The Peterson International Economics Institute (PIIE), one of the two major non-partisan think tanks in the United States, recently issued a warning about Trump's tariff policy. Adam S. Posen, the institute's director, believes that under the Trump administration's reciprocal tariff policy, the United States may be heading towards a devastating "stagflation" and suggests that the Federal Reserve has already over-lowered interest rates, potentially requiring a longer observation period or other intervention methods.
Lecture Content
In a recent lecture, Posen presented a different economic forecast for the United States from mainstream economic expectations. Based on economic models of the US economy and the Trump administration, PIIE predicts that Trump's current policy guidelines, especially those targeting trade closure and using US economic uncertainty as a weapon, will inevitably lead to higher inflation and accompanying worse economic growth performance in the short and medium term.
Posen emphasized that this is not merely a temporary market failure or policy mistake, but potentially represents a fundamental transformation of the US economic policy system (including conventions, institutions, and practices). This transformation deviates from the economic governance trajectory followed by the two major US political parties over the past decades, signaling a challenging new era.
Posen pointed out that the core of this potential policy framework consists of two fatal commitments:
- Significantly "closing" the US economy through measures like tariffs, reducing trade and investment interactions with the global market
- Using policy "uncertainty" as a trade weapon
Posen added that the Trump administration creates unpredictability when handling international relations and trade disputes to gain short-term advantages. These two strategies combined will not only directly reduce US household real income (due to more expensive imported goods and hindered exports) but more importantly, they will constitute a persistent "negative supply shock", meaning a decline in economic production potential, with goods and services becoming more expensive and scarce.
Why Inflation is About to Lose Control
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Moreover, structural factors are also fueling the trend, such as tightened immigration policies that may lead to continued labor supply shortages, especially in key industries like construction, which will drive up wage costs and service prices. The housing market itself faces supply bottlenecks, and with the price increases of imported construction materials (such as Canadian lumber) and other real estate-related imported goods (like air conditioning equipment from China) due to factors like tariffs, these will collectively raise living costs.
Lastly, Bosen proposed the risk of the "Doge – Dysfunction of Government Effectiveness" theory, where uncertainty spreading within government departments brings risks, such as government shutdown threats, public servants and contractors' uncertainty about future policies, which may cause delays in key infrastructure projects, reduced efficiency and reliability of public services, constituting a negative supply shock that affects the normal operation of the economy.
Stagflation Likelihood Significantly Increases
Regarding economic growth, Bosen's prediction is equally pessimistic. He estimates that the risk of the US economy falling into recession is as high as 65%. He believes that unless the government implements "extremely irresponsible massive fiscal stimulus", economic growth rate will hardly exceed 1%. This is because the main growth engines will be suppressed: consumption will weaken due to declining real income and increased uncertainty; corporate investment will stagnate due to ongoing policy uncertainty; net exports will be dragged down by trade barriers and tense international relations. Therefore, the only thing that can drive apparent growth in the short term seems to be large-scale government spending that may cause future problems.
Overall, Bosen believes the most likely scenario is "Stagflation" - where economic growth stagnates or even shrinks, accompanied by persistently high inflation. This is the most challenging situation for policymakers, as traditional policy tools for addressing recession (requiring stimulus) and inflation (requiring tightening) are mutually contradictory. This situation will severely damage the living standards of American families, the business environment, and the long-term competitiveness of the United States.
Bosen concluded that the Trump economic policy he described represents a fundamental break from mainstream US economic thinking over the past half-century, attempting to weaponize uncertainty and withdraw the US from the global economic system. This will not only harm US interests but also have far-reaching and irreversible negative impacts. He emphasized the importance of seeing this broad policy pattern and its foreseeable consequences, rather than being confused by daily political noise or short-term market fluctuations. If this path is truly taken, the US economic recovery will require years of difficult adjustments.
