"Tax Cuts Make Government Deficit Inevitable"
"Tariff Hikes Trigger Stagflation"
As the U.S. Republican Party continues to blame the Biden administration for inflation and takes a confrontational stance, economists have pointed out that former President Donald Trump's pledges could further exacerbate inflation, Bloomberg reported on the 17th (local time).
Julia Coronado, founder of Macro Policy Perspectives and a former economist at the U.S. Federal Reserve (Fed), said, "On the surface, (former President Trump's) stated policies would lead to a significant inflation surge."
Former President Trump has expressed a desire to extend the temporary individual income tax cuts implemented during his 2017 term, and to reduce the corporate tax rate from the current 21% to 15%. Additionally, the Republican Party is pushing for tax exemption on tips, which according to the Congressional Budget Office would increase the deficit by up to $250 billion (approximately 345 trillion won) over ten years. Bloomberg pointed out that, all other conditions being equal, a government deficit is inevitable.
Jeffrey Sherman, Co-Chief Investment Officer at DoubleLine Capital, said, "Tax cuts do not pay for themselves," adding, "The worst outcome for the market is if the Republicans sweep both the White House and Congress."
Former President Trump is also pushing for tariff increases. Previously, he proposed a 10% universal tariff on all imports and a 60% tariff on Chinese goods. Unless sellers, importers, and retailers reduce their profit margins, tariff hikes lead to sharp increases in final consumer prices. According to the Peterson Institute for International Economics, imposing a 60% tariff on Chinese imports would add an additional $1,700 (approximately 2.35 million won) annually to the average American middle-class household's expenses.
Mark Zandi, Chief Economist at Moody's Analytics, said, "This is a type of policy that leads to stagflation (rising prices amid economic recession)," adding, "Economists dislike tariffs. Tariffs harm both inflation and growth simultaneously."
While former President Trump has not specifically pledged to devalue the dollar, he has stated that the dollar's value is higher than that of China and Japan, giving those countries an advantage in trade. Additionally, J.D. Vance, the vice-presidential candidate, has publicly called for a weaker dollar. A stronger dollar lowers import costs and helps ease inflation, whereas a weaker dollar increases upward price pressures.
Former President Trump has also pledged to deport illegal immigrants. Economists believe that immigration increases the labor force, which alleviates wage inflation pressures. Economist Zandi pointed out, "This increases costs and prices and could even cause labor shortages in sectors such as agriculture, construction, manufacturing, and transportation." However, Bloomberg noted that a reduction in illegal immigrants could ease pressures in sectors with supply shortages, such as housing, where costs have risen.
Furthermore, former President Trump has claimed that inflation was caused by rising energy prices and has pledged to increase the use of fossil fuel resources to lower energy costs. However, Bloomberg pointed out that the Fed considers the core Consumer Price Index (CPI), which excludes energy and food, as a key indicator when deciding interest rates. It also added that most recent inflation has occurred in the services sector rather than in energy.
Bloomberg also noted that the implementation of many of former President Trump's pledges depends on the composition of Congress. Some policies are declarative and ambiguous in nature, so significant changes could occur if financial markets react negatively.
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