Republican sweep won't lead to higher inflation
The conventional wisdom on Wall Street has been this for a long time. If the Republicans win the election, there will be inflation.. That's probably wrong.
The basic idea behind the argument that a unified Republican government is more prone to inflation than a divided government is that Republican control would lead to significant fiscal expansion in the following ways: Fiscal deficit expands due to tax cuts. More generally, many analysts believe that unless opposition parties have the power to rein in ambitious economic plans, political parties tend to become fiscally irresponsible.
But historically, this is not the rule. On average, inflation is slightly higher during periods of unified government, but it is often lower. Dating back to the Truman administration, Inflation rates during the divided government era were much higher than during the unified government era.. The same pattern applies to the Eisenhower administration. Inflation was low during unified Republican control, and rose when Democrats gained control of the Capitol.
Inflation at that time was very high gerald ford Retained the presidency in the face of a highly hostile Democratic Congress, which was even higher at the time. jimmy carter enjoyed a unified government. bill clinton Although elected under a unified government, the country faced a divided government after the midterm elections, and it is unlikely that the change would have had a significant impact on inflation.
One reason we expect inflation to fall under President Trump and a Republican Congress is that these politicians are well aware that high inflation was at the heart of the backlash against Democrats in this year's elections. is. It's clear that voters hate inflation even more than they like low unemployment (or whatever metric liberal pundits were touting to support their claims that Biden's economy is great). Therefore, politicians seeking to stay in power should, if you will pardon my redundancy, be expected to: Be cautious in adopting inflation policy.
Immigration restrictions and tariffs do not cause inflation
President Trump's critics often argue that his immigration policies lead to inflation. The idea here is that an expansion in the labor supply suppresses wage increases, which in turn depresses personal consumption and leads to a decline in the inflation rate. of course, Intentional wage suppression by expanding labor supply That's a pretty disastrous way to fight inflation. However, it may not be as effective as expected.
First of all, there is little empirical evidence to support the claim that immigration restrictions increase inflation. Even the idea that wage rates are the main driver of inflation is controversial among economists. Unless wage growth is encouraged by fiscal expansion and accommodative monetary policy; Impact of wage increases on inflation It can be so small that it disappears. In most cases, rising wages redistribute wealth and demand through the economy, but they do not necessarily raise prices sustainably.
Recent history certainly does not support the idea that increased immigration suppresses inflation. During the first Trump administration, immigration dropped from about 1 million a year to about 700,000 in 2020 when the pandemic hit. There was no noticeable increase in inflation. Immigration has surged by more than 2 million people during President Biden's term, reaching at least 2.6 million in 2022. Far from curbing inflation, this resulted in the worst inflation in 40 years.
On July 23, 2024, on the outskirts of Tapachula in the Mexican state of Chiapas, hundreds of migrants, mainly from Central America and Venezuela, set off in a caravan for the United States. (ISAAC GUZMAN/AFP via Getty Images)
It's easy to see why. Newly arrived immigrants are less likely to work and work fewer hours than natives or older immigrants. their much less productive. But they also need shelter, food, clothing, transportation, entertainment, and all the other amenities of American life. The supply of many of these things, especially housing, but also food and transportation, cannot be easily increased. Respond to increased demand. Immigration is therefore likely to contribute to inflation, at least in the short term.
And of course there are customs duties. Despite the misleading claims of some economists, tariffs do not cause inflation. In the worst case scenario, the price of some products may increase once. However, these increases are likely to be offset by declines in prices for other items as consumer demand changes to accommodate upcoming conditions. And since tariffs are likely to result in a stronger dollar, the import purchasing power of U.S. consumers could actually increase. In other words, Prices may fall due to tariffs (However, its effectiveness may be compromised in terms of encouraging domestic production).
Markets and analysts may be expecting more inflation than the Trump administration and Republicans on Capitol Hill will deliver.
