Scott Sumner  

Why Trump's policies will not signficantly boost aggregate demand

Kahan and the Politically Moti... Ralph Raico, RIP...

I've expressed a lot of frustration with the way that pundits have been ignoring monetary offset. Thus it's worth praising one who does not. Here's Matt Yglesias:

Indeed, Fed officials are signaling clearly that more stimulus will mean more rate increases. This is a little bit disguised by the fact that Fed officials are saying they welcome the idea of stimulus. But they aren't saying stimulus will increase growth. They're saying it will increase interest rates.

On November 21, Fed Vice Chair Stanley Fischer argued that more stimulus would allow for faster rate increases, which would be good because it would let the Fed cut interest rates in response to future economic problems.

On November 29, Jerome Powell, another Fed board member, argued that more stimulus would allow for faster rate increases, which would be good because it would curb speculation.

Patrick Harker from the Philadelphia Federal Reserve, who'll be rotating onto the monetary policy committee in January, says he wants to see interest rates go up. Robert Kaplan from the Dallas Fed says the same thing.

Trumponomics will shift activity, not boost it

Given this Federal Reserve regime, there's very little chance that we'll see some kind of Trump boom next year. JP Morgan doesn't think the Fed will fully offset Trump's stimulus, leaving us with 1.9 percent GDP growth in 2017 plus inflation peaking above 2 percent in the second half of the year. My best guess is that the Fed is a bit more hawkish than that and will keep both growth and inflation a little lower.

But either way, in a war between fiscal policy and monetary policy, the central bank always wins.

Trump will end up giving us less private economic activity in interest-rate sensitive areas like homebuilding and car purchases, offset by more infrastructure activity and more consumption from the affluent beneficiaries of his tax largess.

There's still the question of supply-side effects, which would not be offset by the Fed. It's possible that Trump's policies will boost growth, particularly if he focuses on supply-side policies like tax reform and deregulation, and not on anti-growth measures like protectionism and immigration restriction.

Of course Congress also has a say in these issues. One sliver of good news came out yesterday:

Kentucky Sen. Rand Paul gave an indication today of the trouble that President-elect Trump may face from his own party in trying to fulfill campaign promises that cost money.

The former GOP presidential candidate said on ABC News' "This Week" that he "won't vote for a budget that never balances" and that he is working to find a few other conservative GOP senators to join him.

This would push against massive infrastructure spending by the Federal government, and also push Congress toward making any tax reforms "revenue neutral".

In fairness Trump himself recently endorsed one useful form of spending control:

Trump tweeted Monday morning that "the F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th."

Shares of Lockheed Martin (LMT), which makes the F-35 fighting jets, plunged 4% following Trump's tweet.

Defense experts often point to the F-35 program (expected to cost at least $400 billion) as one of the most wasteful forms of defense spending.

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PS. If you go to Matt Yglesias's article, you'll see lots of links to the comments of various Fed officials.

Ramesh Ponnuru has an excellent article on the same topic.

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COMMENTS (13 to date)
EB writes:

The Fed is expected to increase rates before January 20 and the Trump stimulus will be necessary to compensate for the negative effects of higher rates. MY is happy because he believes that the stimulus will never be enough to offset those negative effects, and therefore Trump will fail. You hope that the stimulus may have some supply effect, one that may imply a higher RGDP.

Yes, most likely the Fed will increase rates but just to signal that they are alive. If you compare with early 1981, there is no inflationary pressure on the economy --actually, there has been no inflationary pressure for the past 30 years. The Fed can play with some interest rates to show that they control "the Obscurus" (the dark force in Fantastic Beast and Where To Find Them), but they don't control interest rates in any meaningful sense (as OPEC don't control oil prices today).

Andrew_FL writes:

New Keynesians who lapsed into Old Keynesianism have found religion yet again! And all it took was a "Republican" winning the Presidency.

Rajat writes:

Scott, you've said that the ZLB has taken 30 years of progress from macroeconomics. You've also said that talking about politics takes 30 points off your IQ. How about combining them?

When I hear many otherwise intelligent commentators say that fiscal stimulus/infrastructure spending is good because it will boost interest rates and leave more room to cut in future, I wonder if they realise that would require government spending to keep rising continuously? I presume that if government spending ramps up over a year or two and then flattens (or worse, falls back down again), interest rates may first rise, but then will need to fall again as the government's contribution to GDP growth diminishes. (And rates may even need to fall to lower than where they are now if government spending eventually contracts). So the greater room to cut is only available for the time when government spending is rising. In other words, counter-cyclical fiscal policy may help keep interest rates above the ZLB, but higher government spending in general would not. Is that correct?

AntiSchiff writes:

Dr. Sumner,

With respect I ask, if not the F-35, then what 5th generation fighter/close air support platform? Having studied the program in some detail, my opinion changed for the better on it.

Scott Sumner writes:

Rajat, Yes, that is correct.

Antischiff. I would opt for a less expensive option, even if just fewer planes, but preferably less sophisticated planes. We need a military suited to deal with 21st century threats, and fighter aircraft are not particularly helpful in that sort of environment.

I'd admit to not being an expert here, but lots of people who are experts are also critical of the cost of this program.

More generally, I don't think the US should be incurring such a high proportion of total global military spending. The threats we face are mostly either terrorism, or existential threats which are deterred with our nuclear triad. What sort of plausible threat would justify the numbers of planes being ordered? So I'm not saying we don't need fighter aircraft, just that the expense of this program is hard to justify.

Mark Bahner writes:
With respect I ask, if not the F-35, then what 5th generation fighter/close air support platform? Having studied the program in some detail, my opinion changed for the better on it.

Why do we need a 5th generation fighter/close air support platform? What would be the scenario in which the F-35 would be necessary?

AntiSchiff writes:

Dr. Sumner,

The initial cost of each F-35 will average about $70 million/plane, which in real terms is very much in line with the costs of prior top line US aircraft, bit with far more diverse capabilities. Remember that the F-35 order total will serve both naval, air, and ground forces. Also, what seems like a large nominal total cost will be stretched over decades.

It is needed, not against terrorists, but against hostile powers such as Russia and China. It is designed to be capable of destroying enemy fighters then ground-based anti-aircraft defenses on single sorties, over long distances, before detection. It is an offensive weapon meant to best foreign generation 4.5 and 5 aircraft in every important respect.

It is part of a capable conventional threat, and is designed to be converted into a fully autonomous vehicle.

Where total military spending is concerned, playing the role inherited from the UK maintaining the balance of power in every important region of this world will never be cheap.

AntiSchiff writes:

Mark Banner,

See my reply above.

Michael Byrnes writes:

Question for Scott.

I agree with your (and Yglesias', although I think he got it from you) argument that Trump's fiscal stimulus will lead to higher interet rates.

But the great reluctance of the Fed to target its forecast over the past 8 years along with Bernanke's and Yellen's repeated calls for fiscal stimulus are still hard for me to reconcile with monetary offset. (In other words, I think we are going on 9 years of a monetary policy that is tighter than beliefs in 1) hitting its policy targets and 2) monetary offset would have called for.

I tend to think that, either for political reasons or other reasons, the Fed remains unwilling to do whatever it takes to hit its policy goals.

Coming back to Trump's stimulus, then... I think that even though the stimulus won't do anything but raise rates, there may be some value in that - if higher rates mean a Fed that can hit its policy goals without having to venture into unconventional policies it would rather not do (even if that preference is purely for political reasons).

Also, given the constant drone of the inflationphobes who have been clamoring for higher interest rates for the past decade, maybe rates going up will be seen as a success in and of itself?

Personally, I want the Trump presidency to be as spectacular a failure as is possible without actually hurting anyone, and I hate to see him getting any benefit (real or merely political) from his own ineptness.

Andrew_FL writes:
I want the Trump presidency to be as spectacular a failure as is possible without actually hurting anyone

I'm gonna miss when expressing this exact sentiment, say on the radio between 12 and 3, was the height of racism...

Scott Sumner writes:

Antischiff. How far are we from pilotless fighters, which would presumably cost far less, as they could be far less safe?

Conventional war with Russia and China is far down my list of worries, especially given that our military is vastly superior to either of those countries. Russia had trouble conquering Chechnya, for God's sake. Could you imagine us having trouble with Hawaii?

I would add that in a war with Russia, we'd have lots of European countries on our side. It would (presumably) be Nato vs. Russia, which is an huge mismatch in population, GDP, military strength, technology, you name it. If we choose to go to war with Russia over a non-Nato issue, without Nato's support, I think that would be a huge mistake on our part.

Michael, Interest rates were going up even before Trump was elected, as the Fed feels it's already hit its targets. You may not think they've been targeting the forecast, but they do (or have believed this in the past few years) Look at their inflation forecasts for 2 years out---they've generally been quite close to 2%.

I hope the Trump presidency is a massive success. That's much more important than my distaste for him getting personal credit. But I'm pretty sure it won't be. At least since 1830, America has never seen two consecutive successful 8 year presidencies. Obama left office quite popular.

Mark Bahner writes:

Hi AntiSchiff,

I don't mean to "gang up" on you, but the things you write are very interesting to me, and I have some slightly different questions from Scott.

You wrote about using the F-35 against "hostile powers such as Russia and China". I don't understand where such fighting would take place. Not over U.S. airspace, right? If the fighting isn't over U.S. airspace, why do we need the absolute best equipment?

I do generally support Scott's comments about Russia. I learned last night that, per Credit Suisse, the estimated *median* wealth of Russia is $871 per person. That's less than India. And another interesting/shocking estimate from the Credit Suisse report is that the wealthiest 110 people (likely all male) in Russia own 35% of all wealth in the country. So if the Credit Suisse estimates are reasonably accurate, Russia is an incredibly poor country, with almost unimaginable internal wealth disparities. It seems to me that their leadership would be very foolish to take on a far wealthier country.

You also wrote about converting the F-35 to unmanned flight. Wouldn't it be far better to design a plane from scratch for unmanned flight, rather than to try to convert a plane designed for humans to one capable of autonomous flight?

Andy writes:


I haven't seen you write a lot about Trump/Ryan tax plans. You say here that "It's possible that Trump's policies will boost growth, particularly if he focuses on supply-side policies like tax reform". But what actually suggests that tax reform which will give a massive tax cut to high earners will boost growth? On which arguments can we say that? It also won't be revenue neutral because there are not enough "loopholes" that can be closed to offset the tax cuts.

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