PMT: Some truths about inflation

 

Below are excerpts from an early draft of a piece that ran in the Waco Tribune Herald this week:

        If, like many Americans, you are concerned about inflation, here is an important thing you can do about it: don’t vote for Donald Trump. Two of Trump’s top policy initiatives, deportations and tariffs, are going to drive inflation higher if implemented.

 

         The reason why is not so hard to understand. Inflation goes up when costs go up for producers and sellers of goods and services. Both deportations and tariffs will raise costs for producers and sellers (in varying ways), and those added costs will be passed along to us, the consumers. 

 

         Let’s examine deportations first. Trump’s platform promises “THE LARGEST DEPORTATION IN AMERICAN HISTORY,” [All caps in original] and that’s a problem, if what is actually affecting your life is higher prices. In short, deporting a lot of undocumented workers will shrink the labor supply, and raise the cost of labor for people who grow, process, manufacture, and sell things. These increased labor costs will be particularly acute in certain areas: agriculture and hospitality, for instance. A lot of the focus on inflation lately has been about grocery prices, but what do you think will happen when workers in slaughterhouses, on dairy farms, and in food processing are deported en masse? To get anyone to do those jobs, employers will have to pay more—and that price will show up at grocery stores.

 

         The University of Wisconsin recently estimated that over 10,000 unauthorized workers can be found just on that state’s dairy farms. Take away those workers, and the cost of milk—and everything made from it—will go up. Certainly, one can argue that undocumented workers are breaking the law and should be sent home, but if that’s your view don’t pretend that we won’t pay for it at the grocery store.

 

         Of course, in general when the labor force shrinks, then wages go up; that’s a big part of Trump’s argument, and he is right about that. But the rise in wages will come in those fields where we find a lot of undocumented labor. Most undocumented workers occupy low-wage jobs in agriculture, construction, food service, domestic work and various kinds of day labor. If you are in one of those fields, yes, your own wages may go up—but most citizens aren’t doing that kind of job, so their wages won’t be directly affected by mass deportations. If you work in a restaurant kitchen, for example, your work will become much more lucrative. But if you are someone who eats in the restaurant, you are just going to be paying more.

 

         And what about tariffs? “Tariffs are the greatest thing ever invented,” Donald Trump has said, but that might not be your view once they are imposed. Tariffs are basically a tax on imports—a price that importers have to pay to the government. Trump has proposed a 20% tariff on all imported goods and a special 60% tariff on goods imported from China. In other words, a $10 shirt made in China would actually cost $16 to bring into the United States. The added cost, of course, is paid by consumers—inflation.

 

         In the long term, of course, the idea behind tariffs is that rather than pay high prices for imported goods, American firms will produce those goods. There is truth to that, of course. I lived in Detroit when the North American Free Trade Agreement went into place in 1994, largely eliminating tariffs with Canada and Mexico. The effect on Detroit was very negative, as manufacturing plants and jobs went to Mexico. Tariffs can play a role in maintaining or bolstering domestic production—but they also, especially in the short term, cause inflation.

 

         Trump’s plan for lowering inflation centers on increasing energy production in the United States by lowering regulations and opening up new areas for exploration. There are a few problems with that plan. One is that energy in the forms he is talking about (oil, gas, and coal) are part of a world market. Right now, in fact, the United States is a net petroleum exporter—that is, we sell more of it to other countries than we import from abroad. That world market will greatly dilute the impact of marginally greater production in the United States. A second problem is the lag time that goes with oil exploration and production. For example, production from the Arctic National Wildlife Refuge could not begin until 2031 at the earliest. If energy production is going to bring down prices, it won’t be for a while—and probably won’t have much of an impact, as much of the new production is exported.

 

         One real tool that the federal government has for lowering inflation (albeit, also in the long term) is to reduce the national debt. Neither party seems very good at that, though, and neither candidate is talking about it. 

 

         Inflation is a real problem for a large part of the population, and deserves the attention it is getting on the national stage (even as the inflation rate goes down). The problem is that neither party is addressing it openly and honestly—and Trump’s plan risks making things much worse.