Economists: Why a Trump Presidency Could Lead to “Hyperinflation”

According to a recent ABC/Ipsos poll, voters currently see the economy and inflation as the most important issues. The economy is usually top-of-mind in most elections, but having been through the roller coaster of the COVID-19 pandemic and its aftermath, it’s especially prominent this election cycle.

The United States’ recovery from the pandemic has actually been far better than all other G7 countries, with U.S. gross domestic product (GDP) growth the best of the bunch while having the third-lowest unemployment rate and a stock market that just hit an all-time high. And yet, despite this good growth and jobs picture, only 23% of Americans rate the economy as “excellent” or “good,” with 36% believing it’s “poor” and 41% saying it’s only “fair,” according to the Pew Research Center.

Political bias undoubtedly plays a part in these surveys, but the seeming disconnect can also partly be explained by inflation and interest rates. While inflation is now far below its June 2022 peak of 9.1%, the current 3.4% rate is still a bit higher than Americans have experienced since before the 2008 financial crisis.

On the issue of inflation, voters are clearly yearning for the good old days prior to the pandemic. In the ABC/Ipsos poll asking who voters trusted more on the issue of inflation, a 44% plurality favored Trump, with 30% favoring Biden, and 25% saying neither.

However, many leading economists from both parties have a very different view, with one prominent economist, who was formerly critical of President Biden’s policies on inflation, warning that Trump’s policies would be worse — much worse. Here’s why.

Summers: Trump policies could turn the U.S. into 1950s Argentina

Larry Summers was an economic advisor under the Reagan, Clinton, and Obama administrations, and is generally viewed as an independent-thinking moderate.

Summers was critical of the Biden administration’s American Rescue and Reinvestment Act in 2021, arguing that it was too large for an economy still suffering from supply bottlenecks. Summers appeared to be proven correct when prices soared over the next year, although the COVID-19 delta and omicron variants that emerged that summer and fall, followed by Russia’s invasion of Ukraine, also played a role.

However, if you think inflation was bad in 2021 and 2022, Summers said in interviews with The Hill and more recently in an interview with The Atlantic that the Trump campaign’s policy proposals would lead to “hyperinflation,” akin to what happened in populist 1950s Argentina.

While there are several potentially inflationary elements of the Trump agenda, four big ones stand out.

1. Extending the 2017 tax cuts could increase demand but not supply

The Tax Cuts and Jobs Act of 2017 (TCJA) benefited most Americans by lowering their annual tax bill, but it’s set to expire in 2025. While some of the cuts will likely remain whether Biden or Trump is elected (Biden has said he wants to keep the cuts for people making under $400,000 per year), a Trump presidency would likely seek to extend or even increase the cuts.

However, the TCJA’s skewed generosity toward high earners and corporations has also had an effect on inflation. Inflation is driven by supply and demand, and tax cuts juice demand without necessarily adding to supply. Therefore, the TCJA, enacted at a time when inflation was below 2%, is inflationary by nature.

The TCJA also blew a hole in the deficit. While cause-and-effect between deficits and inflation is a subject of debate, linkages have been shown in less developed countries, though linkages in developed countries is less clear.

According to the Congressional Budget Office (CBO), the TCJA’s effect on the deficit has been in line with initial projections of a $1.8 trillion increase through 2028. While some believe the associated economic growth from the tax cuts would fully offset that deficit, the CBO believes faster growth lowered the cumulative effect to only $1.3 billion.

Whereas government spending on infrastructure boosts both demand and supply, tax cuts really only boost one side of the inflation equation.

2. Large-scale deportations would significantly reduce the labor supply

Speaking of the supply side, following the pandemic, many older Americans left the labor force entirely, and others — of all ages — stayed home out of fear of getting sick. The U.S. was not supplying enough workers to fill all job vacancies. In addition, immigration declined due to Trump-era immigration restrictions, the pandemic, and the associated constraints on processing visas.

Fewer available workers meant employers had to pay higher wages, which led to big price increases across a range of service industries, notably in child care, nursing, agriculture, and hospitality — industries in which a lot of immigrants work.

But over the past year, services inflation has decreased, in no small part due to increased immigration. The number of foreign-born workers joining the U.S. labor force between 2020 and 2023 was 3.7 million, up 13.7%. In contrast, only 2.6 million native-born workers joined the workforce in that time, up 2%. Evgeniya Duzhak, regional policy economist at the Federal Reserve Bank of San Francisco, wrote in a recent paper that the relaxation of immigration policies in 2022, “helped alleviate the shortage of workers relative to job vacancies.”

Meanwhile, the Trump campaign has made recent pledges to conduct mass deportations of undocumented workers upon taking office, totaling perhaps 15 million to 20 million people.

While those deportations would fulfill a campaign promise, deportations on the scale Trump has discussed could lead to “massive labor shortages in lots of different industries,” according to Moody’s Analytics Chief Economist Mark Zandi, as quoted in The Atlantic article.

3. A huge across-the-board tariff would increase costs

The Trump campaign has also repeatedly said Trump intends to put a 10% tariff on all imported goods from all countries, even close allies, and a 60% tariff on all goods coming from China.

Tariffs are often used as a tool to protect domestic industries, but do raise goods prices for U.S. consumers. Trump implemented some in his first term, and Biden extended some Trump tariffs while even instituting some new ones, most recently on Chinese electric vehicles.

However, Trump’s new proposal dwarfs anything the Biden administration has done and is many multiples higher than the tariffs Trump instituted in his first term. Whereas the Biden administration’s targeted tariffs affect about $18 billion of goods, Trump’s new proposal would affect some $3.1 trillion. That would raise the cost of living by $1,700 annually for the average middle-class American family, according to UCLA Tax Professor Kimberly Clausing, who was a source for The Atlantic article.

4. Targeting the Federal Reserve’s independence would likely make it harder to tamp down inflation

According to The Wall Street Journal, Trump allies and advisors have been drafting a 10-page document outlining potential changes to the governance of the Federal Reserve. These are just proposals at the moment, but according to the WSJ, the changes could include giving the president the ability to fire Chair Jerome Powell before his term is up in 2026. Others include requiring the President to be consulted on all interest rate decisions, as well as other measures to strip the central bank of its independence.

If inflation does get out of control, one of the only things that might stop it could be an “unpopular” move by the Federal Reserve. In 1981, Fed Chair Paul Volcker raised the federal funds rate rate to 20% to rein in skyrocketing inflation. That led to a recession that lasted until 1982, with unemployment increasing to above 10% and drawing widespread protests. However, it was also successful in bringing inflation down, setting the economy up for an eventual strong recovery.

If inflation gets out of control but the president has more authority over interest rate decisions, that could potentially impede unpopular interest rate moves to contain inflation as whoever is president might be unwilling to take those steps.

Remember, back in late 2018, inflation started to pick up, the Federal Reserve raised interest rates, and the stock market plunged. At the time, then-President Trump said he was “not even a little bit happy with [his] selection” of Fed Chair Jerome Powell. He then added that the central bank was “way off-base with what they’re doing…They’re making a mistake because I have a gut and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

And keep in mind, that statement happened when the Fed only raised the federal funds rate to 2.5%.

Not just inflation, but stagflation?

It’s unclear whether Trump — if elected — would be able to implement all aspects of his economic agenda, or whether they could withstand court challenges. However, taken together, Summers concludes that when you look at each part of the Trump economic agenda, “it is hard to imagine a policy package more likely to create stagflation.”

The U.S. in the 1970s was beset by “stagflation,” a toxic combination of inflation and high unemployment. The stock market performed horribly during that decade.

So, while voters continue to favor Trump on the broad topics of the economy and inflation, several leading economists are warning the policies he is laying out could ultimately damage to the economy.