Experience Stern | Faculty & Research

Since US President Donald Trump’s election last year, I have argued that at least some of his policies will lead to higher growth and lower inflation over time. This applies to his support for tech-industry innovation, deregulation, lower tax rates on labor and corporations, enhanced energy production, and cuts to wasteful public spending.

Trump’s other policies, however, are stagflationary. Protectionism and tariffs will slow growth and increase prices, as will his administration’s crackdown on immigration, cuts to scientific research funding, attacks on academic institutions, support for unfunded budget deficits, threats to Federal Reserve independence, disorderly attempts to weaken the dollar, attacks on rule of law, and corrupt behavior. The US brand has been badly damaged, and that will have costs.

Still, I have maintained that market discipline (not least from bond vigilantes) and a still-independent Fed would constrain these stagflationary policies, giving Trump’s moderate economic advisers the upper hand and leading to a de-escalation of trade frictions via negotiations. That is what has happened. And now that congressional Republicans are negotiating a budget bill that will further increase deficits and debt ratios, the pressure from the market (through higher long-term bond yields) will grow. Trump can either change course or face a spike in bond yields that will cause a politically damaging recession.

Read the full Project Syndicate article.
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Nouriel Roubini is a Professor Emeritus of Economics and International Business and the Robert Stansky Research Faculty Fellow.