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Opinion/Letter: Can Trump rid the risk of deflation?

 

August 21, 2016

Henri Erti

Against many conventional economic theories and commentators, Donald Trump’s trade policies may eradicate global deflation pressures.

Macroeconomic models function relatively poorly when the economy per se is in a quagmire. Therefore even the most ardent freedom fighters for liberalized trade — including myself — are forced to reconsider the functionality of existing economic models. The inconvenient proposition against conventional trade economics is that Trump’s protectionist trade policy might push us out from pernicious deflation risk.

At first, deflation — defined as a general decrease of prices — sounds appealing. After all, who would complain about paying less for a full shopping cart? That is, until deficient demand for goods and services causes businesses to cut back on production and workers. Due to consumers withholding further spending in hopes of even lower prices, a negative feedback loop exacerbates declining demand, business cutbacks and falling prices.

Donald Trump’s protectionist trade policy can in theory bump up general price levels via trade tariffs and import quotas. For example, a 35 percent tariff on Mexican manufacturing imports could push American consumers toward pricier domestic substitutes, raising the general price level while stimulating output and domestic employment.

Since unemployment rate is currently slightly below the natural rate of unemployment before inflation kicks in, Trump might be hitting three birds with one stone:

» Appease angry voters in the crippling manufacturing industry.

» Stall deflation as other countries respond in kind with their own trade tariffs.

» Grow the economy.

Instead of endorsing such trade mercantilism, left-leaning economists point out that U.S economy can solve looming deflation threat through higher government spending or simply by raising the minimum wage. Both proposals are faulty. Rolling back a higher minimum wage after the economy has reached a stable equilibrium would be political suicide for the Democratic Party, whereas sustainable expansionary fiscal policy requires structural reforms, also a formidable political initiative for liberals.

Can it be that behind Trump’s soundbites, there is an actual comprehensive analysis?

Be that as it may, one aspect is crystal clear: Had someone else proposed this idea — for example, Hillary Clinton — the general reception would have been far less controversial.