One obstacle to Trump's promises: It's not the 2016 economy

When Donald J. Trump became president in 2017, prices had increased by about 5% over the previous four years. If he were to win the 2024 White House race, he would take office at a time when prices have increased by 20% and that number is still rising.

This is a radically different economic context for the kind of tariff and tax cut policies that the Republican candidate has put at the center of his campaign.

Mr. Trump regularly blames the Biden administration for the recent spike in prices, but inflation has been a global phenomenon since the coronavirus pandemic began in 2020. Supply chain problems, changing consumer habits and other quirks related to pandemic lockdowns and their aftermath have collided with stimulus-fueled demand, sending costs soaring.

The resulting years of unusually rapid inflation have changed the nation’s economic fortunes in important ways. Businesses are more accustomed to adjusting prices, and consumers are more accustomed to those changes than they were before the pandemic, when costs had been flat for decades. In addition, the Federal Reserve raised interest rates to 5.3% in an effort to cool demand and bring the situation under control.

This combination of jittery inflation expectations and higher interest rates could make many of the ideas Mr. Trump floated on the campaign trail riskier or more expensive than before, especially at a time when the economy is firing on all cylinders and unemployment is very low.

Mr. Trump is proposing tax cuts that could accelerate economic growth and widen the deficit, which could increase inflation and add to the national debt at a time when borrowing is costly for the government. He has talked about mass evictions at a time when economists warn that the loss of many potential workers could lead to labor shortages and drive up prices. He is promising to raise tariffs across the board and sharply on China, which could drive up import prices dramatically.

He has suggested that interest rates would be much lower under his watch. It would be difficult for him to achieve that because the Fed sets its own interest rates and is isolated from the White House. But if Mr. Trump tried to find a way to undermine the Fed’s independence and lower borrowing costs, he would risk reviving growth and rising prices.

The measures Trump is proposing are an escalation of those he has tried before. Tax cuts that inflated the nation’s debt, tariffs, immigration controls, and verbal attacks on the Fed to push it to lower interest rates were cornerstones of his first term. Yet the way the economy has evolved since then makes it potentially dangerous to repeat these policies in more drastic ways.

“It’s one thing to pursue expansionary fiscal policy in a world where inflation is suboptimal and the unemployment rate is below full employment,” said Mark Zandi, chief economist at Moody’s Analytics who provides research and analysis to the Biden administration. But this is a very different economic context, Zandi said.

Although both President Biden and Mr. Trump are expected to continue running deficits if elected, several economic analyses have suggested that Mr. Trump’s policy proposals so far would be accompanied by a significantly larger budget deficit. Researchers at the investment bank TD Cowen have suggested that the choice between the candidates is between a higher deficit (Mr. Biden) and a much higher deficit (Mr. Trump).

There are many reasons why government spending is likely to continue to rise under either candidate: Programs like Medicare and Social Security are only getting more expensive as the population ages, interest rate costs are high, and even Mr. Biden has suggested he would extend individual tax cuts for people earning less than $400,000, though he has also proposed tax increases for high-income households and corporations.

But the numbers vary widely. A Moody’s analysis suggests that the budget deficit would stabilize at just over 5% of annual GDP in coming years if Mr. Biden were reelected with a divided Congress, climb to 6.4% if Mr. Trump won with a Republican majority, and increase to a more moderate 6% if Mr. Trump won with a divided Congress.

If the budget deficit is stable, Moody's Zandi said, it is likely to keep the economy on a relatively stable path, but a larger deficit could boost it.

Annual deficits add to the national debt. Typically, periods of strong economic growth are seen as an opportunity to reduce deficits to ensure that the national debt remains sustainable.

“I think the bare minimum, given our fiscal stance, should be this: First, do no harm,” said Jason Furman, a Harvard economist and economic adviser to the Obama administration. “Absent one-time emergency spending, there’s no excuse for taking deficit-increasing actions right now.”

This underscores an important point: this is not the economy that both candidates originally inherited.

In 2017, Mr. Trump led an economy with a still-healing labor market and low inflation. Mr. Biden led an economy in the midst of a pandemic in early 2021. Whoever wins the 2024 election, the landscape will be very different. The economy is running at or near capacity, and the Fed is trying to slow it down by raising interest rates to tame inflation.

Even though the labor market has cooled somewhat in recent months, unemployment has been at or below 4% since late 2021, the longest stretch of low unemployment since the 1960s. While that changed in data released Friday, which showed unemployment edged up to 4.1% in June, that level remains low by historical standards.

Wage growth is slowing, but it also remains robust. Consumer spending is slowing, but remains relatively strong by historical standards.

Inflation, as measured by the personal consumption expenditures index, came in at 2.6% in May. While that’s less than half of its 2022 peak, it’s still above the Fed’s 2% target. Inflation is falling, but it’s still faster than usual and could still be slightly elevated when the next president takes office, forecasts suggest.

This is what makes Mr Trump's policies worrisome, economists say.

The economy is more at risk of falling into an inflationary spiral today than it was in 2018, when Mr. Trump launched a trade war, said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. That should make us more cautious about any policies that could let the inflation genie out of the bottle.

Mr. Strain said he thought tariffs could push up prices, though he doubted they would trigger a series of increases, and that immigrant deportations could cause inflation by creating labor shortages in some industries, though that depends on how the policy plays out.

Mr. Trump has vowed to increase his use of tariffs by imposing import taxes on nearly all of his trading partners, including a 60% tariff on all Chinese goods. Studies have found that his previous tariffs have increased costs for importers and consumers, and a recent analysis by the Peterson Institute for International Economics found that the new tariffs were likely to drive up the prices of imported goods and could cost the average household about $1,700 a year.

On taxes, Mr. Trump is promising to permanently extend the individual tax cuts that are set to expire next year and is talking about new cuts for tipped workers.

That could boost growth by leaving more money than expected in consumers’ pockets. And in a world of higher interest rates, the effect on deficits could snowball. Mr. Trump’s initial tax cuts were financed with borrowed money, and analysts have said any extensions or new measures would follow the same path.

The Congressional Budget Office already estimates that annual interest on the government’s debt could reach $1.7 trillion by 2034, nearly double current levels. The budget office estimated that if the expiring personal income tax provisions of the 2017 tax law were extended, deficits would be $3.3 trillion larger between 2025 and 2034, and higher interest payments would be $467 billion.

“If you look at Mr. Trump’s agenda as a whole, you couldn’t have a more inflationary platform,” said Kimberly Clausing, a nonresident senior fellow at the Peterson Institute and a former Treasury official in the Biden administration.

The question is whether the potential for inflationary policies under Mr. Trump would prompt the Fed to raise interest rates or at least prevent the central bank from cutting borrowing costs, as officials plan to do later this year and again several times in 2025.

If Mr. Trump is set to win, it won’t have much of an impact on short-term interest rates, said Thierry Wizman, a rates strategist at Macquarie Group, a financial services firm. The Fed is likely to continue cutting rates as planned later in the year.

But that would change their view of the long-term trajectory, he said, and likely tilt them toward a higher end point than they would have been.

Ana Swanson contributed reporting.

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