More than 30 years ago, economists Rudiger Dornbusch (one of my mentors) and Sebastian Edwards wrote a classic paper on what they called “macroeconomic populism.” Their motivating example was the emergence of inflation under left-wing governments in Latin America, but it was clear that the important problem was not left-wing governance itself. Rather, it was about what happens when governments engage in magical thinking. Indeed, even back then, it could have included the experience of the military dictatorship that ruled Argentina from 1976 to 1983. This military dictatorship killed or “disappeared” thousands of leftists, but it also promoted irresponsible economic policies that caused a balance of payments crisis. Soaring inflation.
Modern-day examples of this syndrome include left-wing governments like Venezuela, but also right-wing nationalist governments like Turkish President Recep Tayyip Erdoğan, who claimed they could fight inflation by cutting interest rates.
Will the US be next?
I wish people would stop calling Donald Trump a populist. After all, he's never shown any desire to help working Americans, and his economic policies haven't really helped — especially his 2017 tax cuts for the wealthy. It was a blessing. But his actions during the COVID-19 pandemic show that he is just as addicted to magical thinking and reality denial as petty tycoons and dictators, so that policy is It is very likely that he will lead the kind of problems that arise when based on something like this. Bogus economics.
Now, what concerns me most about Trump's possible return to power is not his destructive economic policies. The possibility of retaliation against his political opponents, massive detention camps for illegal immigrants, etc. loom much larger in my mind. Still, even as Republicans blame inflation on President Biden's watch, Trump's advisers are proposing policies that could be far more inflationary than anything that has occurred before. It seems worth noting that it has surfaced.
It's true that inflation spiked in 2021 and 2022 and then subsided, and there is active debate about how much of a role Biden's economic policies played. I'm skeptical, especially since the U.S. inflation rate has been about the same as that of other developed countries since the coronavirus pandemic began. But what's notable 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 raising interest rates would trigger a politically catastrophic recession, but so far that hasn't happened. But Biden and others did not pressure the Fed to postpone. They respected the Fed's independence and let it do what they deemed necessary to control inflation.
Does anyone imagine that Mr. Trump, who argued in 2019 that the Fed should cut interest rates below zero, would have exercised comparable restraint?
As many observers have noted, some of President Trump's policy proposals are certain to increase inflation. The immigration crackdown would undermine one of the key factors that has enabled the United States to achieve both strong economic growth and low inflation. A flurry of new tariff proposals will raise consumer prices. And unless the U.S. trade deficit is significantly reduced, President Trump is likely to raise tariffs well beyond the 10% he has offered so far, which is unlikely to happen.
But what is really concerning are the signs that a future Trump administration will manipulate monetary policy in pursuit of short-term political advantage, justifying its actions with bogus economic principles.
The Federal Reserve's quasi-independent status is not due to some sacred constitutional principle, but in fact because countries recognize the importance of limiting partisan influence over interest rates and money creation. This is because there is. But in recent weeks, there have been reports that President Trump's advisers want to strip much of the Fed's independence, perhaps to boost the economy and stock market the way Trump wants in 2019. Dew.
There are also reports that Trump's aides, obsessed with the trade deficit, want to devalue the dollar, which would certainly help exports, but would also obviously lead to inflation, raising import prices. It would overheat the already hot US economy. (In fact, our economic strength is probably the main reason the dollar is rising.)
And while talking about a weaker dollar, President Trump's advisers are reportedly talking about punishing other countries that reduce their use of the dollar, which seems contradictory, and even the U.S. It appears to involve a delusional view of how much economic power one has.
The details of these bad ideas are probably less important than the mindset they reveal: a mindset that rejects the hard-learned lessons of the past in favor of economic illusions.
And how will Trump react if things go wrong? Remember, he suggested considering fighting the coronavirus by injecting disinfectants. For example, why would we expect him not to engage in magical thinking when dealing with a new surge in inflation?
Again, my biggest concern about what will happen if Trump returns to power is not macroeconomic policy. But it's certainly worrying.
