Stagflation: Shooting the Messengers

Mainstream economists’ critiques of Trump were right

A few days ago Donald Trump issued another of his hysterical broadsides, this time attacking a prominent economist who had warned that his policies would cause higher inflation and an economic slowdown. And guess what: We aren’t talking about me. Instead, Trump demanded that Goldman Sachs fire its chief economist, presumably meaning Jan Hatzius.

True, he didn’t call out Hatzius by name, let alone call him a “Deranged BUM,” so I think I’m still ahead on points. But Trump’s latest tirade is one more indication of the extent to which he is triggered by any suggestion that he isn’t delivering on his economic promises.

Bear in mind that Trump inherited an economy in very good shape. Inflation, which surged around the world in 2021-22, had come way down without the recession many predicted. Growth in both GDP and employment was solid. As The Economist put it, the U.S. economy was “The envy of the world” in the fall of 2024.

Trump could have just left this success story alone and claimed credit. If he had, he’d probably be riding high in the polls right now. Instead, however, he took economic policy in a radical direction, notably by raising tariffs to levels not seen in 90 years. Tariffs, he insisted, would create an economic miracle.

What set him off about Goldman Sachs was that Hatzius and his team had just reiterated their prediction that Trump’s tariffs, rather than producing prosperity, will increase inflation and slow economic growth. This is a very mainstream position. While Hatzius has sometimes made predictions at odds with many of his colleagues, on this occasion Goldman was very much part of the professional consensus. And what is driving Trump crazy is the growing evidence that mainstream economists were right.

Before I get there, a word about Hatzius.

For all his self-aggrandizing bluster, Trump is clearly very insecure about his economic bona fides. On one side, he lashes out at any hint of criticism; on the other, he invariably claims that the people he chooses to listen to aren’t just his personal favorites but have great reputations in the wider world. Most recently, he proclaimed E.J. Antoni, who he wants to head the Bureau of Labor Statistics, a Highly Respected Economist, when the truth is that economists who have looked at Antoni’s work, such as it is, consider him "utterly unqualified" , someone ignorant of basic facts relevant to his potential new job, like the effect of an aging population on labor force participation.

And what was Antoni doing as part of the crowd outside the Capitol on Jan. 6?

Source: NBC

But Hatzius really is a Highly Respected Economist. As a profile last year in the Wall Street Journal noted, he has “nailed some big calls.” He correctly predicted a soft landing from the inflationary shock of 2021-22 when many economists insisted that disinflation would require years of high unemployment. Earlier, back in 2008, he warned that the bursting housing bubble could cause a severe recession, when many were still dismissing that risk.

And yes, Hatzius has made some bad calls too. If you’re an economist who has never made an incorrect prediction, you aren’t taking enough risks.

Overall, however, Hatzius has an impressive record of getting things right when many of his colleagues got them wrong. Yet he isn’t one of those attention-seeking economists who is constantly making out-of-consensus predictions and has gotten lucky on a few occasions. Most of the time he and his team are, as they are on tariffs, close to the mainstream view.

And what’s driving Trump crazy (well, crazier) is that as the data roll in, they are increasingly suggesting that the mainstream view was right.

Trump has been insisting that his tariffs will create an economic boom while having no effect on consumer prices. But most independent economists have argued that the tariffs will hurt economic growth while raising prices.

Sure enough, the jobs data released two weeks ago point to a significant economic slowdown, while the two inflation reports released this week — on consumer and producer prices — show clear fingerprints of the effects of tariffs on prices.

To be clear, what we’re looking at so far is probably a 1 or 2 point rise in inflation and a moderate rise in unemployment that might not be enough to be considered a recession. But Trump’s tariffs combined with his savage cuts to social programs will be a huge burden on lower-income households.

And tariffs aren’t the only source of rising prices. Look at what just happened to the wholesale price of fresh vegetables. Here’s the one-month percentage change in vegetable prices, which was a shocking 50 percent in July:

Source: BLS

That’s probably partly ICE at work. After all, who do you think picks vegetables?

Still, as far as I know, the only prominent figure warning about imminent economic catastrophe is Trump himself, who insists that we will face a GREAT DEPRESSION if the courts rule that his illegal tariffs are in fact illegal.

Trump, however, is now staring down the barrels of a different kind of catastrophe, one that is more political and psychological than strictly economic. His whole act — and for Trump, everything is an act — is based around claiming to be an economic genius, who knows far more than all those so-called experts. For a normal president, discovering that he got the economy wrong would hurt, but not that much. For Trump, it would be a humiliating defeat.

So Trump is doing what he always does when he receives bad news: try to shoot the messenger. When the Bureau of Labor Statistics reported weak job growth, he fired the agency’s head. When Goldman Sachs reported that tariffs are indeed raising consumer prices, he demanded that the firm fire its chief economist.

This won’t work, of course. And Trump’s refusal to accept bad news makes sustained stagflation much more likely. But more about that in Sunday’s primer.

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