It seems the whole world and the entire liberal media are hyperventilating over the Trump tariffs and their inflationary impact. Many of the sharpest critics of President Donald Trump’s policies are the same “experts” who assured us four years ago that President Joe Biden’s policies wouldn’t cause inflation. Oops!
Then there is the argument put forth by the New York Times and many economists like Mark Zandi of Moody’s that Trump’s tariffs are inflationary and so are his tax cuts.
Hello! Tax cuts and tax increases both can’t cause inflation. This is political advocacy dressed up as (bad) economics.
Inflation is a government-generated disease induced by fiscal and monetary policy that leads to too many dollars chasing too few goods. Anything that increases money puts pressure on consumer prices and anything that increases the supply of goods produced reduces inflationary pressures.
HERE’S HOW TRUMP’S TARIFFS ON CHINA COULD IMPACT DRUG PRICING AND OTHER HEALTHCARE COSTS
As economists who believe in free markets, we aren’t fans of higher taxes in general, including tariffs, and it is true they may raise prices slightly for certain products. But there are three problems with the argument that Trump’s tariffs will cause an overall rise in prices.
The first is, of course, that they are not implemented and merely used as effective threats to yield concessions. This “peace through strength” in trade wars rather than regular wars mimics our influential but unused nuclear capabilities. Indeed, Colombia caved while Mexico and Canada are now pledging to assist in keeping deadly drugs from coming across the border.
The second flaw in the “tariffs cause inflation” line is that U.S. economic activity is mostly domestic and thus the quantitative impact of tariffs is relatively small. Imports now make up about 12% relative to our GDP. Much-debated Chinese imports represent only 2%, so a 10% increase in tariffs, even if fully pushed onto U.S. consumers, represents a 0.2 percent change. This is one reason why the Trump tariffs did not cause inflation in the first Trump term. But the effect on prices is likely to be a lot less than that this time around because some of the burden of the tariff is borne by foreign producers. If you sell a close substitute to U.S. goods, many consumers will say goodbye if you raise prices in response to a tariff.
Policies that make the American economy more productive are the best antidote to inflation.
Similarly, Trump’s promised deportation of illegal aliens may raise prices by causing a shortage of workers and thus higher prices in some immigrant-dependent industries. But let us say that 2 million workers were deported — which we think would be a high number. In a country with a labor force of 168 million, this wage-push inflation is likely to be small. In addition, if wages rise, the effect on real wages for U.S. workers from price hikes is reduced.
But here is what the inflation hawks are missing. Any pressure on prices from deportations and tariffs are likely to be more than offset by other Trump economic policies that will put downward pressures on overall inflation. Policies that make the American economy more productive are the best antidote to inflation.
Trump is suggesting slashing income tax rates to 15% on made-in-America products. DOGE cost cutting and caps on federal hiring will make government products and services less expensive. And perhaps most importantly, reducing onerous regulations will cut costs and prices.
More drilling and mining will make energy and minerals less expensive. Trump’s push for health care price transparency will make medical consumers more attentive to costs and put downward on prices. Trump’s call for legal immigrant worker visas will offset losses of illegal alien workers.
Those who warn of runaway inflation under Trump ignore all the Trump policies that are disinflationary. They forget that Trump was already president for four years and the annual inflation rate from many of the same policies he is talking about now was 1.9% or slightly less than the Federal Reserve’s 2% inflation target.
One prediction you can take to the bank: if Trump can win spending cuts from Congress anywhere near what he is proposing, inflation is going to look a lot more like the low levels in his first term than the blizzard of inflation under Bidenomics.
Stephen Moore is a visiting senior fellow at the Heritage Foundation. Tomas Philipson is an economist at the University of Chicago and served as chairman of the Council of Economic Advisers under President Donald Trump. Moore is co-founder and Philipson a visiting research fellow at Unleash Prosperity.
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