Americans, fed up with high prices and dissatisfied with an economy that by almost any measure is healthy, desired change when they voted for president.
They could acquire it.
President-elect Donald Trump has promised to reverse several of the Biden administration’s economic measures. Trump campaigned on vows to impose high tariffs on foreign goods, lower taxes on individuals and corporations, and deport millions of unauthorized immigrants working in the United States.
With their votes, tens of millions of Americans demonstrated their belief that Trump can restore the low prices and economic stability that they remember from his first term — at least until the COVID-19 recession of 2020 halted the economy and then a powerful rebound pushed inflation skyrocketing. Inflation has since dropped and is almost back to normal. However, Americans are dissatisfied with the continued high pricing.
“His track record has been, on the whole, positive, and people now look back and say, ‘Oh, okay. “Let’s try that again,” said Douglas Holtz-Eakin, a former White House economic adviser, director of the Congressional Budget Office, and current president of the conservative American Action Forum think tank.
Since Election Day, the Dow Jones Industrial Average has risen by more than 1,700 points, owing primarily to optimism that tax cuts and a sweeping relaxing of regulations will drive economic growth and boost company earnings.
Perhaps they will. However, many economists warn that Trump’s ideas are likely to exacerbate the inflation he has claimed to eliminate, increase the federal debt, and eventually hamper GDP.
Trump initiatives could increase inflation.
The Peterson Institute for International Economics, a renowned research tank, estimates that Trump’s policies will reduce the United States’ gross domestic product — the overall output of goods and services — by $1.5 trillion to $6.4 trillion by 2028. Peterson also calculated that Trump’s policies will dramatically increase costs within two years: If Trump’s proposals are fully implemented, inflation will rise to between 6% and 9.3% in 2026, up from 1.9% previously.
Last month, 23 Nobel Prize-winning economists wrote a statement warning that a Trump presidency “will lead to higher prices, larger deficits, and greater inequality.”
“Among the most important determinants of economic success,” they concluded, “are the rule of law and economic and political certainty, all of which Trump threatens.”
Trump is inheriting an economy that, despite annoyingly high prices, appears to be fundamentally robust. From July to September, yearly growth averaged a solid 2.8%. Unemployment is 4.1%, which is relatively low by historical standards.
According to the International Monetary Fund, Spain will be the only wealthy country to have stronger growth this year. The United States is the economic “envy of the world,” according to the Economist magazine.
The Federal Reserve is so sure that US inflation will fall to its 2% target that it cut its benchmark rate in September and again this week.
Americans are profoundly dissatisfied with prices.
Consumers, meanwhile, continue to face the pains of the inflationary increase. Prices are 19% higher than they were before inflation began to increase in 2021. Grocery expenses and rent increases continue to cause challenges, particularly for low-income households. Although inflation-adjusted hourly wages have grown for more than two years, they remain lower than they were before President Joe Biden took office.
Voters took their frustrations to the polls. According to AP VoteCast, a countrywide survey of more than 120,000 voters, three out of every ten voters indicated their family was “falling behind” financially, up from two out of ten in 2020. Approximately 90% of voters were concerned about the cost of groceries, while 80% were concerned about the expense of healthcare, housing, or gasoline.
“I don’t think it’s either deep or complicated,” Holtz-Eakin explained. “The real issue is that the Biden-Harris team made people worse off, and they were furious, and we saw the consequences.”
The irony is that conventional economists worry Trump’s remedies would worsen rather than improve price levels.
Tariffs are taxes on customers.
Import taxes are the core of Trump’s economic strategy. It is an approach that he claims will reduce America’s trade imbalances and drive other countries to make concessions to the US. In his first term, he raised duties on Chinese goods, and he has now vowed much more of the same. Trump intends to increase tariffs on Chinese goods to 60% while imposing a “universal” tax of 10% or 20% on all other imports.
Trump insisted that other countries pay tariffs. In fact, American corporations pay them — and then often pass on the increased expenses to their customers through higher prices. This is why taxing imports typically causes inflation. Worse, other nations frequently retaliate with tariffs on American goods, which hurts US exporters.
Kimberly Clausing and Mary Lovely of the Peterson Institute projected that Trump’s planned 60% tax on Chinese imports and his high-end 20% tariff on everything else would result in an annual after-tax loss of $2,600 for the average American household.
The economic impact would most certainly spread globally. Capital Economics researchers calculated that a 10% tariff by the United States would disproportionately harm Mexico. Germany and China would both suffer. All of this, of course, relies on whether he follows through on what he promised during the campaign.
Deportations would disrupt the US job market.
Trump has vowed to deport millions of unauthorized immigrants, potentially undercutting one of the elements that enabled the United States to control inflation without entering a recession.
The Congressional Budget Office estimated that net immigration — arrivals minus departures — will reach 3.3 million in 2023. Employers needed the newcomers. After the economy recovered from the pandemic crisis, businesses struggled to hire enough workers, particularly as so many native-born baby boomers retired.
Immigrants filled the gap. Over the last four years, 73% of individuals who joined the labor force were foreign-born.
Economists Wendy Edelberg and Tara Watson of the Brookings Institution’s Hamilton Project discovered that by increasing the supply of labor, immigrants enabled the United States to create jobs without overheating or driving inflation.
The Peterson Institute forecasts that deporting all 8.3 million immigrants estimated to be working illegally in the United States would decrease US GDP by $5.1 trillion and hike inflation by 9.1 percentage points by 2028.
Large tax cuts could increase the federal deficit.
Trump has proposed extending 2017 tax cuts for individuals that were supposed to expire after 2025, as well as restoring previously lowered tax incentives for businesses. He has also proposed eliminating taxes on Social Security benefits, overtime pay, and tips, as well as drastically lowering the corporate income tax rate for US manufacturers.
According to the University of Pennsylvania’s Penn Wharton Budget Model, Trump’s tax plans will result in a $5.8 trillion increase in budget deficits over 10 years. Even assuming the tax cuts stimulated enough growth to recoup some of the lost tax income, Penn Wharton predicted that deficits would still rise by more than $4.1 trillion between 2025 and 2034.
The government budget is currently out of balance. An aging population necessitated increasing spending on Social Security and Medicare. Past tax cuts have reduced government revenue.
Holtz-Eakin expressed concern that Trump is unwilling to take the steps required to bring the federal budget closer to balance, such as cutbacks to Social Security and Medicare, tax increases, or a combination of the two.
“It’s not going to happen,” Holtz-Eakin declared.