In a letter obtained by Axios, sixteen Nobel Prize-winning economists have warned that the re-election of Donald Trump could reignite inflation due to his “fiscally irresponsible budgets.” The economists expressed deep concerns about the potential risks to the US economy should Trump win the November election.
The Nobel laureates emphasised that although their views on specific economic policies vary, they unanimously agree that President Joe Biden’s economic agenda is “vastly superior to Donald Trump’s” plans. Despite inflation cooling since April, it remains above the US Federal Reserve’s 2% target. High living costs and mortgage rates are critical issues for voters as the November elections approach.
The letter, signed by prominent economists including Joseph Stiglitz and Sir Angus Deaton, highlighted nonpartisan research from organisations like Evercore, Allianz, and Oxford Economics. These studies forecast that Trump’s proposed agenda would increase inflation, negatively impact the country’s global economic standing, and destabilise the domestic economy.
Mismatch Between Public Sentiment and Economic Data
Polls consistently show that many people blame President Biden for the current state of the economy, particularly concerning job and living costs. However, Biden’s top advisors urge voters to consider economic fundamentals such as a resilient job market and declining inflation. The White House believes that voters may have a more positive view of the economy than they admit, citing steady US consumer health and record-high new business applications. According to FitchRatings, annualised consumer spending growth in Q1 was 2.5%, and this momentum continued in Q2 as 2023 tax cuts increased household disposable income. Although excess savings are fading, they may continue to support consumer spending for the remainder of the year.
Biden seeks to increase taxes on corporations and has kept his promise not to raise taxes on households earning under $400,000 annually despite elevated prices. The Biden administration has been on the defensive about the economy since the Federal Reserve’s historic monetary tightening campaign, which led to record-high prices in 2022. However, the administration plans to adopt an offensive strategy by highlighting Trump’s economic proposals. These include a 10% tariff on all imports, a 60% tariff on Chinese imports, reducing corporate taxes, and eliminating taxes on tipped wages.
High Import Tariffs Could Burden Americans
A recent study by the Peterson Institute for International Economics indicates that Trump’s plans to increase import tariffs could reduce after-tax incomes by 3.5% for those in the bottom half of the income distribution. The research further suggests that Trump’s new trade war could cost middle-class families at least $1,700 annually. According to the study, Trump’s proposed new tariffs could cost consumers about $500 billion annually, nearly five times the cost of the US-China trade war he initiated in 2018.
The former president aims to reduce US reliance on income taxes and compensate for the shortfall by increasing import tariffs. While Trump has argued that foreigners bear the impact of tariffs, economists acknowledge that tariffs affect domestic buyers of imported products. A tariff subsidises producers by raising domestic prices for buyers, impacting both sides of the market. However, tariffs are inefficient revenue generators as they often result in losses to domestic buyers that exceed the benefits to producers and overall tariff revenues. While Trump has reiterated that tariffs would benefit the working class, research suggests these policies could negatively impact US workers, companies, and international relations.
Comparing Debt Increases Under Trump and Biden
According to a recent analysis by the Committee for a Responsible Federal Budget, the national debt increased significantly more during Trump’s term in office compared to the debt approved by Biden in his current term. During his tenure, Trump approved $8.8 trillion of gross new ten-year debt, with $3.2 trillion attributed to bipartisan Covid-19 relief measures and executive actions. His executive orders in 2018 and 2019 to increase tariffs are estimated to have reduced the deficit by $443 billion.
In contrast, President Biden has approved $6.2 trillion of gross new ten-year debt in his current term, with $2.1 trillion allocated for the American Rescue Plan. Executive orders like the Inflation Reduction Act and the Fiscal Responsibility Act, along with other deficit-reduction measures, led to a debt reduction of $1.9 trillion. While Trump approved $5.9 trillion of net spending increases and $2.5 trillion of net tax cuts, the Biden administration facilitated $4.3 trillion in net spending increases without any net tax changes. Notably, Trump’s executive actions contributed under $20 billion to ten-year debt on net, whereas President Biden’s actions have added $1.2 trillion to ten-year debt.
Long-term Economic Implications
The next US president will inherit a national debt of $34.83 trillion, expected to surpass $50 trillion by 2034. Several other economic risks loom, including forecasts that Social Security benefits may drop significantly by 2034 due to a rapidly depleting trust fund.
The letter from the Nobel laureates, led by American economist Joseph Stiglitz, highlighted the strong labour market recovery during Biden’s presidency. They believe that another term for Biden would enable further support for an “inclusive US economic recovery.” The Nobel Prize winners assert that the upcoming election results will have long-term economic repercussions and that Trump’s re-election would harm the US’s financial standing.
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