Former Treasury Secretary Larry Summers on Friday said he hasn’t seen a more inflationary economy policy than that of presumptive presidential candidate Donald Trump in his lifetime, calling it an “irresponsible set of proposals.”
Biggest Supply Shock: Trump’s tariff proposals are the biggest supply shock that will likely push up prices of not just imported goods but all of goods that compete with those imported, Summers said in an interview with Bloomberg.
“Anybody who’s worried about gouging should think that more competition, including from abroad, is a very, very important step,” he said.
Summers noted that Trump’s plans for greater labor restrictions will likely cause wage inflation, and scaling back renewable energy subsidies will increase energy costs. This, the economist said, will significantly increase inflation and inflation expectations, putting more pressure on the Fed to prove its credibility.
“This could easily be a prescription for a 10% mortgage rate,” he said, adding that “this is really dangerous stuff.”
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Misspeak? Regarding reports that Trump discussed replacing income taxes with tariffs in a meeting with Republican lawmakers, Summers said people sometimes misspeak and aren’t serious about what they say.
“That’s probably a feature of candidate Trump,” he said.
Replacing the income tax with revenue from tariffs would be the worst macroeconomic policy proposal in U.S. history, the former Treasury secretary said.
“It, of course, burdens the middle class and the poor who purchase goods, the goods that exist on international markets. So, it’s regressive,” he added.
The economist noted that the 1930 Smoot-Hawley tariffs, which were only 0.6% of GDP, caused enormous damage and worsened the Great Depression. If currently, half of income tax revenues were replaced with tariffs, it would work out to six times Smoot-Hawley levels, he said.
“That’s got the potential to do enormous damage to the competitiveness of every U.S. exporter, to do huge damage to all kinds of workers who use imported goods in what their businesses produce to create a downward spiral,” Summers said.
He added that significantly higher prices for imported goods mean consumers will have less to spend on other items.
Summers also pointed out that higher tariffs will lead to economic warfare as other countries respond in kind.
“This is a prescription for the mother of all stagflations,” he said.
The economist, however, believes that tariffs replacing income taxes could happen if Trump were elected, urging the market not to dismiss this possibility.
“But this is something that I think should be viewed very ominously,” he added.
Nobel laureate and economist Paul Krugman said last week that Trump tariffs may have to be as high as 133% if they were to make up for the loss of revenue from income taxes.
The iShares TIPS Bond ETF TIP, an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday’s session up 0.12% at $106.19, according to Benzinga Pro data.
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