More than 30 years ago, the economists Rudiger Dornbusch (one of my mentors) and Sebastian Edwards wrote a classic paper on what they called “macroeconomic populism.” Their motivating examples were inflationary outbreaks under left-wing regimes in Latin America, but it seemed clear that the key issue wasn’t left-wing governance per se; it was, instead, what happens when governments engage in magical thinking. Indeed, even at the time they could have included the experience of the military dictatorship that ruled Argentina from 1976 to 1983, which killed or “disappeared” thousands of leftists but also pursued irresponsible economic policies that led to a balance-of-payments crisis and soaring inflation.
Modern examples of the syndrome include leftist governments like that of Venezuela, but also right-wing nationalist governments like that of Recep Tayyip Erdogan of Turkey, who insisted that he could fight inflation by cutting interest rates.
Will the United States be next?
I wish people would stop calling Donald Trump a populist. He has, after all, never demonstrated any inclination to help working Americans, and his economic policies really didn’t help — his 2017 tax cut, in particular, was a giveaway to the wealthy. But his behavior during the Covid-19 pandemic showed that he’s as addicted to magical thinking and denial of reality as any petty strongman or dictator, which makes it all too likely that he might preside over the type of problems that result when policies are based on quack economics.
Now, destructive economic policy isn’t the thing that alarms me the most about Trump’s potential return to power. Prospects for retaliation against his political opponents, huge detention camps for undocumented immigrants and more loom much larger in my mind. Still, it does seem worth noting that even as Republicans denounce President Biden for the inflation that occurred on his watch, Trump’s advisers have been floating policy ideas that could be far more inflationary than anything that has happened so far.
Advertisement
SKIP ADVERTISEMENT
It’s true that inflation surged in 2021 and 2022 before subsiding, and there’s a vigorous debate about how much of a role Biden’s economic policies played. I’m skeptical, among other things because inflation in the United States since the beginning of the Covid pandemic has closely tracked with that of other advanced economies. What’s notable, however, is what the Biden administration didn’t do when the Federal Reserve began raising interest rates to fight inflation. There was a clear risk that rate hikes would cause a politically disastrous recession, although this hasn’t happened so far. But Biden and company didn’t pressure the Fed to hold off; they respected the Fed’s independence, letting it do what it thought was necessary to bring inflation under control.
Sign up for the Opinion Today newsletter Get expert analysis of the news and a guide to the big ideas shaping the world every weekday morning. Get it sent to your inbox.
Does anyone imagine that Trump — who in 2019 insisted that the Fed should cut interest rates to zero or below — would have exercised comparable restraint?
As a number of observers have noted, some of Trump’s policy proposals would surely raise inflation. An immigration crackdown would undermine one of the key factors that have allowed America to combine solid economic growth with falling inflation. Proposals for a wave of new tariffs would raise consumer prices — and the odds are that Trump would raise tariffs well beyond the 10 percent rate he’s been floating if it didn’t significantly reduce U.S. trade deficits, which it wouldn’t.
What’s really worrisome, however, are indications that a future Trump regime would manipulate monetary policy in pursuit of short-run political advantage, justifying its actions with crank economic doctrines.
The Federal Reserve is a quasi-independent institution, not because of any sacrosanct constitutional principle, but because nations have found that in practice it’s important to limit partisan influence over interest rates and money creation. But in recent weeks there have been reports that Trump advisers want to take away much of the Fed’s independence, presumably so that Trump could juice the economy and the stock market the way he wanted to in 2019.
There are also reports that Trump advisers, obsessed with the trade deficit, want to devalue the dollar, which would indeed help exports but would also be clearly inflationary — raising import prices and overheating a U.S. economy that is already running hot. (In fact, our economic strength is probably the main reason the dollar has been rising.)
And even as they talk about weakening the dollar, Trump advisers are reportedly discussing punishing other countries that reduce their use of the greenback — which seems both contradictory and to involve a delusional view of how much economic power even America possesses.
The details of these bad ideas are probably less important than the mind-set they reveal, one that rejects hard-learned lessons from the past and buys into economic fantasies.
And how would Trump respond if things went wrong? Remember, he suggested we look into fighting Covid by injecting disinfectant. Why expect him to be any less inclined to magical thinking in dealing with, say, a new surge in inflation?
Again, macroeconomic policy isn’t my biggest worry about what could happen if Trump returns to power. But it’s definitely a worry.
Modern examples of the syndrome include leftist governments like that of Venezuela, but also right-wing nationalist governments like that of Recep Tayyip Erdogan of Turkey, who insisted that he could fight inflation by cutting interest rates.
Will the United States be next?
I wish people would stop calling Donald Trump a populist. He has, after all, never demonstrated any inclination to help working Americans, and his economic policies really didn’t help — his 2017 tax cut, in particular, was a giveaway to the wealthy. But his behavior during the Covid-19 pandemic showed that he’s as addicted to magical thinking and denial of reality as any petty strongman or dictator, which makes it all too likely that he might preside over the type of problems that result when policies are based on quack economics.
Now, destructive economic policy isn’t the thing that alarms me the most about Trump’s potential return to power. Prospects for retaliation against his political opponents, huge detention camps for undocumented immigrants and more loom much larger in my mind. Still, it does seem worth noting that even as Republicans denounce President Biden for the inflation that occurred on his watch, Trump’s advisers have been floating policy ideas that could be far more inflationary than anything that has happened so far.
Advertisement
SKIP ADVERTISEMENT
It’s true that inflation surged in 2021 and 2022 before subsiding, and there’s a vigorous debate about how much of a role Biden’s economic policies played. I’m skeptical, among other things because inflation in the United States since the beginning of the Covid pandemic has closely tracked with that of other advanced economies. What’s notable, however, is what the Biden administration didn’t do when the Federal Reserve began raising interest rates to fight inflation. There was a clear risk that rate hikes would cause a politically disastrous recession, although this hasn’t happened so far. But Biden and company didn’t pressure the Fed to hold off; they respected the Fed’s independence, letting it do what it thought was necessary to bring inflation under control.
Sign up for the Opinion Today newsletter Get expert analysis of the news and a guide to the big ideas shaping the world every weekday morning. Get it sent to your inbox.
Does anyone imagine that Trump — who in 2019 insisted that the Fed should cut interest rates to zero or below — would have exercised comparable restraint?
As a number of observers have noted, some of Trump’s policy proposals would surely raise inflation. An immigration crackdown would undermine one of the key factors that have allowed America to combine solid economic growth with falling inflation. Proposals for a wave of new tariffs would raise consumer prices — and the odds are that Trump would raise tariffs well beyond the 10 percent rate he’s been floating if it didn’t significantly reduce U.S. trade deficits, which it wouldn’t.
What’s really worrisome, however, are indications that a future Trump regime would manipulate monetary policy in pursuit of short-run political advantage, justifying its actions with crank economic doctrines.
The Federal Reserve is a quasi-independent institution, not because of any sacrosanct constitutional principle, but because nations have found that in practice it’s important to limit partisan influence over interest rates and money creation. But in recent weeks there have been reports that Trump advisers want to take away much of the Fed’s independence, presumably so that Trump could juice the economy and the stock market the way he wanted to in 2019.
There are also reports that Trump advisers, obsessed with the trade deficit, want to devalue the dollar, which would indeed help exports but would also be clearly inflationary — raising import prices and overheating a U.S. economy that is already running hot. (In fact, our economic strength is probably the main reason the dollar has been rising.)
And even as they talk about weakening the dollar, Trump advisers are reportedly discussing punishing other countries that reduce their use of the greenback — which seems both contradictory and to involve a delusional view of how much economic power even America possesses.
The details of these bad ideas are probably less important than the mind-set they reveal, one that rejects hard-learned lessons from the past and buys into economic fantasies.
And how would Trump respond if things went wrong? Remember, he suggested we look into fighting Covid by injecting disinfectant. Why expect him to be any less inclined to magical thinking in dealing with, say, a new surge in inflation?
Again, macroeconomic policy isn’t my biggest worry about what could happen if Trump returns to power. But it’s definitely a worry.
