In a classic paper from over 30 years ago, economists Rudiger Dornbusch and Sebastian Edwards discussed the concept of “macroeconomic populism,” focusing on the inflation outbreaks in Latin America under left-wing regimes. The key issue they identified was not left-wing governance itself, but the result of governments engaging in magical thinking. This phenomenon can be seen in modern examples, such as leftist governments like Venezuela and right-wing nationalist governments like that of Recep Tayyip Erdogan in Turkey.
The concern now is whether the United States could be the next victim of macroeconomic populism. While Donald Trump is often labeled as a populist, his economic policies, such as the 2017 tax cut, were not aimed at helping working Americans. However, his behavior during the Covid-19 pandemic revealed a tendency towards magical thinking and denial of reality, similar to other dictators. This raises the possibility of policies based on quack economics leading to economic problems.
The fear of Trump’s potential return to power extends beyond economic policy. The prospect of retaliation against political opponents, detention camps for immigrants, and other authoritarian actions are more alarming. However, the economic implications of Trump’s return are also significant. Trump’s advisers have floated policy ideas that could be even more inflationary than what has been observed under Biden’s administration.
Inflation surged in 2021 and 2022 before subsiding, with debates on the role of Biden’s economic policies in this trend. While the United States has closely tracked inflation with other advanced economies since the start of the Covid pandemic, Biden and his administration respected the Federal Reserve’s independence when interest rates were raised to combat inflation. The concern is whether Trump would exercise similar restraint, given his past calls for zero or negative interest rates.
Reports suggest that a future Trump regime may manipulate monetary policy to gain short-term political advantages, potentially undermining the quasi-independence of the Federal Reserve. Trump advisers have proposed policies such as devaluing the dollar and punishing other countries for reducing their use of the greenback, which could lead to inflation and economic instability. This approach reflects a rejection of past economic lessons and reliance on economic fantasies.
While macroeconomic policy is not the primary concern regarding a potential Trump return to power, it poses significant risks. Trump’s history of embracing magical thinking and unconventional economic policies raises concerns about his ability to effectively manage economic challenges, such as a new surge in inflation. Despite other pressing issues, the economic implications of a Trump administration should not be overlooked.
