These days, it seems everyone is talking about inflation. Many Americans are apprehensive about how expensive things like food, gas and insurance have become, and about whether the increases will continue to get worse. Being that we’re in a presidential election year, that apprehension has made its way into the discourse about our candidates, and onto the campaign messaging of the candidates themselves. The question on people’s minds is, will inflation be worse under one president than another?
Inflation in context
The average inflation (annual change in prices) has been about 3 percent since the end of World War II. There have been occasional spikes, but we got used to exceptionally low inflation since the Great Financial Crisis of 2008, averaging about 1.5% from 2008 to 2020.
COVID changed that. With the economy shutting down in 2020, the government poured money into the economy in order to try to prevent greater disruption than what occurred. By getting money to businesses, they could keep workers on the payroll so that the economic damage wouldn’t be worse than it already was. Unfortunately, global supply chains collapsed, meaning that the products that would normally be purchased with these emergency relief funds weren’t always available.
The result was a classic case of too much money chasing too few goods, and some policy mistakes made things worse. The Federal Reserve kept interest rates too low (which essentially encourages people to borrow money, making more money available in the economy) for too long, and the Biden Administration followed up on a Trump proposal to send a ton of stimulus payments to taxpayers in 2021, adding more fuel to the inflation fire.
We’ve finally got inflation back down to a little over 3% per year. So, it begs the question, what would the two Presidential candidates’ policies do to inflation?
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Tax Policy and Inflation
Tax policy is always a top item in presidential campaign messaging, and 2024 is no exception. Donald Trump wants to extend most of the tax cuts he signed into law in 2017. Biden wants to extend most of the tax cuts, except for those on the highest earning taxpayers. Forget the ballooning deficit for a moment (the tax cuts did NOT “pay for themselves” as promised). Cutting taxes is a way to stimulate the economy by paying for government services with borrowed (instead of taxed) money. The government isn’t likely to cut its spending, so the net effect of extending the tax cuts will be upward pressure on inflation.
The U.S. Dollar and Inflation
The value of the US Dollar relative to other currencies has an effect on international trade, the US economy, and on inflation as well. The Dollar has been very strong over the past two years, rebounding from a low during COVID.
Donald Trump wants to reduce the value of the dollar in order to make US exports more attractive to foreign buyers. The problem with this is that it also makes imported goods more expensive for US consumers. With the US economy growing faster than many of those around the world, there is already upward pressure on the value of the dollar, so this may not even be possible. But a weaker dollar would benefit the roughly 4% of American workers in manufacturing jobs while making almost everything more expensive for the other 96% of us.
Trade Policy and Inflation
Trade policy is an effective tool for protecting US jobs and industries, but it is also an effective foreign policy tool. “Weaponizing” trade policy is nothing new, countries have done it for centuries. However, aggressive policies like tariffs, sanctions, and restrictions can have a direct effect on prices, and therefore inflation.
Both candidates want to maintain tariffs on China, but Trump has proposed increasing tariffs on all foreign imports. Tariffs do make foreign goods more expensive, but it’s not clear that they make domestically produced goods cheaper. This is because the higher import prices just give domestic producers room to raise prices without fear of losing market share to competitors. Furthermore, there are some goods (like semiconductors) which are almost entirely made overseas, so a massive universal tariff will only raise prices across the board.
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Jobs and Inflation
Over the past few years, the labor market has been red hot. This is usually good news for workers, who can easily switch jobs and negotiate better pay. Plus, workers have more money to spend, which helps drive economic growth. However, there is a downside: low unemployment and strong jobs growth can drive higher inflation.
An especially tricky dynamic is how immigration policy influences the labor market. Legal immigration added about four million workers over the last couple of years, greatly reducing the upward pressure wages would normally have on inflation. Trump’s proposals to greatly reduce legal immigration and expel immigrant workers already here would massively reduce the labor force at a time when unemployment is near the lowest it’s ever been. This would likely cause massive upward pressure on wages, which businesses would then pass through to consumers as higher prices. Currently, the US labor force is only growing at about 0.5% per year. If we want the economy to grow faster, we’re going to need more workers from overseas. These workers also pay into programs like Social Security and Medicare, and study after study shows they are a net positive to the economy.
From Bad to Worse?
Inflation spiked under President Biden’s watch, although the rate of increase has come way down since its peak. A group of Nobel-winning economists fear it could be worse under a second Trump presidency. In their letter on the topic, they warned that though inflation has decreased drastically, “fiscally irresponsible budgets” could “reignite this inflation.” Vox.com put it quite succinctly: “Slash the dollar’s value, insulate US producers from competition, juice demand with tax cuts, and then throttle supply with mass deportation, and prices are bound to soar.”
The bottom line is that though presidential policies do have a direct effect on inflation, external factors such as war, economic downturn, and public health crises can have an even greater effect, and these may be largely outside the president’s control.
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