One Obstacle for Trump’s Promises: This Isn’t the 2016 Economy

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When Donald J. Trump became president in 2017, prices had risen roughly 5 percent over the previous four years. If he were to win the race for the White House in 2024, he would be entering office at a time when they are up 20 percent and counting.

That is a critically different economic backdrop for the kind of policies — tariffs and tax cuts — that the Republican contender has put at the center of his campaign.

Mr. Trump regularly blames the Biden administration for the recent price surge, but inflation has been a global phenomenon since the onset of the coronavirus pandemic in 2020. Supply chain problems, shifting consumer spending patterns and other quirks related to pandemic lockdowns and their aftermath collided with stimulus-fueled demand to send costs shooting higher.

The years of unusually rapid inflation that resulted have changed the nation’s economic picture in important ways. Businesses are more accustomed to adjusting prices and consumers are more used to those changes than they were before the pandemic, when costs had been quiescent for decades. Beyond that, the Federal Reserve has lifted interest rates to 5.3 percent in a bid to slow demand and wrestle the situation under control.

That combination — jittery inflation expectations and higher interest rates — could make many of the ideas Mr. Trump talks about on the campaign trail either riskier or more costly than before, especially at a moment when the economy is running at full speed and unemployment is very low.

Mr. Trump is suggesting tax cuts that could speed up the economy and add to the deficit, potentially boosting inflation and adding to the national debt at a time when it costs a lot for the government to borrow. He has talked about mass deportations at a moment when economists warn that losing a lot of would-be workers could cause labor shortages and push up prices. He promises to ramp up tariffs across the board — and drastically on China — in a move that might sharply increase import prices.

And he has implied that interest rates would be much lower on his watch. That would be difficult for him to bring about because the Fed sets interest rates on its own and is insulated from the White House. But if Mr. Trump tried and found a way to successfully infringe upon the Fed’s independence and push down borrowing costs, it would risk reigniting growth and price increases.

The policies Mr. Trump is floating are escalations of things he has tried before. Tax cuts that swelled the nation’s debt pile, tariffs, immigration controls, and verbal attacks on the Fed haranguing it to lower interest rates were all cornerstones of his first term. Yet the economy’s evolution since makes it a potentially dangerous moment to repeat those policies in a more drastic fashion.

“It’s one thing when you run expansionary fiscal policy in a world with suboptimal inflation and an unemployment rate below full employment,” said Mark Zandi, chief economist at Moody’s Analytics and someone who provides research and analysis to the Biden administration. But this is a “very different economic backdrop,” Mr. Zandi said.

While both President Biden and Mr. Trump are expected to continue to run deficits if elected, several economic analyses have suggested that Mr. Trump’s policy proposals so far would come with a substantially larger budget gap. Researchers at the investment bank TD Cowen suggested that the choice between candidates was one between a “higher deficit” (Mr. Biden) and a “much higher deficit” (Mr. Trump).

There are baked-in reasons that government spending would most likely continue to rise under either candidate: Programs like Medicare and Social Security are only growing more expensive as the population ages, interest rate costs are high, and even Mr. Biden has suggested that he will extend individual tax cuts for people earning less than $400,000 — though he has also proposed tax increases on high-income households and corporations.

But magnitudes differ sharply. An analysis by Moody’s suggests that the budget deficit is likely to stabilize at just above 5 percent of annual output in the coming years if Mr. Biden were re-elected with a divided Congress, would climb to 6.4 percent if Mr. Trump won along with a Republican sweep, and increase to a more muted 6 percent if Mr. Trump won along with a divided Congress.

If the budget deficit is stable, Mr. Zandi of Moody’s said, it is likely to keep the economy on a relatively steady path — but that a bigger one could heat it back up.

And annual deficits add to the nation’s debt pile. Typically, periods of economic strength are seen as an opportunity to pare deficits to try to make sure the nation’s debt is on a sustainable course.

“I think the minimum principal given our fiscal course should be: First, do no harm,” said Jason Furman, a Harvard economist who was an economic adviser in the Obama administration. “Absent one-time emergency spending, there’s just no excuse at all for steps that add to the deficit right now.”

That underscores an important point: This is not the economy that either candidate originally inherited.

Mr. Trump took on an economy with a still-healing labor market and low inflation in 2017. Mr. Biden oversaw an economy in the middle of a pandemic in early 2021. Whoever wins the election in 2024 will face a very different backdrop. The economy is operating at or near full capacity, and the Fed has been trying to slow it down with higher interest rates to bring inflation under control.

Even as the job market has cooled somewhat in recent months, unemployment had been at or below 4 percent since late 2021, the longest stretch of such low joblessness since the 1960s. While that changed in data released Friday, which showed unemployment ticking up slightly to 4.1 percent in June, that is still a low level by historical standards.

Wage growth has been cooling, but it too remains robust. Consumer spending is slowing, but has remained decently strong by historical standards.

And inflation as defined by the Personal Consumption Expenditures index stood at 2.6 percent in the May reading. While that is less than half of its 2022 peak rate, it is still higher than the Fed’s 2 percent target. Inflation is coming down, but it remains quicker than usual and may still be slightly elevated when the next president takes office, forecasts suggest.

That is what makes Mr. Trump’s policies concerning, economists said.

“The economy is at greater risk of tipping into an inflationary spiral today than it was in 2018” when Mr. Trump started a trade war, said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “That should make us more cautious about any policies that could potentially let the inflationary genie out of the bottle.”

Mr. Strain said that he thought tariffs could boost prices, though he doubted they would touch off a series of increases, and that immigrant deportations could cause inflation by spurring labor shortages in some industries — though it would depend on how the policy played out.

Mr. Trump has pledged to pump up his use of tariffs by imposing import taxes on nearly all trading partners, including a 60 percent tariff on all Chinese goods. Studies have concluded that his previous tariffs increased costs for importers and consumers, and a recent Peterson Institute for International Economics analysis found that the new ones were likely to push price levels on imported goods higher, and could cost a typical middle-income household about $1,700 annually.

On taxes, Mr. Trump is promising to permanently extend cuts for individuals that are set to expire next year and is talking about new cuts for tipped workers.

That could stoke growth by leaving more money than expected in consumers’ pockets. And in a world of higher interest rates, the effect on deficits could snowball. Mr. Trump’s initial tax cuts were financed with borrowed money, and analysts guessed that any extension or new ones would follow suit.

The Congressional Budget Office already estimates that the annual interest expense on the government’s debt could rise to $1.7 trillion by 2034, nearly doubling from today’s levels. The budget office has estimated that if the expiring individual income tax provisions of the 2017 tax act are extended, deficits would be $3.3 trillion larger between 2025 and 2034, and higher interest expenses would tack on $467 billion.

When Mr. Trump’s agenda is taken as a whole, “you couldn’t have a more inflationary platform,” said Kimberly Clausing, a nonresident senior fellow at the Peterson Institute and a former Treasury official in the Biden administration.

One question is whether the potential for inflationary policies under Mr. Trump would prod the Fed to raise interest rates — or at least prevent the central bank from lowering borrowing costs, as officials expect to do later this year and then repeatedly in 2025.

If Mr. Trump is poised to win, it is “not really going to inform interest rates in the short term,” said Thierry Wizman, a rates strategist at Macquarie Group, a financial services firm. The Fed would probably still lower rates as expected later this year.

But it would change “where they see the trajectory going longer term,” he said, “and it probably tilts them toward an endpoint that is higher than it would have been.”

Ana Swanson contributed reporting.



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