The media’s latest attack on the Trump economic program is that it will unleash inflation. The New York Times led the parade with a front-page story about prices surging if former President Donald Trump makes his 2017 tax cuts permanent.
Alas, these are the same false predictions that Democrats made against the Reagan tax cuts some 40 years ago.
The New York Times predicted that the Reagan tax cuts would be “dangerously inflationary.” Paul Krugman and Larry Summers, two of the Democrats’ favorite economists, warned of a Reaganomics “inflation time bomb.” President Jimmy Carter called the Reagan plan “one of the most highly inflationary ideas ever presented to the American people.”
Could they have been more wrong? After President Ronald Reagan cut taxes and Federal Reserve chief Paul Volcker tightened the money supply, we had one of the most rapid periods of disinflation in history, from 11% before the tax cut to 4% after the tax cut.
As former Trump economist Larry Kudlow has noted: “When marginal tax rates were slashed under JFK, Reagan, and Trump, inflation never uttered a serious peep.”
How did commentators get it so wrong then, and why do they still get it wrong? After all these years, the skeptics still don’t understand the supply side of the economy.
The Reagan tax cuts were expected to cause a surge of consumer demand and thus force prices for everything from gasoline to groceries to go up. But the main effect of reducing the tax on work, investment, and production was to increase all of these things. This is why it is called “supply-side” economics.
An increase in supply reduces prices; it doesn’t raise them. In other words, if there are more apples or iPhones produced, the price of apples and iPhones falls.
This is exactly what happened after the JFK tax cuts in the 1960s, the Reagan tax cuts in the 1980s, and the Trump tax cuts of 2017: a surge of investment and output. Prices rise when there is scarcity of goods, not a surge in production.
That supply-side effect is why Trump’s pro-drilling energy policy caused oil and gasoline prices to fall and Biden’s war on domestic energy production caused prices to rise by 50% to $3.59 a gallon.
Which brings us to the Trump tax cuts. The argument goes that if Trump makes the tax cuts permanent, this will cause the deficit to rise, and then prices will rise. Except that revenues did not fall after the Trump tax cuts. They rose. Corporate tax rates fell from 35% to 21%, but the corporate tax collections have risen by nearly 50% since 2017. This is because companies brought much of their money and many of their operations home when the tax rate was lowered.
The overall share of the income taxes paid by the richest 1% also rose from 40% of the total to 46% of the total.
What’s doubly absurd about the New York Times’s claim of runaway inflation under Trump is that the editors seem to have repressed from their memories that Trump was already president for four years. And the inflation rate under Trump was nearly the lowest of any modern president. Under Biden, the inflation rate was nearly the highest.
So how could a Trump victory be worse for inflation than a Biden reelection? Under Biden, inflation was three times higher than under Trump.
Finally, the media are also claiming that Trump’s proposed across-the-board 10% tariff will cause prices to rise. That may well be true. A tariff is a tax on consumption, so one would expect some higher prices from the tariff as the tax is passed on to consumers. But this ignores that the Trump tariffs would likely be offset with reductions in taxes, so the overall effect would be close to neutral.
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Notice also the almost comical contradiction by the New York Times. It says the Trump tax cuts will cause inflation and the Trump tariff increases will also cause inflation.
The media are either deeply confused about economics or they suffer from “Trump Derangement Syndrome.” Or both.
Stephen Moore is a senior fellow at the Heritage Foundation and a co-founder of the Committee to Unleash Prosperity.