Why is Trump Fueling Inflation?
The Mueller noose is tightening around the Trump Presidency, but the outcome of the Russia investigation is far from certain, and meanwhile, Donald J Trump is still the President of the United States. As President, he has taken a series of economic actions that will have one impact: creating inflation.
Inflation is when the price of goods goes up faster than commensurate increases in income. Inflation hurts those living on fixed incomes (that used to be a pretty undefined term for me until I retired from teaching) and those living on the lowest incomes (as wages don’t keep up with costs.) Inflation is something those of us who lived in the 1960’s and 70’s, when gas went from twenty-five cents a gallon to $1.50, remember well – but recently it hasn’t been a serious concern.
It’s coming back, and President Trump’s caused it.
He most recent action is to impose a twenty-five percent tariff on imported steel, and a ten percent tariff on imported aluminum. This “protective tariff” is designed to raise the cost of imports to make American-made steel and aluminum more competitive. And while there are several concerns with this, particularly US capacity to make those products, the real issue is that it will raise prices for everyone. The breadth of the products effected is astounding: as MSNBC commentator Stephanie Ruhl stated: “Even Hershey’s kisses are made with ‘love,’ but they’re wrapped in aluminum foil.”
This isn’t a Republican versus Democrat fight. Many Democrats, including Ohio Senator Sherrod Brown, have long demanded protection for heavy industries like steel. And Republicans have long been the party of free-trade, allowing world market forces to establish prices. Regardless of which side you’re on, one of the likely outcomes of the Trump tariffs is to start an “old fashioned” trade war, with effected countries responding to the US moves by raising taxes on uniquely American products. Already Kentucky Bourbon (made in the home state of Majority Leader McConnell,) and Harley Davidson motorcycles (made in Wisconsin, home of Speaker Paul Ryan) as well as American food exports have been targeted.
While free-trade versus protectionism is a good academic argument; the reality is if the tariffs are implemented, the costs will be pushed onto consumers. Prices will go up.
And that’s not the only force driving inflation.
The “vaunted” Republican tax cut is certain to have the same impact. It has “created” money, by adding $1.6 trillion into the economy without finding a way to collect it back in taxes. And while Republicans claim that the impact on the economy will create a “boost” raising incomes to meet the additional tax burdens (people making more money and therefore paying more taxes,) there is no evidence to show that will occur. The economy has had a steady growth rate of around three percent for several years, that won’t be enough to overcome the deficit they created.
But what the tax cut does do is shove more money in the economy. And while I’m as happy to see my “paycheck” increase as the next guy (by having less with-held for taxes) and I’m certainly able to spend the extra, the real effect is to create inflationary forces in the economy. In simple terms: more people spend more money for the same goods, reasonable sellers will raise prices to meet the increased demand.
Something to be wary of: while the new with-holding tables, slammed into action on a month’s notice, do decrease with-holding so we all “get more money” before the November election, some may be surprised to find that their 2018 taxes didn’t decrease as much as expected, and that they owe money come next year. That’s my situation, so check before you spend it all up front!!
The next inflationary step is current Congressional action to remove the restrictions of the Dodd-Frank legislation. This law was passed after the Great Recession of 2008, when the uncontrolled actions of large banks and investment firms created a “bubble” of high earnings. When the bubble burst, the entire economy began to crash. Only huge government bailouts saved us from a full-on Depression of the 1930’s mold.
Dodd-Frank put tight restrictions on bank lending and investment, and demanded that those institutions had enough actual cash around to cover variations in the market. Now, Congress is working to remove those restrictions.
While the immediate result will be an increase in the amount of money available for borrowing, probably creating a new housing boom, inevitably (or at least history has shown) the ability to profit will create abuses that will threaten economic stability. What will happen for sure: more money in the economy, and therefore an increase in prices. And it’s not just for homeowners selling, increases in home values means more availability of second mortgage (home equity) loans.
As homeowners borrow closer to the maximum value of their homes, they become more vulnerable to shifts in market prices. 2008 was the year of the “upside down” and “underwater” mortgage; Dodd-Frank put controls on some of the processes that created that crisis. An example even today: a commercial on television urges veterans to borrow from a company that can lend them “100% of their home’s value.” That’s great, as long as the value of their home goes up. What if it goes down?
And the final inflationary pressure by President Trump is to restrict the labor market. He calls it immigration reform, but his goal is to reduce the number of people in the United States willing to work for lower wages. By doing so, his advisors believe that those jobs will become more competitive, requiring higher wages to fill, and more “Americans” will be employed.
This is in an era of four percent unemployment (what many economists call a full-employment figure.) But Trump has tapped into a deep-set view of many Americans that they are working harder for less. He’s not wrong that people feel that way, but it’s not the immigrant from (Honduras, El Salvador, Somalia, Haiti, or wherever) that’s causing it.
American immigration history shows that the newest immigrants work the “worst” jobs, providing for their families, and that the second generation moves “up” into better employment (an example: Washington Post – Cactus, Texas .) Should jobs that are often done by immigrants: migrant farm labor, roofing and dry-walling in house construction, the factory meat processing noted in the article, go unfilled by immigrants; it would require a substantial pay increase to make it an “American” job. We can argue the right or wrong of low pay and new immigrants (legal or illegal) but today’s reality is that the American economy depends on them. Should President Trump get his way, it would have a huge inflationary impact by driving the costs of those products and services up.
Prices will go up, and while wages will too, they certainly won’t keep up with the costs. Those whose incomes are restricted (pensions, social security, welfare) will feel the immediate impact, but the end result will be the “quality of living” will get worse for many Americans. Those at the high end of the economy, with incomes based on investments, will do well. Those are the real constituents President Trump serves.
