Trumponomics 2.0 May Be Much Worse Than the Original

Inflation will present an immediate challenge to whoever wins November’s election. More than two years after the Federal Reserve started raising interest rates to alleviate a pandemic-era price spike, the core consumer price index remains well above the central bank’s target. It’s a bit puzzling, then, that former President Donald Trump’s economic agenda seems to be dedicated to raising prices.

What policies would a second Trump administration pursue? The presumptive Republican presidential nominee hasn’t been a model of clarity on the campaign trail, but some general themes have emerged.

Tariffs, one of Trump’s only consistent enthusiasms, are a sure thing. Starting in 2018 his administration imposed several rounds of duties, prompting predictable retaliation. Combined, these measures eliminated jobs, slashed incomes and cost consumers about $51 billion annually. Now Trump wants to impose tariffs of 60% on Chinese-made products and 10% on other imports. Bloomberg Economics estimates that such tariffs would raise consumer prices by 2.5% over two years and reduce growth by 0.5%. Trump has also promised a 100% duty on imported cars. Details TBD—one analyst describes the likely effect as catastrophic—but the point is that trade wars of this kind are always prone to rising prices.

Trump’s plans for monetary policy pose a similar risk. According to the Wall Street Journal, his advisers are laying the groundwork for the president to weigh in directly on interest-rate decisions. (His campaign has vaguely disputed the report.) The rationale for central bank independence— among the most successful policy innovations of the postwar era—is that politicized monetary policy will tend to have a pro-inflationary bias. In this case, a self-fulfilling prophecy is likely: Consumers and businesses, expecting the Fed to tolerate higher inflation under Trump, will behave in ways that (once again) make prices go up.

More directly, Trump is toying with devaluing the dollar. Although the hope is to revive domestic manufacturing, exactly how he’d carry out this plan isn’t clear. On balance, such manipulation is likely to invite retaliation, erode faith in the dollar and do little to actually boost exports. Raising the cost of imported goods and inputs for domestic producers would also (perhaps you’ve sensed a pattern) increase prices.

Trump’s tax plans, finally, would tend in the same direction. He says he’ll extend the expiring provisions of the Tax Cuts and Jobs Act of 2017 and has at times mused about a further reduction in the corporate rate, to 15% from 21%. Recall that the drafters of the law tied themselves in knots to avoid acknowledging its true costs (hence the expirations).

Extending it in full would cost about $3.8 trillion by 2033. A 15% corporate rate would cost perhaps a half-trillion more. Plans for further tax cuts—“I’ll give you a Trump middle-class, upper-class, lower-class, business-class big tax cut,” he said at a rally on May 11—remain rather nebulous, but fiscal discipline doesn’t sound like the governing priority. It’s safe to say (at the risk of repetition) that these policies, too, will contribute to higher prices.

Some caveats are in order. Trump doesn’t always mean what he says. He rarely gets what he wants from subordinates. Many of these policies may never come into effect, or the Fed may partly neutralize them if they do. But what do you get, all else equal, when you add much higher tariffs, a politicized central bank, a deliberately weakened currency and an enormous surge in public borrowing at a time of already elevated inflation? It would be best not to find out. For more commentary, go to bloomberg.com/opinion