Robert Samuelson: The coming Trump inflation?
WASHINGTON — Can we run the economy “hot”?
To those who think President Donald Trump’s economic policy is simply an extended program to make the rich richer, there is another, more subtle possibility. The focus on the rich, while understandable, simplifies and misrepresents Trump’s larger ambition. This is to create an economy that is operating at the outer edges of its productive capacity — one that is exhausting its supply of workers and surplus of goods and services.
It is in this sense that the economy is “hot”; the comparable term in the 1960s and 1970s was the “high pressure” economy. The theory is that only such an economy can force businesses to raise wages and hire marginal employees. Trump is shaping economic policy to realize this vision and, in the process, reap the political rewards of doing so.
There is only one large snag: We tried this in the ’60s and ’70s, and it failed abysmally. It led to double-digit inflation, frequent recessions and public demoralization. No matter. Trump is moving toward this sort of inflationary system by raising the economy’s demand and constricting its supply.
Here’s Trump’s checklist.
First, pass a large tax cut financed by more borrowing. Check. The Tax Cuts and Jobs Act will reduce taxes by $1.5 trillion throughout a decade and be financed by larger deficits.
Second, increase government spending without, of course, offsetting extra demand with higher taxes (see above). Check. The recent budget plan is estimated to raise federal outlays by another $1.5 trillion throughout a decade.
Third, reduce government regulations, making it easier to begin new investment and construction projects. Check. This, too, would raise demand, though estimating how much is hard.
Fourth, limit competition from foreign workers and businesses by restricting immigration and imports. Check. From the border wall to rescinding DACA, the administration has been anti-immigrant. Likewise, it’s been protectionist; last week, Trump announced new tariffs on steel and aluminum imports.
These various policies are familiar. What’s less familiar is their collective impact, which (again) is to stimulate demand and shrink supply.
For the record, the economy hasn’t yet broken decisively from the Obama presidency. Economic growth is averaging near 2 percent annually; payroll employment is growing slightly below 200,000 per month; annual inflation, by various measures, is about 2 percent. But we are moving into the zone where Trump’s politics might foster bad economics.
Tight labor markets might well raise wage increases, and these, in turn, might stimulate higher price increases — and we are then off on a wage-price spiral reminiscent of the ’60s and ’70s. This, of course, won’t be the end of it.
The prospect of higher inflation means “the Fed and the (Trump) administration are on a collision course,” as my colleague Sebastian Mallaby recently wrote in The Washington Post. The Fed could respond to heightened inflation fears by raising interest rates more than is now expected. Or it could leave current plans unchanged on the hope that inflation won’t worsen. Either way, the economy and stock market could be vulnerable to a significant setback.
Running the economy “hot” is a superficially attractive policy. It promises to deliver the benefits of a strong economy to those who most need them. It suggests that we can enjoy the advantages of “full employment” on a more-or-less permanent basis. But like many appealing and visionary ideas, its utility breaks down in practice. It might make matters worse.
Traditionally, these policies have been most popular among the liberal left because less skilled workers seem to benefit the most. But, inevitably, there’s a backlash against higher inflation that — entailing higher interest rates and, often, recessions — hurts these very same workers. Though the process might be drawn out, it still takes its toll. Trump is either unaware of or indifferent to the contradictions.
At considerable social cost — fluctuating prices, widespread fears of the future — we learned these lessons in the 1970s. Surely, we don’t have to learn them again.