- Adam Posen told Bloomberg TV that President Trump’s vows to launch a massive deportation campaign pose a threat of stagflation.
- Think tank experts say this will lead to a manufacturing-led recession.
- President Trump’s trade proposals, which promise to eliminate tariffs, also increase inflation risks.
President Donald Trump’s vow to launch the nation’s largest deportation campaign risks massive stagflation and could trigger an economic downturn as monetary policy becomes even tighter, according to a think tank economist.
Still, Republican candidates would have the legal backing to push for it, said Adam Posen, president of the Peterson Institute.
If implemented, Trump would have to deport more than 1.2 million immigrants to break the previous record for deportations, Posen said, adding that he has also pledged to deport all 7.5 million illegal immigrants from the US.
Effectively, this would mean a massive shortage of labor, raising the prices that businesses would have to pay to attract workers, he noted. That would raise costs for consumers in the future, but a smaller labor force generally means slower economic growth.
“Personnel issues and implementation issues aside, what this will create for the economy is a manufacturing-centric recession,” he said. Bloomberg TV on Wednesday“Inflation will rise, in effect resulting in stagflation, but the effects of inflation will be outweighed by the recession.”
In recent months, a handful of organizations have argued that the surge in immigration is a positive for the economy, with foreign-born workers providing cheap labor and boosting U.S. production.
For Posen, the risk of inflation from immigration is exacerbated by Trump’s trade proposals, where the former president has generally called for higher tariffs.
Experts warn that taxes on U.S. imports would reduce the flow of goods that would normally come into the country, reducing supply and raising prices of goods both at home and abroad.
If President Trump keeps his promise, markets should expect the Fed to raise interest rates aggressively, as there are few other solutions in a stagflation scenario — by well over 100 basis points by late 2025, in Posen’s view.
To be sure, a Biden continuation comes with its own inflation risks, but they likely won’t reach the extreme levels expected under a Trump administration, he said.
The current president has also leaned toward protectionism and recently increased trade tariffs on certain Chinese products. Similarly, Biden has gently tightened immigration restrictions. Under Biden, the Fed will likely be forced to raise interest rates once or twice.
Pozen also noted that both candidates face broader inflationary factors in the near future.
For example, he said, federal spending is expected to increase no matter who is elected, while the Fed’s current interest rates are not tight enough to keep inflation in check.
