Stagflation would make Americans feel poorer by pushing up prices

Tariffs could be a trigger, making imported products more expensive and hurting businesses that manufacture overseas

"I want tariffs," President Donald Trump reportedly told his advisers recently — he also reportedly rejected a Chinese offer to cut steel production as a way of avoiding tariffs

If President Donald Trump is able to enact the trade policy he wants, the US economy could be blasted to a very uncomfortable part of its past — a period during the 1970s when it suffered from something called stagflation.

Stagflation is a cocktail of persistently low economic growth, high unemployment, and inflation. For average Americans, that means prices are rising but a weak economy means incomes can't keep up.

Wall Street has been thinking about this since Trump was elected.

"The classic stagflationary episode occurred between 1967/68 and the early 1980s," Victor Shvets, a strategist at Macquarie, wrote in a note to clients last year. "The US economy had effectively moved into stagflation around five years before global oil prices were raised in 1973. It was a period of persistently high and volatile inflation, high unemployment and volatile industrial production."

You see how this could be a problem.

'Tariffs — I want tariffs'

You may have caught a report this week by the news website Axios describing the president throwing a mild tantrum about trade policy while chatting with advisers in the Oval Office a few weeks ago. It appears that the National Economic Council director, Gary Cohn; the US trade representative, Robert Lighthizer; the senior trade adviser Peter Navarro; the chief strategist at the time, Steve Bannon; and the White House chief of staff, Gen. John Kelly, were all there.

It was Kelly's first week as chief of staff.

"Tariffs. I want tariffs," Trump exclaimed to his advisers, according to Axios' Jonathan Swan.

As unsettling as it might be to imagine him calling for this while stomping his foot like Veruca Salt, it's worse to think about the real consequences of what Trump is asking for.



Tariffs invariably push prices higher. Tariffs on steel, for example — the import from China that Trump seems obsessed about — would affect the price of anything made of imported steel.

Wages, however, can stay exactly where they are. That's where stagflation comes in.

The good news is that directives on steel and aluminum tariffs that were supposed to be coming down the pipeline have been delayed time and time again.

But say Trump gets what he wants — tariffs on goods coming from China. Say he manages to inflict the damage he has, as yet, been unable to inflict because of the complex nature of our globalized economy.

That will introduce inflation to a slowly growing economy already suffering from low wage growth and underemployment.

This is not the inflation you're looking for

Now, it's true that inflation has been almost nonexistent across the developed world since the financial crisis even though cheap money has been abundant. The US Federal Reserve has kept interest rates near zero, and yet inflation constantly comes in below the 2% level that the Fed says would warrant higher rates.

When near-zero interest rates were introduced, Wall Street's wizards feared a snap back with inflation roaring in sharply and suddenly to our surprise and horror.

But that never happened. We live in a deflationary world where demand is scarce and we're overloaded with supply. So the stagflation Trump could produce now would be like what happened in the US in the 1970s but with a postrecession twist.

Donald Trump in his 30s. Maybe the prospect of stagflation makes him feel young again? Instagram/RealDonaldTrump

Last year, Citi's chief economist, Willem Buiter, suggested that throwing up tariffs could lead to retaliation from other countries (a trade war) and “could easily trigger a global recession.”

Ironically, we may get the inflation central banks around the world have been trying to stoke for almost a decade — it would just be in the wrong places and for the wrong reasons.

'That Which is Seen, and That Which is Not Seen'

The nineteenth-century French economist Frédéric Bastiat said the difference between a good economist and a bad economist was that a bad economist "takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee."

So the question is, Can the Trump administration foresee this? It’s been warned.

Wall Street analysts played around with a bunch of reasons inflation could be coming when Trump took office. Some said it would be from tax cuts (unlikely to pass this year), others said it would be from infrastructure spending (also unlikely), and then there were those like Buiter who saw a trade war as the biggest threat. It is, after all, one of the few areas where Trump has threatened unilateral action.

And it seems that some around Trump can see how these policies would affect the economy. They've been stalling Trump's efforts to do destabilizing things like scrap the North American Free Trade Agreement and place duties on steel importers.

These people are sitting in the same meetings with Trump and other advocates of protectionist policies, like trade adviser Peter Navarro.

Those efforts have garnered mixed results. The Financial Times reports that Trump rejected China's offer to cut steel production by 150 million tonnes by 2022. He wanted to be more aggressive, and as a result talks between China and the Treasury Department all but collapsed around the same time.

This is to say that the problem isn't that Trump and Navarro don't hear or know what could happen to prices if we start a trade war — it seems they don't care. Every now and then that flippancy becomes very public. I'll give you an example.

Back in January, Navarro was on CNBC advocating a tax-policy proposal. The problem with it, though, as host Melissa Lee pointed out, was that it could cause major pain for retailers resulting in job losses and price hikes.

Navarro called Lee's observation, for which she pulled research that Citigroup wrote for its clients, "fake news."

"Yeah, well, the Dow just hit 20,000 — how you like them apples?" he said. "There are winners and losers."

The point is that Trump and his ilk aren't afraid of pushing for bad policies as long as they suit ideologically. (Quick recap: The ideology is that trade and overseas manufacturing is bad for American workers who've lost jobs as other countries — namely China — have become exporters.)

Worse than the bad economist who cannot see danger coming down the line, Trump is actually pushing for the danger. He's calling on it from the past.