Professor Krugman has Part II of his primer on stagflation, and it ponders the degree to which a stagflation period under Trump will be bad or fucking terrible.
Bad looks like a temporary surge in prices caused by a combination of deportations increasing labor costs; tariffs increasing the price of consumer goods and electrical costs hitting everything all at once. This seems to be combining with a massive boost in AI data centers that has kept overall economic numbers growing, but are likely not being felt by many Americans. For most Americans, prices are rising, everything seems uncertain and they are naturally cutting back on spending.
This should be understood in terms of Keynes' concept of overall demand in an economy. It consists of Consumer Spending; Business Investments (new factories and the like); Government Spending and (Exports minus Imports).
Now, we have good evidence that Consumer Spending is going down because of higher prices caused by Trump's policies - especially deportation and tariffs, but also electricity which is only somewhat his fault at the moment, but will grow as renewable energy projects like the one off Rhode Island are killed by spite. Government Spending is also cratering, except for the narrow band of spending on ICE agents and gulags. Business Investments are slowing because of Trump's crazy on-again-off-again economic policies. That leaves what should be a mild boost from fewer imports, but it's unclear if American exports won't also be hurt by the trade wars Trump is starting.
Basically, we look to be headed towards a real slow down in demand, with the exception of the AI boom, which feels much more like a bubble than an economic paradigm shift that its acolytes foresee.
What's more, the primary supply side boost - tax cuts - seem tailored for the wealthiest Americans who don't spend nearly as much money on goods (demand) as less wealthy Americans do. Additionally, the decimation of food aid and ACA subsidies will pull more money out of working class and poor families that will, in turn, lead to less demand.
When demand collapses, you get a recession. If you get a recession while prices are rising, you get stagflation. We sure seem to be headed towards Bad at the very least.
What does Terrible look like? Terrible is entrenched inflation. That's what we saw in the 1970s, and Krugman's first primer does a good job explaining that. With entrenched inflation, we get a self-reinforcing death spiral of businesses assuming that prices will keep rising, so they keep raising prices. With hyperinflation (WORSE THAT TERRIBLE) you get prices that rise monthly or weekly, even daily. With entrenched inflation, prices rise at 3-12 month intervals, depending on a million variables. A business doesn't want to raise its prices every other month, so it holds off and then raises its prices not to where they need to be for that moment, but to cover losses from the previous month and to anticipate rising prices in next few months.
There are a ton of signs we are entering stagflation, and if the AI and/or Crypto bubbles collapse, then we will tilt into a full blown recession. Trump's policies that are inflationary - tariffs, deportations, killing renewable energy - will come into conflict with the deflationary impact of a recession - lost jobs, lost wages, lost spending power.
The good news - if that's the right term - is that there two of the three primary inflationary drivers are easily reversible: tariffs and deportations. The bad news is that Trump (and Miller) seem unlikely to reverse course. The collapse of the AI bubble would reduce electrical demand somewhat, but the move to more renewables can't be flipping on like a, well, light switch.
If the Trump Slump hits this fall (recessions seem to be fond of starting in the fall), then Trump's authoritarian impulses will grow bigger as his popularity recedes even further. At the same time, unpopular dictators wind up before firing squads.
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