Inflationary Populism Is Trump's Path Forward

After advancing traditional Republican policies in his first year, the president has an opportunity to deliver the gains he promised his voters.

Shortly after Trump’s election, the political scientist Mark Blyth argued that the outcome was not an idiosyncratic event, but rather the culmination of a long-brewing revolt against an anti-inflationary regime that had been built up over 30 years by parties of the center-right and center-left. If the inflation of the 1970s made that era a debtor’s paradise, the years since have for the most part been a creditor’s paradise, to the detriment of the debt-plagued working and middle classes of the developed countries. After the 2008 crisis, however, what had been a period of stable inflation and stable politics came unglued, and debtors started to embrace a succession of political outsiders who promised to shake things up.

As one of the chief beneficiaries of this development, it would have been natural for Trump to push an inflationary agenda, to start easing debt burdens. Trump’s decades-long experience as a real-estate speculator made him far less debt-averse, and thus less inflation-averse, than your typical billionaire, who is more likely to see inflation as a hideously unjust vehicle for wealth destruction. Throughout his career, he made a habit of taking on massive amounts of debt and then renegotiating the terms when things went south. At one point, Trump went so far as to dub himself “the king of debt,” boasting that he could work similar magic as the chief executive of U.S.A., Inc. Needless to say, presiding over the federal government is not quite the same as running a highly leveraged real-estate business, as countless critics pointed out at the time. But one thing was clear: There was no mistaking candidate Trump for a green-eyeshade, deficit-hawk Republican.

So it came as something of a surprise when he played against type by largely sticking to the Republican playbook, a few populist rhetorical missives aside. Trump’s first budget proposal, the handiwork of Mick Mulvaney, his austerity-minded OMB director, called for drastic cuts in the growth of future federal spending, cuts that the president himself never lifted a finger to defend.

The budget deal that’s just been brokered by congressional leaders marks a break with all that. We’re about to see an unprecedented surge in federal deficits while labor markets are as tight as they’ve been this century. Barring an aggressive clampdown by the Fed—a possibility that can’t be ruled out, but that Trump would presumably do his best to lean against—it looks like we’re going to get an inflationary agenda after all.

How could the president build on this moment? Over the course of his first year in office, Republicans in Congress have largely pursued their preexisting ideological agenda, and Trump mostly followed along. Having pledged to repeal and replace Obamacare, conservative lawmakers struggled mightily to do so through the reconciliation process, and they failed. Then, the congressional GOP moved on to a tax overhaul, where it found itself on more familiar ground. That effort succeeded, with the president as cheerleader in chief for deep cuts in taxes on corporate profits. But now the Republican cupboard is bare; the party’s readily attainable goals have been achieved, and the balance of its policy agenda seems unlikely to pass this Congress. That gives Trump an opportunity to push the party in a new direction, more consistent with the populist themes of his 2016 campaign.

Some congressional Republicans may want to take another crack at replacing Obamacare with easily-demonized block grants, only now with an even slimmer Senate majority, or pushing for a welfare-reform bill that seeks to impose more stringent work requirements on the poor, an effort that would be doomed from the start. But the window of opportunity for a government-shrinking agenda has closed, and GOP fiscal hawks know it in their bones. As Paul Winfree of the Heritage Foundation has observed, the budget deal “basically guarantees” that Republicans won’t be in a position to pass any significant legislation on a party-line basis until 2019.

The natural next move for Trump would be to at least try to reinvent himself as a bipartisan dealmaker. Failure at bipartisan bridge-building can’t be worse than success at bipartisan bridge-burning. And opening the spigot of spending, deficits be damned, is the way to make deals happen.

Infrastructure is still the most obvious candidate for a bipartisan breakthrough. There are at least some congressional Democrats who could be won over with a commitment to higher levels of direct federal spending than the Trump administration has contemplated to date, as my colleague Russell Berman has reported. The president should consider letting them have their way.

More ambitiously, Trump might consider revisiting the federal minimum-wage debate. Sharp increases in the federal minimum wage have historically been anathema to Republican lawmakers, especially those from lower-wage regions of the country, where concerns about the displacement of low-skill labor are particularly salient. In lieu of minimum-wage increases, conservative policy thinkers have instead called for increases in wage subsidies, on the grounds that they’re less likely to freeze out low-skill workers from the labor market. It’s also true, however, that Republican voters are favorably disposed to minimum-wage hikes. Moreover, the president’s commitment to immigration restriction is premised on the belief that in the absence of low-skill immigrant labor, U.S. businesses would embrace labor-saving technologies that would ultimately boost productivity and incomes. Higher wage floors could have a broadly similar effect.

With Trump’s support, centrist Republicans could float a modest minimum-wage hike that would phase in over time and would be indexed to inflation. They could pair this measure with an increase in Earned-Income Tax Credit benefits for childless adults, a proposal that has (theoretically) enjoyed bipartisan support in the past. Some Republicans would surely oppose this package. But some Democrats might be tempted to sign on.

Going further still, the president could push the idea of investing in America’s industrial commons by, for example, giving a boost to industry-led R&D consortia, devoting more resources to apprenticeships and other workforce-development efforts, and beefing up the Export-Import Bank. Putting together a package along these lines could attract an odd bedfellows coalition of Rust Belt liberals and business-minded centrists while offering a welcome respite from talk of trade wars and tariff hikes.

If this all sounds terribly reckless, or terribly socialistic, I take your point. At this point, though, Trump can’t afford to rely solely on a demotivated Republican base. He needs to energize swing-state swing voters, especially those of modest means, and he needs to change the perception that he has become the cat’s paw of the plutocrat class. A dose of inflationary populism could be just what the doctor ordered.