July 21, 2024

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Will Trump’s economic policies really cause ‘the mother of all stagflations’? Here’s what experts say

2 min read

Harvard economist and former Treasury Secretary Larry Summers fears 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 wreaked havoc on the U.S. economy in the 1970s. 

The Federal Reserve has been hoping to prevent this scenario with its policies for years now, but that work could be undone with a few swipes of the pen, at least according to Summers.

“Trump’s tax proposal to replace a major amount of income-tax revenue with tariffs is a prescription for the mother of all stagflations,” the economist wrote in a June 15 tweet. “It burdens the middle class and the poor who purchase goods on international markets. It would also create worldwide economic warfare.”

Trump has said that if he’s re-elected this November, he will impose a 10% tariff on all products imported into the U.S., while also slashing the corporate tax rate from 21% to as low as 15%.

Summers didn’t pull any punches in his critique of that economic agenda last week, warning that Trump’s tariff proposals are likely to cause a significant supply shock in the U.S. as foreign goods suppliers pull back on shipping products to the U.S. or raise prices amid a brewing trade war.

All of that will exacerbate inflation, and could force the Fed to hike rates even more aggressively. The fed funds rate is already at the highest level in 23 years. Summers even said he could see a scenario where mortgage rates surge above 10% for the first time since the 1980s if Trump’s tariffs go through.

“I don’t think there’s been a more inflationary presidential economic policy platform in my lifetime,” he told Bloomberg TV. “This is really dangerous stuff.”

To Summers’ point, the non-partisan Peterson Institute for International Economics found that Trump’s 10% tariffs on all imported goods, when coupled with the more hefty 60% proposed levy on Chinese imports,…

Will Daniel

2024-06-22 06:00:00

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