Harvard economist and former Treasury Secretary Larry Summers is sounding the alarm. He warns that Trump’s economic proposals, particularly his fondness for trade wars, could trigger severe stagflation—the toxic mix of high inflation and low growth that plagued the U.S. in the 1970s.
The Federal Reserve has been working hard to stave off this scenario for years. Yet, Summers argues, a few policy changes by Trump could undo this work.
“Trump’s tax proposal to replace a major amount of income-tax revenue with tariffs is a prescription for the mother of all stagflations,” the economist wrote in a June 15 tweet. “It burdens the middle class and the poor who purchase goods on international markets. It would also create worldwide economic warfare.”
Trump has promised that, if re-elected, he will impose a 10% tariff on all imported goods and slash the corporate tax rate from 21% to as low as 15%.
Summers didn’t mince words, warning that Trump’s tariffs could cause a significant supply shock as foreign suppliers reduce shipments to the U.S. or hike prices amid a trade war.
This, in turn, would exacerbate inflation, potentially forcing the Fed to hike rates even more aggressively.
The fed funds rate is already at its highest level in 23 years, and Summers predicts mortgage rates could surge above 10% for the first time since the 1980s if Trump’s tariffs are implemented.
“I don’t think there’s been a more inflationary presidential economic policy platform in my lifetime,” he told Bloomberg TV. “This is really dangerous stuff.”
Backing up Summers’ concerns, the non-partisan Peterson Institute for International Economics found that Trump’s tariffs, including a hefty 60% levy on Chinese imports, would cost the typical middle-class household around $1,700 a year in additional costs due to inflation.
Summers also criticized Trump’s plans to sharply curb immigration at a time when a robust labor supply is helping prevent significant wage pressures that can worsen inflation. Additionally, he noted Trump’s intention to scale back subsidies to renewable energy, which would raise energy costs.
However, Bob Elliott, a former Bridgewater executive who now runs Unlimited Funds, has a different take. “Tariffs, at their core, are a regressive tax that is inflationary,” Elliott said. “But they’re also a modest support to U.S. economic conditions.”
He argued that tariffs could bring some production back to the U.S. and mildly increase tax revenues. Elliott also noted that Trump’s tax cuts could stimulate economic growth by boosting asset prices.
Yet, while Elliott doesn’t foresee the “mother of all stagflations” that Summers predicts, he doesn’t believe Trump’s policies are suitable for the current economic environment.
“It would have been a more appropriate set of policies when we were dealing with a low growth environment, with concerns about longer-term deflation,” the Wall Street veteran said.
“We’re kind of in the opposite circumstances today, where growth is pretty good and inflation is too elevated. So the policy is just not consistent with the macroeconomic dynamics that are really in play today.”
In this high-stakes economic and business debate, Summers and Elliott highlight the fine line between bold policy moves and economic stability. The next chapter in this story will unfold with the upcoming election and its impact on America’s economic future.
