Best of 2025: Mark Blyth Trump’s Tarrifs and Inflation

Ordinary people experience inflation as a rise in the total level of prices, directly impacting their disposable income, especially for the bottom 60% who spend most on consumption goods. Economists, however, often focus on the rate of change. This disconnect explains why official inflation numbers can feel out of touch with public sentiment, as a slowing rate of inflation doesn't mean prices have returned to previous levels.

The example of eggs still costing $12 even if the rate of inflation slows. Poorer individuals spending 60-70% of income on consumption goods are severely impacted by price levels, unlike the top 10% who use less income for direct consumption and may even benefit from rising equities.

The prevailing wisdom that 1970s inflation was 'always and everywhere a monetary phenomenon' (Milton Friedman) is challenged. Instead, it was a series of discrete supply shocks (Vietnam War funding, oil crises, labor market shifts). Learning the wrong lesson led central banks to primarily use interest rate hikes to 'break expectations,' which can cause unnecessary economic destruction when the root cause is supply-side.

Alan Blinder's research indicates the 70s saw multiple supply shocks. The European Central Bank in 2023 acknowledged 40% of inflation was 'price gouging,' not just money supply or labor market tightness. Raising interest rates to make people poorer is the standard response, but it's ineffective against supply shocks.

Trump's tariffs are a deliberate policy choice to create supply shocks, making imported goods more expensive. This strategy is driven by a complex, often contradictory, coalition of national conservatives, China hawks, and tech lords, all aiming for a re-industrialization based on carbon assets and an idealized 1950s economy, rather than modern green sectors.

Tariffs are explicitly designed to make things more expensive to bring industrial jobs back. The rationale for tariffs shifts based on which faction (e.g., tax cut advocates vs. China hawks) has the President's ear. The 100% tax on Chinese EVs protects a carbon-based business model.

U.S. treasuries are typically 'information invariant assets,' meaning their value is stable regardless of news. Trump's unpredictable tariff policies, however, made them 'information sensitive,' causing investors to sell dollars and seek alternatives. This increased volatility and rising yields in the bond market acted as a disciplinary force, compelling Trump to adjust his aggressive tariff stance.

On April 2nd, Trump's actions made people question the stability of treasuries, leading to selling of dollars and a search for alternatives. This 'broke the bond market,' forcing a policy rollback.

The Democratic Party is criticized for inadvertently becoming the 'party of the status quo,' catering to the top 20% (the 'Whole Foods crowd') and lacking transformative economic policies for ordinary people. This failure has alienated the working-class vote and necessitates a shift towards 'left populism' focused on addressing deep-seated economic inequalities.

The absence of transformative policies from figures like Kamala Harris. The party's mainstream often opposes figures like AOC and Bernie Sanders who advocate for such changes. The example of Democratic donors being the same wealthy individuals who benefit from the current system.

The housing crisis is a direct result of treating housing as an asset class rather than a basic need, leading to a shortage of affordable homes. A solution involves a 'left deregulation' agenda to simplify building processes, close tax loopholes (like conservation easements), and massive public investment in constructing houses for normal people. This would not only provide housing but also create jobs, upskill the working class, and improve labor mobility.

The observation that new developments are almost exclusively 'luxury condos.' The existence of 'conservation easements' as a tax scam that restricts building. The need for vocational training (HVAC, plumbers, electricians) to support large-scale construction.