Is Trump taking America back to high inflation?

February 22, 2025

Is Trump taking America back to inflation, unemployment, and stagnation?

We love the Donald. He's the essence of the dark side of the American Spirit yet our spirit nonetheless. For the English and most Western Europeans, the Donald is the incarnation of the America First revolutionary and greedy spirit. For liberals, moderates, and true republicans (believers in the republican form of government), the Donald is a despicable king wannabe. For us, he's an useful idiot running a trial and error experiment that will help all of us one way or another. The Donald is a once in a hundred years, 78-year old cellular network of contradictions, risks, and potential rewards. For good or bad, the Donald will die relatively soon, most likely of a massive heart attack. 

In the meantime, President Donald Trump's economic policies continue sparking debate regarding their potential to lead the United States toward high inflation, elevated unemployment, increased deficits, soaring national debt, and economic stagnation. Key aspects of his policy agenda—including expansive tax cuts, aggressive trade tariffs, deregulation, and stringent immigration measures—may collectively contribute to these economic challenges.

Tax Cuts and Fiscal Deficits

A cornerstone of Trump's economic strategy involves significant tax reductions, notably the extension and expansion of the 2017 Tax Cuts and Jobs Act (TCJA). While aimed at stimulating economic growth, these tax cuts have substantially decreased federal revenue. The Congressional Budget Office (CBO) estimated in May 2024 that extending the expiring provisions of the TCJA would add $4.6 trillion to the national deficit over the subsequent decade. This surge in the deficit exacerbates the national debt, which reached $35 trillion in 2024, an increase of over $25 trillion in the past 18 years. The outsized deficits have brought U.S. government debt to $35 trillion, an increase of over $25 trillion over the past 18 years. The Government Accountability Office (GAO) has repeatedly advised Congress that we are on a completely unsustainable fiscal path. 

Inflationary Pressures

The combination of expansive tax cuts and increased federal spending can overheat the economy, leading to inflation. In June 2024, sixteen Nobel Prize-winning economists warned that Trump's fiscal and trade policies, coupled with efforts to limit the Federal Reserve's independence, could reignite an inflation surge in the United States. Most economists surveyed by The Wall Street Journal in July 2024 found that inflation would be worse under Trump compared to his predecessor, due in part to tariffs, a crackdown on illegal immigration, and larger federal budget deficits. 

Trade Policies and Economic Stagnation

Trump's trade policies, characterized by high tariffs and protectionist measures, aim to reduce trade deficits and protect domestic industries. However, these actions often lead to retaliatory tariffs from trade partners, disrupting global supply chains and increasing costs for American consumers and businesses. Such trade tensions can stifle economic growth and lead to stagnation. The Peterson Institute predicts that Trump's policies could significantly reduce GDP and spike inflation. 

Immigration Policies and Labor Markets

Strict immigration policies, including mass deportations and reduced inflows of foreign workers, can lead to labor shortages in key industries such as agriculture, construction, and technology. These shortages can drive up labor costs, contributing to inflation, and potentially lead to decreased productivity and higher unemployment rates as businesses struggle to fill essential positions. Deporting undocumented immigrants might negatively impact the job market and inflation. 

Erosion of Institutional Independence

Some say that Trump is a king wannabe who wants to control everything. Trump has expressed intent to influence the Federal Reserve, which some economists fear will undermine the central bank's independence that has been crucial for maintaining monetary policy stability. In April 2024, The Wall Street Journal reported that Trump allies plan on greatly limiting the independence of the Federal Reserve.Political interference in interest rate decisions can lead to suboptimal economic outcomes, including increased inflation and financial market instability. 

Trump is the king of trial and error. If his experiments work, the rich will get richer. If his policies fail, everyone will get poorer. There is a moderate risk of Trump failing and causing economic stagnation beginning later this year or early next. 

What is economic stagnation?

Economic stagnation is a prolonged period of slow or no economic growth, typically characterized by low GDP growth, high unemployment, stagnant wages, and declining business investment. It often occurs when an economy fails to expand at its potential rate, leading to reduced consumer demand, weaker corporate earnings, and limited job creation. If prolonged, economic stagnation can lead to a decline in a country's global economic standing and a lower standard of living for its population. 

Typical causes of economic stagnation include high inflation or deflation (rising prices reduce purchasing power, while deflation discourages investment and spending); extreme government policies (from overregulation, high taxes, and trade restrictions on one side to poorly managed fiscal policies on the other); trade disruptions (protectionist policies, tariffs, or trade wars can limit economic activity by reducing exports and increasing costs; technological slowdown (a lack of innovation or failure to adopt new technologies can lead to lower productivity growth); financial crises (a weak banking system, high debt levels, or a stock market crash can lead to prolonged stagnation).

Historical Examples of Economic Stagnation:

• Japan’s "Lost Decades" (1990s–present) – A period of slow economic growth, deflation, and weak consumer demand due to high debt and an aging population.
• The Great Depression (1929–1939) – A severe economic downturn in the U.S. with high unemployment and prolonged stagnation.
• 1970s Stagflation in the U.S. – A combination of slow economic growth, high unemployment, and high inflation.

Typical Solutions to Economic Stagnation:

• Monetary Policy Adjustments – Lowering interest rates or increasing money supply to stimulate investment and consumption.
• Fiscal Stimulus – Government spending on infrastructure, tax cuts, or direct payments to boost demand.
• Trade and Investment Incentives – Reducing tariffs and encouraging business expansion through tax breaks and innovation grants.
• Labor Market Reforms – Policies to improve workforce skills, retraining programs, and support for small businesses.

Will Trump lead us into economic stagnation?

We don't think so, but it's always a possibility. The king of trial and error may get it right or may get it wrong. While the objectives of Trump's economic policies are to stimulate growth and protect domestic interests (America First), the policies may backfire (America Trumped). Trump envisions a growing economy without inflation, which is very hard to achieve. Trump's tariffs, deportations, and protectionist spending priorities are forecasted to bring heightened inflation. Other potential adverse consequences of Trump's policies include increased unemployment, escalating deficits and national debt, and economic stagnation. The interplay of expansive fiscal policies, protectionist trade measures, restrictive immigration actions, and challenges to institutional independence presents significant risks to the long-term stability and prosperity of the U.S. economy. 

Now you know it.

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