Trump’s Economy
Paul Krugman among others has started to warn about “stagflation”, a term coined by Paul Samuelson in the 1970’s. Samuelson was a Nobel Prize winner who is known to a lot of college students for his book Economics: An Introductory Analysis. The term is most often associated with the Carter Administration although it was present during the Nixon and Ford Administrations as well. Samuelson defined it as ” slow growth, high inflation and high unemployment”.
Stagflation puts enormous pressure on the Federal Reserve Board because its prime tool to combat inflation is to raise interest rates while its prime tool to stimulate growth and employment is to lower interest rates. Plainly, fiscal policy has a role to play, but it faces similar tradeoffs, is not as nimble and is clouded by politics. Bottom line, stagflation is very bad because it is difficult to escape and therefore should be avoided if possible.
The stagflation of the 1970’s was only broken by Paul Volker being appointed to head the Federal Reserve by Jimmy Carter in 1979. At the time, the Federal Funds rate (the rate at which banks lend their excess reserves to other banks overnight) was 11% and the unemployment rate was 5.9%. A year later, the Federal Funds rate was 20%, unemployment was up to 7.2% and the recession that continued into the Reagan years broke the back of inflation for the next 50 years.
While the GOP was not content with Reagan’s landslide victory in 1980 and has continued to demonize Carter to this very day, it is useful to look at the numbers during the 1970’s to see how realistic Krugman’s and other warnings are about the current risks of stagflation. The average inflation rate during the Carter administration was 9.8%. Nixon’s was 6.01% and Ford’s was 8.11%. The worldwide oil shocks of 1973 and 1979 played a huge role, but some of the underlying factors included LBJ’s ” guns and butter policies” of fighting the the War on Poverty and the Vietnam War simultaneously and Labor’s relative strength in pushing the wage/price spiral. For perspective, the average inflation rate under Biden was 4.95% and is currently 2.7%.
GDP growth under Carter averaged 2.8%, under Nixon growth was 2.7% and under Ford 5.4%. During Trump’s first term ( which included 10 months of the pandemic) GDP growth averaged 2.3% while under Biden (who also dealt with the pandemic) GDP grew at an average rate of 3.2%. So far during the first 6 months of 2025, the growth of GDP is averaging 1.25% annually.
The unemployment numbers during Carter averaged 6.5% compared to 7.8% under Ford, 7.5% under Reagan and 7.4% under Obama. Trump’s first term averaged 5% and Truman, Biden and LBJ each averaged 4.2%. As of July, the unemployment rate which got the head of the BLS fired was 4.2%.
Looking at these metrics, the only criteria of stagflation which seems to be presenting itself is slow growth. Presumably, this is the reason why Trump is putting so much pressure on Powell to lower interest rates. Powell is resisting because of the fear that Trump’s tariff madness will reignite inflation and this seems to be at the heart of Krugman’s warning as well.
I know a lot less than Powell and Krugman, but although tariff’s will undoubtedly lead to increases in prices to consumers, that will only produce inflation if consumers pay those higher prices. From the consumer’s standpoint the tariff’s are just like an increase in taxes without an increase in government services. This should be deflationary rather than inflationary. Further, while in an earlier time, one could have expected that Labor would work overtime to make up for the increased taxes with increased wages, Labor is not the force it was in the 1970’s.
When OPEC drastically increased the world price of oil, consumers had little ability to avoid those price increases. While that will undoubtedly be true of some tariffed goods, on many, perhaps most, consumers will either do with less or seek domestic substitutes. Domestic producers will try and raise their prices to match the price increase caused by tariffs in imported goods, but will have to face the reality that unless dealing with a necessity, demand will be relatively elastic meaning consumers will buy less if the price goes up.
Krugman did point to another problem with Trump economics that could cause stagflation–the mass deportation and terrorizing of agricultural and construction workers. Food is a necessity and as scarcity increases, prices rise and must be paid. Similarly, shelter is a necessity and must be paid for in some manner. Exactly how inflationary this becomes again depends on whether consumers will cut back on all other purchases in order to finance their food and shelter needs.
There is certainly a case to be made that Trump’s economic policies will cause stagnation if not downright recession, but in my layman’s opinion, the case for stagflation–at least as defined by Samuelson in the 1970’s–is not present.
Stagflation puts enormous pressure on the Federal Reserve Board because its prime tool to combat inflation is to raise interest rates while its prime tool to stimulate growth and employment is to lower interest rates. Plainly, fiscal policy has a role to play, but it faces similar tradeoffs, is not as nimble and is clouded by politics. Bottom line, stagflation is very bad because it is difficult to escape and therefore should be avoided if possible.
The stagflation of the 1970’s was only broken by Paul Volker being appointed to head the Federal Reserve by Jimmy Carter in 1979. At the time, the Federal Funds rate (the rate at which banks lend their excess reserves to other banks overnight) was 11% and the unemployment rate was 5.9%. A year later, the Federal Funds rate was 20%, unemployment was up to 7.2% and the recession that continued into the Reagan years broke the back of inflation for the next 50 years.
While the GOP was not content with Reagan’s landslide victory in 1980 and has continued to demonize Carter to this very day, it is useful to look at the numbers during the 1970’s to see how realistic Krugman’s and other warnings are about the current risks of stagflation. The average inflation rate during the Carter administration was 9.8%. Nixon’s was 6.01% and Ford’s was 8.11%. The worldwide oil shocks of 1973 and 1979 played a huge role, but some of the underlying factors included LBJ’s ” guns and butter policies” of fighting the the War on Poverty and the Vietnam War simultaneously and Labor’s relative strength in pushing the wage/price spiral. For perspective, the average inflation rate under Biden was 4.95% and is currently 2.7%.
GDP growth under Carter averaged 2.8%, under Nixon growth was 2.7% and under Ford 5.4%. During Trump’s first term ( which included 10 months of the pandemic) GDP growth averaged 2.3% while under Biden (who also dealt with the pandemic) GDP grew at an average rate of 3.2%. So far during the first 6 months of 2025, the growth of GDP is averaging 1.25% annually.
The unemployment numbers during Carter averaged 6.5% compared to 7.8% under Ford, 7.5% under Reagan and 7.4% under Obama. Trump’s first term averaged 5% and Truman, Biden and LBJ each averaged 4.2%. As of July, the unemployment rate which got the head of the BLS fired was 4.2%.
Looking at these metrics, the only criteria of stagflation which seems to be presenting itself is slow growth. Presumably, this is the reason why Trump is putting so much pressure on Powell to lower interest rates. Powell is resisting because of the fear that Trump’s tariff madness will reignite inflation and this seems to be at the heart of Krugman’s warning as well.
I know a lot less than Powell and Krugman, but although tariff’s will undoubtedly lead to increases in prices to consumers, that will only produce inflation if consumers pay those higher prices. From the consumer’s standpoint the tariff’s are just like an increase in taxes without an increase in government services. This should be deflationary rather than inflationary. Further, while in an earlier time, one could have expected that Labor would work overtime to make up for the increased taxes with increased wages, Labor is not the force it was in the 1970’s.
When OPEC drastically increased the world price of oil, consumers had little ability to avoid those price increases. While that will undoubtedly be true of some tariffed goods, on many, perhaps most, consumers will either do with less or seek domestic substitutes. Domestic producers will try and raise their prices to match the price increase caused by tariffs in imported goods, but will have to face the reality that unless dealing with a necessity, demand will be relatively elastic meaning consumers will buy less if the price goes up.
Krugman did point to another problem with Trump economics that could cause stagflation–the mass deportation and terrorizing of agricultural and construction workers. Food is a necessity and as scarcity increases, prices rise and must be paid. Similarly, shelter is a necessity and must be paid for in some manner. Exactly how inflationary this becomes again depends on whether consumers will cut back on all other purchases in order to finance their food and shelter needs.
There is certainly a case to be made that Trump’s economic policies will cause stagnation if not downright recession, but in my layman’s opinion, the case for stagflation–at least as defined by Samuelson in the 1970’s–is not present.
@Terry,
Demand for food and shelter is relatively inelastic. If, as seems likely, the Fed lowers the prime by a full percentage by December, will that relieve the housing crisis? Will the deportation of immigrants working in the ag sector significantly impact food inflation?
Joel:
What are you looking for yes and no’s? This will do nothing except blow us up. We might see .25 of 1%? In any case. Powell will probably not make the year as the Fed Chair. Keep feeding Tr__p cheeseburgers.
Joel, I think you are right that the Fed will cut interest rates if the unemployment numbers keep ticking up and inflation does not take off, but it will not do a darn thing about the price of housing except stabilize prices— some markets have actually seen price decreases. Builders will still not build enough housing with the cost of imported lumber and other materials skyrocketing and an uncertain labor force. Indeed, lowering interest rates will only exacerbate venture capitalists buying up housing stock and jacking up rents. As to food, overall it is inelastic but on any given item there is more elasticity. As a Wisconsin native I love my cheese even if my heart does not, but if the price doubles because dairy farms shut down without undocumented labor, I will buy and eat less and I am better off than probably 70% of consumers. The same goes for a lot of fresh produce which is labor intensive. Probably, the toughest thing are the meats but you can get protein from combining legumes and rice. Not my favorite but a lot of people may not have choice
I don’t think we need to tie ourselves to Samuelson’s definition. The key point is that inflation and output will not behave as predicted by any flavor of the Phillip’s Curve, so the Fed will be faced with a tough choice and won’t be able to find a “bliss point” that is tangent to its monetary policy rule. My expectation is that inflation will be somewhat lower than what we experienced in the 1970s but growth will be more stagnant. More “stag” and less “flation.” We also shouldn’t forget that the dollar has depreciated (especially against developed economies), which is not what we would normally expect with tariffs. The effect of a weaker dollar on prices would be the same as higher inflation as far as consumers are concerned. I just hope I don’t have to start wearing polyester leisure suits and gold chains and listening to hours of K.C. and the Sunshine Band.
2slug:
This: ” just hope I don’t have to start wearing polyester leisure suits and gold chains and listening to hours of K.C. and the Sunshine Band.” sounds like something from the past on Angry Bear.
Some other economist pointed out that tariffs are a nominal one time price adjustment. (In this case stretched out by many factors.) Once the adjustment occurs, the mechanism for inflation does not persist.
On top of that, in the 70s unions still had some power and many workers could expect raises when we had inflation. Now most workers can only hope for raises based on inflation. If the economy is stagnant, the job market will be loose and workers will have lost the factor that gave many of them raises during Biden’s term.
In other words, things are bad, but are not leading to stagflation.
I am with you on the leisure suits and KC and the Sunshine Band and that is sort of my premise on Trump’s policies– not so much inflation but a lot of stagnation. The drop in value of the US dollar has a lot of interesting ramifications. On the one hand it makes equities cheaper for foreign investors. On the other hand, it also makes financing the debt harder and drives up the cost–higher interest rates. It should help exports and hinder imports which I understand is Trump’s stated reason for engaging in trade wars with our allies, but is not going to win friends anywhere in the world.
While Volker gets credit for breaking inflation, two other factors are often overlooked. In 1978 natural gas was deregulated opening the door for greater production and competition with oil. Fearing loss of market share in energy OPEC slashed prices on crude oil. The other was fiscal policy by Reagan. The Social Security tax was increased by around 2% which is actually 4% due to the employer match. Any tax increase reduces demand causing disinflation. Monetary policy will always get credit because it is easier than fiscal but monetary is far from effective due to the many unintended factors.
@Marky,
Absolutely so. Also much of so-called “stagflation” proposed by the Right as the result of government spending was actually the result of the Nixon oil shock gifted to US by OPEC.
Ron:
What could Nixon or Ford, or Carter have done to negate the oil price increases? Not much. What I see is a vast uncertainty in the economy as created by a president with his tariff games. The last thing (I believe) Powell should do is decrease the Fed Rate. Think back to the seventies when a president was threatening the FED about lowering interest rates.
Trump is not asking for a tweak.
@Bill,
I fail to see in any way that agreeing with Marky is in disagreement with you. The mythic “stagflation” of Carter/Reagan was neither a fiscal nor monetary phenomenon, but rather supply side oil shock aside a labor demand shock from automation.
“no shit!”
In your post, you do mention neither imported intermediate goods nor goods shipped back and forth over the border for further processing, especially the Canadian & Mexican borders. Tariffs on these goods increase the (production) costs of goods that are “Made in America”. That is, the supply curve shifts out for (some kinds of) domestically produced goods, notably automobiles. Resulting in both higher prices and reductions in produced quantities of these goods, this begins to look very much like stagflation.* The effect is compounded by (differential) tariffs falling harder on these goods than on many of their foreign-produced substitutes, leading US consumers to shift from the domestic product to the foreign one.
*The tariffs on solar panels and other parts used for renewable energy will almost certainly lead to energy costs in the US that are higher than those in other countries, further hampering US producers.
I have quibbles.
An exact match between expected post-liberation-day economic conditions and Samuelson’s definition of”stagflation” is not our biggest concern. Conventional estimates of growth and employment are lower, inflation higher, in response to the felon-in-chief’s policies. That potential loss of welfare, it seems to me, is more important than definitions.
Asserting some magnitude of effect of reduced real incomes due to tariffs on prices isn’t justified without empirical evidence to back it up. Lower real income pushes one way, tariffs the other, and absent some kind of quantification, nobody knows which one wins.
The argument that tariffs have only a one-time inflationary effect is a static argument. Dynamic effects from lower real investment and reduced productivity grow may well prove to be persistent. At this point, the best we can do is recognize risks and try to mitigate them in a balanced way. Since inflation, employment and output all end up worse due to tariffs, the most obvious policy choice is to roll tariffs back.
Even accepting the idea that the inflationary effect of tariffs are a one-time thing, “one-time” in economist-speak can mean “only in September” or “only for one business cycle”. Seems a weak argument for tariffs or against stagflation risks.
Weaken the Fed’s resistance to political influence and allow for a few “one-time” quarters of above-target inflation and we could change inflationary expectations.
I’ll wrap up: To be convincing, the case for or against stagflationary risk needs to consider both sides fairly and to rely to a reasonable extent on empirical evidence.
Stagflation and the entire neoclassical synthesis project was merely Paul Samuelson and the rest of the bedraggled Keynesian economists surrendering to the Chicago School economists who were backed by the popularity of the New Deal’s most virulent reactionary Milton Friedman. On the wider scope then one might also consider it the US polity making peace with Wall Street after the dust from the Great Depression had settled. In either case, it began with Taft-Hartley only one year after Keynes died and was cemented in 1954 with the tax reform that ensured a lasting tax preference for capital gains from share sales over dividends for share holding, the rocket fuel for M&A.
https://en.wikipedia.org/wiki/Neoclassical_synthesis
The neoclassical synthesis (NCS), or neoclassical–Keynesian synthesis[1] is an academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936) with neoclassical economics.
The neoclassical synthesis is a macroeconomic theory that emerged in the mid-20th century, combining the ideas of neoclassical economics with Keynesian economics. The synthesis was an attempt to reconcile the apparent differences between the two schools of thought and create a more comprehensive theory of macroeconomics.
It was formulated most notably by John Hicks (1937),[2] Franco Modigliani (1944),[3] and Paul Samuelson (1948),[4] who dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 60s, and 70s.[5]
The Keynesian school of economics had gained widespread acceptance during the Great Depression, as governments used deficit spending and monetary policy to stimulate economic activity and reduce unemployment. However, neoclassical economists argued that Keynesian policies could lead to inflation and other economic problems. They believed that markets would eventually adjust to restore equilibrium, and that government intervention could disrupt this process.
In the 1950s and 1960s, economists like Paul Samuelson and Robert Solow developed the neoclassical synthesis, which attempted to reconcile these two schools of thought. The neoclassical synthesis emphasized the role of market forces in the economy, while also acknowledging the need for government intervention in certain circumstances. According to the neoclassical synthesis, the economy operates according to the principles of neoclassical economics in the long run, but in the short run, Keynesian policies can be effective in stimulating economic growth and reducing unemployment. The synthesis also emphasized the importance of monetary policy in controlling inflation and maintaining economic stability. Overall, the neoclassical synthesis was a significant development in the field of macroeconomics, as it brought together two previously competing schools of thought and created a more comprehensive theory of the economy……
Albeit historically correct, then as usual there is no apparent understanding of the long run effects on labor wages for this surrender to the interests of the ownership class and the political instability that would evolve within an electoral republic if such a reversion to public interests in the hands of a wealthy aristocracy of private property persists for long.
The New Deal was a brief respite in the US after the New Old Deal then the Old Old Deal and before the Same Old Deal Again.