harris has in mind either, and consider her proposed legal ban on extortionate prices to be an ineffective means of combating high food costs. But they do not believe that her economic plans would have any particular impact on inflation. In contrast, the analysis and consulting firm Moody's Analytics, for example, expects prices to be 1.1 percentage points higher in 2025 and a further 0.8 percentage points higher in 2026 under Trump, provided he is able to implement his plans unhindered by the majority in Congress.
Consumers pay the price for higher tariffs
Taxes on imports - i.e. tariffs - are Trump's favorite economic recipe. He mainly argues that they protect jobs in US factories from foreign competition. In his first term in office, he launched a trade war with China, imposed high tariffs on most Chinese goods and also raised import taxes on steel and aluminum, washing machines and solar panels from abroad.
He has even bigger plans for his potential second term in office, talking about 60% tariffs on all Chinese goods and a "universal tariff" of 10% or 20% on everything else that comes into the US.
Trump insists that the cost of taxing imported goods will be absorbed by foreign countries. But the truth is that U.S. importers pay the tariff - and then typically pass the cost on to consumers in the form of higher prices. Kimberly Clausing and Mary Lovely of the Peterson Institute, for example, have calculated that a 60 percent tax on Chinese imports and a 20 percent tariff on everything else would result in a combined after-tax loss to typical US households of $2,600 (about $2,250) annually.
The impact of Trump's deportation plans
Trump has promised the "biggest deportation operation" in US history in terms of illegal immigration. However, many economists say that the strong wave of immigration in recent years has helped to tame inflation and prevent a recession. The influx of foreign-born workers has made it easier to fill job openings - reducing pressure on employers to raise wages sharply and shift high labor costs to consumers through price increases.
Net immigration - arrivals minus departures - was 3.3 million in 2023, and employers needed the newcomers. The economy was recovering rapidly from the coronavirus pandemic, and companies were struggling to find enough workers to meet the massive demand. Immigrants filled the gap.
Wendy Edelberg and Tara Watson of the Brookings Institution think tank, also in Washington, say the influx of foreign workers has allowed the US to create jobs without overheating the economy. In the past, economists estimated that US employers could add no more than 100,000 jobs a month without fueling inflation. Now, experts say, it could be 160,000 to 200,000 without creating upward price pressure.
Trump's mass deportations would change everything. The Peterson Institute has calculated that the inflation rate would be 3.3 percentage points higher in 2026 if he managed to deport all 8.3 million undocumented foreign workers estimated to be working in the US.
Interfering with interest rates would make it harder to fight inflation
The Fed fights high inflation by raising interest rates to curb spending and slow the economy. Research has shown that it and other central banks can only manage inflation appropriately if they remain independent of political pressure. This is because raising interest rates can be economically painful, perhaps even creating a recession, and so they are anathema to politicians seeking re-election.
Accordingly, Trump alarmed many economists in August when he said he would try to "have a say" in Fed interest rate decisions. According to the Peterson Institute, interfering with independence - i.e. political pressure to keep interest rates low - would increase inflation by 2 percentage points a year.
