Trump Tariffs and Stagflation: Why TACO is the Least Bad Option

By  Robert Pollin

Robert Pollin is Distinguished University Professor of Economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst.


Is stagflation—the toxic blend of high unemployment and high inflation—taking hold now in the U.S. economy? The most recent evidence mostly signals “yes.” If stagflation is on the way, we can mainly thank President Donald Trump’s imposition of unprecedented tariffs—that is, taxes on the products we import from more than 90 countries. The latest data from the Bureau of Labor Statistics (BLS) reported that only 106,000 jobs had been added to the U.S. labor market between May and July.

This represents a nearly 80% drop in job growth relative to the 474,000 jobs created over the same three-month period last year. Meanwhile, wholesale prices spiked by 0.9% in July, the largest monthly wholesale inflation increase since May 2022. It was in response to the dismal May-July job report that Trump fired BLS Commissioner Erika McEntarfer, after claiming, without evidence, that she had “rigged” the numbers to make him look bad.  

How could Trump’s tariff polices produce stagflation? According to the Yale Budget Lab, as of July 30, U.S. consumers are facing an average import tax/tariff rate of 17.5%, the highest since 1934. At the same time, imports account for 14%of overall purchases in the U.S. economy. Therefore, if the average 17.5% tariff rate were simply passed on, dollar for dollar, to U.S. consumers, this alone would raise average prices in the United States by 2.5% (that’s 17.5% x 0.14 = 2.5%). But price increases resulting from the tariffs don’t need to be confined to imported products only. This is because higher prices for imports create cover for businesses to raise prices on domestically produced goods and services as well, enabling them to boost their profit margins.

Of course, nobody forces businesses that sell imported products to raise their prices. The alternative is for them to pay the tariffs to the U.S. Treasury and then just eat their average 17.5% cost increases by cutting their profits. Obviously, businesses would much rather raise prices before letting their profit margins shrivel.    

Why should employment conditions also get worse in this situation? This is because businesses worry that the tariffs will cut into their profits. They therefore hold off on plans to expand their operations and hire new people.  

To date, the Trump program to combat stagflation has two prongs. First, cook the government data to make reality disappear. Second, lambast Jerome Powell, the chair of the Federal Reserve (which is the U.S. central bank, and commonly referred to as “the Fed”), into cutting interest rates. Trump regularly ridicules Powell as a “stiff,” “numbskull,” or “moron” for not having cut interest rates so far.  

Most recently, Trump also began attacking and demanding the resignation of Lisa Cook, the first Black woman to serve as a member of the Fed Board of Governors and a Biden appointee.  Trump and company claim that Cook committed mortgage fraud in 2021, before she joined the Fed. Cook vehemently denies the charges and insists that she will not resign. Trump’s real purpose here is to replace independent voices at the Fed with loyalists who will toe his policy line, whatever that line happens to be.  

In fact, by maintaining relatively high interest rates to fight inflation, Powell, Cook, and the other Fed policymakers are only following the standard Fed playbook. The aim with high interest rates is to slow the economy and increase unemployment. The higher unemployment rate then weakens workers’ bargaining power, which lowers labor costs for businesses, enabling businesses to maintain their profit margins without raising prices. Thus, it is baked into the standard Fed inflation control program that working people are the designated sacrificial lambs, even if their wage increases have not caused the inflation in the first place.

Trump’s tantrums aside, there are indeed major problems with this standard Fed approach. To begin with, workers gaining excessive bargaining power has never been the driver of stagflation in the United States. In the 1970s and early 1980s, stagflation resulted because global crude oil prices rose roughly tenfold between 1973 and 1980, from $3.56 to $39.50 a barrel. The only other bout of stagflation was after the COVID lockdown was lifted. In this case, stagflation resulted because the production of major items, like new cars, had been cut during the lockdown conditions. Demand for cars then returned quickly when lockdown conditions lifted, but with new cars in short supply, used car prices roseby 40%.  

From a longer-term perspective, we also have to remember how the U.S. working class has fared, on average, under the 50 years of neoliberalism that preceded Trump. The most central facts are that average wages for nonsupervisory workers are basically where they were 50 years ago, at roughly $50,000 per year (in 2024 dollars), even while average worker productivity has increased by 150%. Meanwhile, over this same 50-year period, average CEO compensation has risen nearly tenfold, from $1.5 million to almost $15 million.   

In fact, in a major August 22 speech, Powell signaled that, at its next official meeting in September, the Fed is likely to modestly reduce the main interest rate that it controls (the federal funds rate), due to mounting evidence of worsening employment conditions. As Powell knows well, this will accomplish nothing to reduce the inflationary pressures created by Trump’s tariffs. In other words, through deploying the Fed’s main policy tool of manipulating interest rates, you can either reduce inflation through raising unemployment or reduce unemployment at the cost of higher inflation. What you can’t do is combat both sides of stagflation—inflation and unemployment—at the same time.    

The first obvious step right now for fighting stagflation is for Trump to dump his tariff policies. We shouldn’t rule that option out. Trump didn’t earn the nickname TACO—“Trump Always Chickens Out”—for nothing. But even if Trump does chicken out on the tariffs, we will still be stuck at square one in terms of advancing inflation control policies that also enable U.S. workers to get the long-overdue raises they deserve. 
     
Published in: Left Hook Economics