When Donald J. Trump took office in 2017, home prices had risen about 5% over the previous four years. If he wins the 2024 presidential election, he would take office at a time when home prices have risen 20% and are continuing to rise.
This is a crucially different economic backdrop for policies like tariffs and tax cuts that Republican candidates have made central to their campaigns.
While Trump has consistently blamed the Biden administration for the recent price hikes, inflation has been a global phenomenon since the coronavirus pandemic began in 2020. Supply chain issues, shifting consumer spending patterns and other quirks related to pandemic lockdowns and their aftermath collided with demand from stimulus checks, causing costs to soar.
The country’s economic situation has changed dramatically after several years of unusually rapid inflation. Companies are accustomed to price adjustments, and consumers are more accustomed to those changes than they were before the pandemic, when prices were at their lowest in decades. Moreover, the Federal Reserve raised interest rates to 5.3% in an attempt to dampen demand and get the situation under control.
This combination of uneasy inflation expectations and rising interest rates could make many of the ideas Trump talks about on the campaign trail riskier and more costly than they may have been in the past, especially at a time when the economy is running at full capacity and unemployment is very low.
Trump has proposed tax cuts that could boost the economy and widen the budget deficit, spurring inflation and increasing the national debt at a time when government borrowing costs are high. He has spoken of mass deportations at a time when economists are warning that the loss of many would-be workers could create labor shortages and drive up prices. Trump has pledged to raise tariffs across the board, and significantly more on China in particular, a measure that could send import prices soaring.
And Trump has suggested that interest rates would be much lower during his term. That would be hard for him to achieve because the Fed sets its own rates and is insulated from the White House. But if Trump were to erode the Fed’s independence and try and find a way to lower borrowing costs, there would be a risk that growth and inflation would reignite.
Trump’s policies are an escalation of what he has tried before: tax cuts that ballooned the national debt, tariffs, immigration restrictions and fierce rhetoric about the Fed needing to lower interest rates were all pillars of his first term. But given how the economy has evolved since then, it may be a dangerous time to repeat those policies in a more extreme form.
“It’s one thing to implement expansionary fiscal policy in a world where inflation is suboptimal and unemployment is below full employment,” said Mark Zandi, chief economist at Moody’s Analytics and an adviser to the Biden administration. But this is a “very different economic backdrop,” Zandi said.
Both Biden and Trump would likely continue to run deficits if elected, but some economic analysis suggests that Trump’s policy proposals so far would significantly increase the deficit. Researchers at investment bank TD Cowen suggested the choice between the candidates is between “bigger deficits” (Biden) and “much bigger deficits” (Trump).
There are several reasons why government spending is likely to continue to rise under either candidate: Programs like Medicare and Social Security are becoming increasingly expensive as the population ages, and interest costs are high. Even Biden has signaled he would extend personal tax cuts for people making less than $400,000 a year, though he has also proposed raising taxes on higher-income households and corporations.
But the magnitudes are very different: Moody’s analysis finds that if Biden is reelected and Congress is divided, the deficit would likely stabilize at just over 5% of annual GDP over the next few years, rising to 6.4% if Trump wins and the Republicans take a landslide victory, and to a more modest 6% if Trump wins and Congress is divided.
Moody’s Zandi said that as long as the deficit remains stable, the economy is likely to remain on a relatively stable trajectory, but a widening deficit could spark renewed economic activity.
And each year’s deficit adds to the nation’s debt mountain. Normally, good economic times are seen as an opportunity to reduce the deficit to put the nation’s debt on a sustainable path.
“When thinking about fiscal policy, I think the minimum principle is to first do no harm,” said Jason Furman, a Harvard economist who served as an economic adviser to the Obama administration. “Absent some one-time emergency spending, there’s really no excuse at this point for taking steps that would increase the deficit.”
This underscores an important point: This is not the economy either candidate originally inherited.
In 2017, Trump took on an economy with a still-recovering labor market and low inflation. In early 2021, Biden presided over an economy in the middle of a pandemic. Whoever wins the 2024 election will face a very different situation: an economy operating at or near capacity, with the Fed raising interest rates to tame inflation and slow the economy.
While the job market has cooled somewhat in recent months, the unemployment rate has remained below 4% since the second half of 2021, the longest record low unemployment rate since the 1960s, and wage growth has been strong. Consumer spending, while cooling, is still rising slowly and steadily.
And inflation, as defined by the personal consumption expenditures index, was 2.6% in May, less than half its 2022 peak but still above the Fed’s 2% target. Inflation is falling, but it’s falling at a faster pace than normal and projections suggest it may still be a bit higher by the time the next president takes office.
Economists say that raises concerns about Trump’s policies.
“The economy is at greater risk of falling into an inflationary spiral now than it was in 2018 when Trump launched his trade war,” said Michael Strain, director of economic and policy studies at the conservative American Enterprise Institute. “We should be more cautious about policies that could let the inflation genie out of the bottle.”
Strain said tariffs could push up prices, but he doesn’t think they will cause a series of price hikes, and deporting immigrants could create labor shortages in some industries, which could spark inflation, though that would depend on how the policies are implemented.
Trump has pledged to increase the use of tariffs by imposing import taxes on nearly all trading partners, including a 60% tariff on all Chinese products. Studies have concluded that previous tariffs have increased costs for importers and consumers, and a recent analysis by the Peterson Institute for International Economics found that the new tariffs are likely to raise the price levels of imported goods, potentially costing a typical middle-income household about $1,700 a year.
On taxes, Trump has promised to permanently extend personal tax cuts that expire next year and has also talked about a new tax cut for tipped workers.
That could put more money in consumers’ pockets than expected, stimulating economic growth. And in a world of rising interest rates, the impact on the deficit could snowball. Trump’s original tax cuts were funded with borrowing, and analysts had expected extensions and new tax cuts to follow suit.
The Congressional Budget Office already estimates that annual interest payments on the government’s debt could rise to $1.7 trillion by 2034, nearly double current levels. The budget office estimates that extending expiring individual income tax provisions of the 2017 Tax Act could expand the deficit by $3.3 trillion between 2025 and 2034, adding an additional $467 billion in increased interest costs.
Looking at Trump’s policies as a whole, “there is no more inflationary policy,” said Kimberly Clausing, an adjunct senior fellow at the Peterson Institute and a former senior Treasury official in the Biden administration.
One question is whether the possibility of inflationary policies under Trump will prompt the Fed to raise interest rates, or at least block the cuts in borrowing costs that officials expect to make later this year and again in 2025.
A Trump victory “won’t have much of an impact on interest rates in the short term,” said Thierry Wisman, interest rate strategist at Macquarie Group Inc., adding that the Fed would probably cut rates this year as expected.
But it would change “how they view where the long-term trajectory is going,” and perhaps it would push them to a higher endpoint than they otherwise might, he said.
Anna Swanson Contributed report.