Trump tax proposals would spark "mother of all stagflations," warns Larry Summers

Former Treasury Secretary Lawrence Summers blasted policy ideas floated by former President Donald Trump as immensely damaging to both the US and the global economy.

“This is a prescription for the mother of all stagflations,” Summers said on Bloomberg Television’s Wall Street Week with David Westin Friday, with regard to replacing a major amount of income-tax revenue with tariffs. It would also create “worldwide economic warfare,” he said.

Summers was speaking a day after Trump presented the idea of using tariff hikes as a way to pay for some income tax cuts in a meeting with House Republicans. Trump has also proposed a minimum 10% universal import levy and a punitive rate for China.

A shift to relying on tariffs for revenue would push up not just the cost of imports, but those of goods and services that compete with those imports, Summers said. Consumers would have less to spend on everything else, creating a “downward spiral” in the economy, he said.

“I don’t think there’s been a more inflationary presidential economic policy platform in my lifetime,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “Perhaps George McGovern in 1972 in some ways would be a comparison,” he said, referring to the Democratic nominee who lost in that contest.

Campaign Response

Asked about Summers’s criticisms, Karoline Leavitt, a Trump campaign spokesperson, said, “President Trump’s first-term pro-growth economic policies created record-low mortgage, interest and unemployment rates and made inflation virtually non-existent.”

“Americans can expect President Trump’s second-term economic agenda will have the same impact and end Joe Biden’s inflation crisis that continues to rob working families of thousands of dollars every month,” Leavitt said.

Summers, a Democrat, also called on Republican-leaning business leaders and economists to address the consequences of Trump’s economic-policy ideas — while highlighting how he himself has been willing to call out Democratic President Joe Biden’s policies. Summers in March 2021 slammed Biden’s Covid stimulus package as excessive and inflationary.

The former Treasury chief indicated that it’s not entirely clear what Trump’s true policy intentions are, saying that those running for political office are sometimes “not serious about the things they say” and “that’s probably a feature of candidate Trump.”

‘Dangerous Stuff’

But a policy platform that included advocating a cheaper dollar — something that would help give US exports a cost advantage — and pressuring the Federal Reserve into lowering interest rates alongside trade protectionism would amount to an “irresponsible set of proposals,” Summers said.

He also alluded to Trump’s anti-immigration stance, referring to “much greater restrictions on the supply of labor” that would lead to “more wage inflation pressures.” Scaling back Biden’s subsidies for renewable energy would also push up energy costs, Summers said.

The Fed, in the face of any political pressure, could effectively be pushed into having to “prove that it’s credible” by keeping rates higher than otherwise, he suggested.

“This could easily be a prescription for a 10% mortgage rate — something that I lived through when I bought my first house, but that I didn’t think we were going to see again in the United States,” Summers said. “This is really dangerous stuff.”