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Posts Tagged ‘Keynesian Economics’

The coronavirus is a genuine threat to prosperity, at least in the short run, in large part because it is causing a contraction in global trade.

The silver lining to that dark cloud is that President Trump may learn that trade is actually good rather than bad.

But dark clouds also can have dark linings, at least when the crowd in Washington decides it’s time for another dose of Keynesian economics.

  • Fiscal Keynesianism – the government borrows money from credit markets and politicians then redistribute the funds in hopes that recipients will spend more.
  • Monetary Keynesianism – the government creates more money in hopes that lower interest rates will stimulate borrowing and recipients will spend more.

Critics warn, correctly, that Keynesian policies are misguided. More spending is a consequence of economic growth, not the trigger for economic growth.

But the “bad penny” of Keynesian economics keeps reappearing because it gives politicians an excuse to buy votes.

The Wall Street Journal opined this morning about the risks of more Keynesian monetary stimulus.

The Federal Reserve has become the default doctor for whatever ails the U.S. economy, and on Tuesday the financial physician applied what it hopes will be monetary balm for the economic damage from the coronavirus. …The theory behind the rate cut appears to be that aggressive action is the best way to send a strong message of economic insurance. …Count us skeptical. …Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves. …The Fed’s great mistake after 9/11 was that it kept rates at or near 1% for far too long even after the 2003 tax cut had the economy humming. The seeds of the housing boom and bust were sown.

And the editorial also warned about more Keynesian fiscal stimulus.

Even if a temporary tax cuts is the vehicle used to dump money into the economy.

This being an election year, the political class is also starting to demand more fiscal “stimulus.” …If Mr. Trump falls for that, he’d be embracing Joe Bidenomics. We tried the temporary payroll-tax cut idea in the slow growth Obama era, reducing the worker portion of the levy to 4.2% from 6.2% of salary. It took effect in January 2011, but the unemployment rate stayed above 9% for most of the rest of that year. Temporary tax cuts put more money in peoples’ pockets and can give a short-term lift to the GDP statistics. But the growth effect quickly vanishes because it doesn’t permanently change the incentive to save and invest.

Excellent points.

Permanent supply-side tax cuts encourage more prosperity, not temporary Keynesian-style tax cuts.

Given the political division in Washington, it’s unclear whether politicians will agree on how to pursue fiscal Keynesianism.

But that doesn’t mean we can rest easy. Trump is a fan of Keynesian monetary policy and the Federal Reserve is susceptible to political pressure.

Just don’t expect good results from monetary tinkering. George Melloan wrote about the ineffectiveness of monetary stimulus last year, well before coronavirus became an issue.

The most recent promoters of monetary “stimulus” were Barack Obama and the Fed chairmen who served during his presidency, Ben Bernanke and Janet Yellen. …the Obama-era chairmen tried to stimulate growth “by keeping its policy rate at zero for six-and-a-half years into the economic recovery and more than quadrupled the size of the Fed’s balance sheet.” And what do we have to show for it? After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures. Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. …Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow. Easy money not only expands debt-service costs but also encourages malinvestment. …when Donald Trump hammers on the Fed for lower rates, …he is embarked on a fool’s errand.

Since the Federal Reserve has already slashed interest rates, that Keynesian horse already has left the barn.

That being said, don’t expect positive results. Keynesian economics has a very poor track record (if fiscal Keynesianism and monetary Keynesianism were a recipe for success, Japan would be booming).

So let’s hope politicians don’t put a saddle on the Keynesian fiscal horse as well.

If Trump really feels he has to do something, I ranked his options last summer.

The bottom line is that good short-run policy is also good long-run policy.

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Back in 2010, I wrote about the absurd contention, promoted by some advocates of Keynesian economics, that wars are good for prosperity.

According to this crackpot theory, destroying wealth is a net positive because people then have to spend money to rebuild.

Now this “conceptual bad penny” is showing up again.

The New York Times, in an article about Iran’s economy, includes some analysis suggesting that war would stimulate growth.

…some experts suggest that the regime’s hard-liners may eventually come to embrace hostilities with the United States as a means of stimulating the anemic economy. …Iran has in recent years focused on forging a so-called resistance economy in which the state has invested aggressively, subsidizing strategic industries, while seeking to substitute domestic production for imported goods. …it appears to have raised employment. Hard-liners might come to see a fight with Iran’s archenemy, the United States, as an opportunity to expand the resistance economy.

Needless to say, Iran is marching in the wrong direction. Not only would a war be devastating for the country’s prosperity, but Iran also is making a big mistake by pursuing a policy of “import substitution.”

That’s basically the Peronist approach that helped trigger Argentina’s big economic decline. Though, to be fair, Iran presumably is doing the wrong thing for geopolitical reasons (avoiding sanctions) rather than protectionist reasons.

There are some Keynesians in other parts of the world who think war is good for growth, in part based on a misreading of America’s economic history.

In a piece for the Foundation for Economic Education, Professor Burton Folsom exposes a great weakness in their argument, pointing out that advocates of Keynesian wrongly expected a return to depression when government spending dropped after World War II.

On the surface, World War II seems to mark the end of the Great Depression. During the war more than 12 million Americans were sent into the military, and a similar number toiled in defense-related jobs. Those war jobs seemingly took care of the 17 million unemployed in 1939. Most historians have therefore cited the massive spending during wartime as the event that ended the Great Depression. …In truth, building tanks and feeding soldiers—necessary as it was to winning the war—became a crushing financial burden. …In other words, the war had only postponed the issue of recovery. …President Roosevelt and his New Dealers sensed that war spending was not the ultimate solution; they feared that the Great Depression—with more unemployment than ever—would resume after Hitler and Hirohito surrendered. Yet FDR’s team was blindly wedded to the federal spending that…had perpetuated the Great Depression during the 1930s. …Roosevelt’s death in the last year of the war prevented him from unveiling his New Deal revival. But President Harry Truman was on board for most of the new reforms. …Republicans and southern Democrats refused to give Truman his New Deal revival. …Instead they cut tax rates to encourage entrepreneurs to create jobs for the returning veterans. …In 1945 and 1946 Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent.

Let’s be thankful that FDR (and then Truman) didn’t succeed in the plan for an “economic bill of rights” that would have radically expanded the power of government.

For those interested, there are other possible economic consequences of war.

In a scholarly study for the Journal of Monetary Economics, Professors Dan Ben-David and David H. Papell find that moments of significant economic disruption – such as wars – often are followed by periods of above-average and better-than-expected growth.

In this paper, we use up to 130 years of annual aggregate and per capita GDP data for 16 countries to investigate whether output exhibits a trend break and whether economic growth is constant or changing over time. …This study provides empirical evidence that, for nearly every one of the countries, the years that provide the strongest evidence for a trend break are associated with a sharp decline in GDP. These breaks are associated with World War II for most of the countries and either World War I or the Great Depression for the remainder. While countries do tend to exhibit relatively constant growth rates for extended periods of time, the occurrence of a major shock to the economy and the resultant drop in levels are usually followed by sustained growth that exceeds the earlier steady state growth. …On average, aggregate postbreak steady state growth rates are 79 percent higher than the average prebreak rates. The results are even stronger for the per capita case, where all fifteen countries exhibit postbreak growth rates that exceed prebreak rates. In the per capita case, the steady state postbreak rates are 163 percent higher than the steady state prebreak rates.

Their study doesn’t explain why the economy expands beyond the pre-disruption trend, but one obvious explanation is that wars erode the power of privileged interest groups and thus reduce the deadweight cost of cronyism. Especially for nations that lose wars and have to start from scratch.

That’s not an excuse to have a war, of course, but it does suggest that dark clouds can have silver linings.

But sometimes dark clouds have dark linings.

In a column for Vox, Dylan Matthews examines research about the link between war and harsh tax rates.

…for the first century of American history, the federal government was funded mainly through tariffs, not income taxes. It was only in the early 20th century that the 16th Amendment authorizing income taxes passed… A recent paper by UC – Berkeley grad student Juliana Londoño Vélez provides an intriguing explanation for this evolution. Progressive taxation wasn’t an inevitable effect of democracy… It was an accidental effect of the 20th century’s massive wars. …The first federal income tax proposal came during the War of 1812, and one was implemented briefly during the Civil War. While the Progressive Era brought a renewed push, and the 16th Amendment and an accompanying income tax law were passed four years before US entry into World War I, it wasn’t until the US joined the conflict that the tax’s scale expanded to modern levels. …World War I also greatly expanded the French income tax; in 1920, to help pay for reconstruction, the top rate grew from 2 percent to 50 percent. …Londoño Vélez’s argument is quantitative. She compiled data on top income tax rates for sixteen rich, developed countries, and pairs it with data on mass mobilizations for war. …Londoño Vélez found that “no country had high taxes on the rich before the advent of war, with [the] top rate rarely exceeding 10 percent … the Wars created substantial income tax progressivity, with periods of mass war mobilization coinciding with significant rises in the top income tax rate.” …Londoño Vélez also finds that war mobilization has a significant effect on income tax rates five years on, suggesting that the effect on taxes persisted.

Here’s Figure 1 from the article, showing how tax burdens jumped because of World War I and then jumped again because of World War II.

My two cents is that wars may have been the initial excuse for income taxes and high rates, but politicians eventually would have concocted other reasons (based on their self interest) to extract lots of money.

Indeed, “Wagner’s Law” is an entire hypothesis based on the notion that politicians figure out how to grab ever-greater amounts of money as nations get richer.

That being said, it’s good to have another reason to oppose war.

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Arthur Okun was a well-known left-of-center economist last century. He taught at Yale, was Chairman of the Council of Economic Advisors for President Lyndon Johnson, and also did a stint at Brookings.

In today’s column, I’m not going to blame him for any of LBJ’s mistakes (being a big spender, creating Medicare and Medicaid).

Instead, I’m going to praise Okun for his honesty. Is his book, Equality and Efficiency: The Big Trade Off, he openly acknowledged that higher taxes and bigger government – policies he often favored – hindered economic performance.

Sadly, some folks on the left today are not similarly honest.

A column in the New York Times by Jim Tankersley looks at the odd claim, put forth by Elizabeth Warren and others, that class-warfare taxes are good for growth.

Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth… Generations of economists, across much of the ideological spectrum, have long held that higher taxes reduce investment, slowing economic growth. …Ms. Warren and other leading Democrats say the opposite. …that her plans to tax the rich and spend the revenue to lift the poor and the middle class would accelerate economic growth, not impede it. …That argument tries to reframe a classic debate…by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans.

Most people, when looking at why some nations grow faster and become more prosperous, naturally recognize that there’s a trade-off.

So what’s the basis of this counter-intuitive and anti-empirical assertion from Warren, et al?

It’s partly based on their assertion that more government spending is an “investment” that will lead to more growth. In other words, politicians ostensibly will allocate new tax revenues in a productive manner.

Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth. …Ms. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. …a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.

To be fair, this isn’t a totally absurd argument.

The Rahn Curve, for instance, is predicated on the notion that some spending on core public goods is correlated with better economic performance.

It’s only when government gets too big that the Rahn Curve begins to show that spending has a negative impact on growth.

For what it’s worth, modern research says the growth-maximizing size of government is about 20 percent of economic output, though I think historical evidence indicates that number should be much lower.

But even if the correct figure is 20 percent of GDP, there’s no support for Senator Warren’s position since overall government spending currently consumes close to 40 percent of U.S. economic output.

Warren and others also make the discredited Keynesian argument about government spending somehow kick-starting growth, ostensibly because a tax-and-spend agenda will give money to poor people who are more likely to consume (in the Keynesian model, saving and investing can be a bad thing).

Democrats cite evidence that transferring money to poor and middle-class individuals would increase consumer spending…liberal economists say taxes on high-earners could spur growth even if the government did nothing with the revenue because the concentration of income and wealth is dampening consumer spending.

This argument is dependent on the notion that consumer spending drives the economy.

But that’s not the case. As I explained two years ago, consumer spending is a reflection of a strong economy, not the driver of a strong economy.

Which helps to explain why the data show that Keynesian stimulus schemes routinely fail.

Moreover, the Keynesian model only says it is good to artificially stimulate consumer spending when trying to deal with a weak economy. There’s nothing in the theory (at least as Keynes described it) that suggests it’s good to endlessly expand the public sector.

The bottom line is that there’s no meaningful theoretical or empirical support for a tax-and-spend agenda.

Which is why I think this visual very succinctly captures what Warren, Sanders, and the rest (including international bureaucracies) are proposing.

P.S. By the way, I think Tankersley’s article was quite fair. It cited arguments from both sides and had a neutral tone.

But there’s one part that rubbed me the wrong way. He implies in this section that America’s relatively modest aggregate tax burden somehow helps the left’s argument.

Fueling their argument is the fact that the United States now has one of the lowest corporate tax burdens among developed nations — a direct result of President Trump’s 2017 tax cuts. Tax revenues at all levels of government in the United States fell to 24.3 percent of the economy last year, the Organization for Economic Cooperation and Development reported on Thursday, down from 26.8 percent in 2017. America is now has the fourth lowest tax burden in all of the O.E.C.D.

Huh? How does the fact that we have lower taxes that other nations serve as “fuel” for the left?

Since living standards in the United States are considerably higher than they are in higher-taxed Europe, it’s actually “fuel” for those of us who argue against class-warfare taxation and bigger government.

Though maybe Tankersley is suggesting that America’s comparatively modest tax burden is fueling the greed of U.S. politicians who are envious of their European counterparts?

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I was interviewed yesterday about the possibility of a recession and potential policy options. You can watch the full interview here and get my two cents about economic forecasting, as well as Keynesian monetary policy.

In this segment, you can see that I’m also worried about a return of Keynesian fiscal policy.

Let’s examine the issue, starting with an analogy.

According to the Urban Dictionary, a bad penny is a “thing which is unpleasant, disreputable, or otherwise unwanted, especially one which repeatedly appears at a bad time.”

That’s a good description of Keynesian economics, which is the strange notion that the government can provide “stimulus” by borrowing money from some people, giving it to other people, and assuming that society is then more prosperous.

Keynesianism has a long track record…of failure.

Now the bad penny is showing up again.

Donald Trump already has been pushing Keynesian monetary policy, and the Washington Post reports that he is now contemplating Keynesian fiscal policy.

Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown… The payroll tax was last cut in 2011 and 2012, to 4.2 percent, during the Obama administration as a way to encourage more consumer spending during the most recent economic downturn. …Payroll tax cuts have remained popular with Democrats largely because they are seen as targeting working Americans and the money is often immediately spent by consumers and not saved. …In the past, Democrats have strongly supported payroll tax cuts, while Republicans have been more resistant. Republicans have complained that such cuts do not help the economy.

As I wrote back in 2011, it’s possible that a temporary reduction in the payroll tax rate could have some positive impact. After all, the marginal tax rate on work would be lower.

But it wouldn’t be a large effect, and whatever benefit wouldn’t accrue for Keynesian reasons. Consumer spending is a symptom of a strong economy, not the cause of a strong economy.

Now let’s look at another nation.

Germany was actually semi-sensible during the last recession, resisting the siren song of Keynesianism.

But now politicians in Berlin are contemplating a so-called stimulus.

The Wall Street Journal opines against this type of fiscal backsliding.

The German Finance Minister said Sunday he might possibly…cobble together a Keynesian stimulus package for his recession-menaced country. …Berlin invites this stimulus pressure as the only large eurozone government responsible enough to live within its means. A balanced budget and government debt below 60% of GDP encourage the International Monetary Fund…to call for Berlin to “use” its fiscal headroom to avert a recession. …Germany’s record on delivering projects quickly is lousy, as with Berlin’s perennially delayed new airport. Too few projects would arrive in time to stimulate the new business investment proponents say would save Germany from an imminent downturn, if they stimulate business investment at all. …The worst idea, though one of the more likely, is some form of cash-for-clunkers tax handout to support the auto industry.

The right answer, as I said in the above interview, is to adopt sensible pro-market reforms.

The main goal is faster long-run growth, but such policies also help in the short run.

And the WSJ identifies some of those reforms for Germany.

Cutting taxes in Germany’s overtaxed economy would be a faster and more effective stimulus… The main stimulus Germany needs is deregulatory. In the World Bank’s latest Doing Business survey, Germany ranked behind France on time and cost of starting a business, gaining construction permits and trading across borders. Germany also lags on investor protections and ease of filing tax returns. A dishonorable mention goes to Mrs. Merkel’s Energiewende (energy transformation), which is driving up costs for businesses already struggling with trade war, taxes and regulation. …these problems don’t require €50 billion to fix, and scrapping the Energiewende would save Berlin and beleaguered businesses and households money. The bad news for everyone is that Berlin is more likely to fall for a quick-fix chimera and waste the €50 billion.

The bottom line is that Keynesian economics won’t work. Not in the United States, and not in Germany.

But politicians can’t resist this failed approach because they can pretend that their vice – buying votes by spending other people’s money – is actually a virtue.

In other words, “public choice” in action.

Let’s close by augmenting our collection of Keynesian humor. Here’s a “your mama” cartoon, based on the Keynesian notion that you can boost an economy by destroying wealth.

P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Earlier this month, I commented on a Wall Street Journal report that expressed puzzlement about some sub-par economic numbers in America even though politicians were spending a lot more money.

I used the opportunity to explain that this shouldn’t be a mystery. Keynesian economics never worked in the past, so it shouldn’t be a surprise that it’s not working today.

This is true in the United States, and it’s true in other nations.

Speaking of which, here are some excerpts from a story in the Wall Street Journal about China’s sagging economy.

A strategy by Chinese policy makers to stimulate the economy…hasn’t stopped growth from slowing, stoking expectations that Beijing will roll out more incentives such as easier credit conditions to get businesses and consumers spending. …The breakdown of second-quarter figures shows how roughly 2 trillion yuan ($291 billion) of stimulus, introduced by Premier Li Keqiang in March, is failing to make business owners less risk-averse. …While Beijing has repeatedly said it wouldn’t resort to flooding the economy with credit, economists say it is growing more likely that policy makers will use broad-based measures to ensure economic stability. That would include fiscal and monetary stimulus that risks inflating debt levels. Policy makers could lower interest rates, relax borrowing restrictions on local governments and ease limits on home purchases in big cities, economists say. Measures they could use to stimulate consumption include subsidies to boost purchases of cars, home appliances and other big-ticket items.

This is very worrisome.

China doesn’t need more so-called stimulus policies. Whether it’s Keynesian fiscal policy or Keynesian monetary policy, trying to artificially goose consumption is a dead-end approach.

At best, temporary over-consumption produces a very transitory blip in the economic data.

But it leaves a permanent pile of debt.

This is why, as I wrote just a couple of days ago, China instead needs free-market reforms to liberalize the economy.

A period of reform beginning in the late 1970s produced great results. Another burst of liberalization today would be similarly beneficial.

P.S. Free-market reforms in China also would help cool trade tensions. That’s because a richer China would buy more from America, thus appeasing folks like Trump who mistakenly fixate on the trade deficit. More important, economic liberalization presumably would mean less central planning and cronyism, thus mitigating the concern that Chinese companies are using subsidies to gain an unfair advantage.

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Given the repeated failures of Keynesian economic policy, both in America and around the world, you would think the theory would be discredited.

Or at least be treated with considerable skepticism by anyone with rudimentary knowledge of economic affairs.

Apparently financial journalists aren’t very familiar with real-world evidence.

Here are some excerpts from a news report in the Wall Street Journal.

The economy was supposed to get a lift this year from higher government spending enacted in 2018, but so far much of that stimulus hasn’t shown up, puzzling economists. Federal dollars contributed significantly less to gross domestic product in early 2019 than what economic forecasters had predicted after Congress reached a two-year budget deal to boost government spending. …Spending by consumers and businesses are the most important drivers of economic growth, but in recent years, government outlays have played a bigger role in supporting the economy.

The lack of “stimulus” wasn’t puzzling to all economists, just the ones who still believe in the perpetual motion machine of Keynesian economics.

Maybe the reporter, Kate Davidson, should have made a few more phone calls.

Especially, for instance, to the people who correctly analyzed the failure of Obama’s so-called stimulus.

With any luck, she would have learned not to put the cart before the horse. Spending by consumers and businesses is a consequence of a strong economy, not a “driver.”

Another problem with the article is that she also falls for the fallacy of GDP statistics.

Economists are now wondering whether government spending will catch up to boost the economy later in the year… If government spending were to catch up in the second quarter, it would add 1.6 percentage points to GDP growth that quarter. …The 2018 bipartisan budget deal provided nearly $300 billion more for federal spending in fiscal years 2018 and 2019 above spending limits set in 2011.

The government’s numbers for gross domestic product are a measure of how national income is allocated.

If more of our income is diverted to Washington, that doesn’t mean there’s more of it. It simply means that less of our income is available for private uses.

That’s why gross domestic income is a preferable number. It shows the ways – wages and salaries, small business income, corporate profits, etc – that we earn our national income.

Last but not least, I can’t resist commenting on these two additional sentences, both of which cry out for correction.

Most economists expect separate stimulus provided by the 2017 tax cuts to continue fading this year. …And they must raise the federal borrowing limit this fall to avoid defaulting on the government’s debt.

Sigh.

Ms. Davidson applied misguided Keynesian analysis to the 2017 tax cut.

The accurate way to analyze changes in tax policy is to measure changes in marginal tax rates on productive behavior. Using that correct approach, the pro-growth impact grows over time rather than dissipating.

And she also applied misguided analysis to the upcoming vote over the debt limit.

If the limit isn’t increased, the government is forced to immediately operate on a money-in/money-out basis (i.e. a balanced budget requirement). But since revenues are far greater than interest payments on the debt, there would be plenty of revenue available to fulfill obligations to bondholders. A default would only occur if the Treasury Department deliberately made that choice.

Needless to say, that ain’t gonna happen.

The bottom line is that – at best – Keynesian spending can temporarily boost a nation’s level of consumption, but economic policy should instead focus on increasing production and income.

P.S. If you want to enjoy some Keynesian-themed humor, click here.

P.P.S. If you’re a glutton for punishment, you can watch my 11-year old video on Keynesian economics.

P.P.P.S. Sadly, the article was completely correct about the huge spending increases that Trump and Congress approved when the spending caps were busted (again) in 2018.

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Being a policy wonk in a political town isn’t easy. I care about economic liberty while many other people simply care about political maneuvering. And the gap between policy advocacy and personality politics has become even larger in the Age of Trump.

One result is that people who should be allies periodically are upset with my columns. Never Trumpers scold me one day and Trump fanboys scold me the next day. Fortunately, I have a very simple set of responses.

  • If you would have loudly cheered for a policy under Reagan but oppose a similar policy under Trump, you’re the problem.
  • If you would have loudly condemned a policy under Obama but support a similar policy under Trump, you’re the problem.

Today, we’re going to look at an example of the latter.

The New York Times reported today on Trump’s advocacy of easy-money Keynesianism.

President Trump on Friday called on the Federal Reserve to cut interest rates and take additional steps to stimulate economic growth… On Friday, he escalated his previous critiques of the Fed by pressing for it to resume the type of stimulus campaign it undertook after the recession to jump-start economic growth. That program, known as quantitative easing, resulted in the Fed buying more than $4 trillion worth of Treasury bonds and mortgage-backed securities as a way to increase the supply of money in the financial system.

I criticized these policies under Obama, over and over and over again.

If I suddenly supported this approach under Trump, that would make me a hypocrite or a partisan.

I’m sure I have my share of flaws, but that’s not one of them.

Regardless of whether a politician is a Republican or a Democrat, I don’t like Keynesian fiscal policy and I don’t like Keynesian monetary policy.

Simply stated, the Keynesians are all about artificially boosting consumption, but sustainable growth is only possible with policies that boost production.

There are two additional passages from the article that deserve some commentary.

First, you don’t measure inflation by simply looking at consumer prices. It’s quite possible that easy money will result in asset bubbles instead.

That’s why Trump is flat-out wrong in this excerpt.

“…I personally think the Fed should drop rates,” Mr. Trump said. “I think they really slowed us down. There’s no inflation. I would say in terms of quantitative tightening, it should actually now be quantitative easing. Very little if any inflation. And I think they should drop rates, and they should get rid of quantitative tightening. You would see a rocket ship. Despite that, we’re doing very well.”

To be sure, many senior Democrats were similarly wrong when Obama was in the White House and they wanted to goose the economy.

Which brings me to the second point about some Democrats magically becoming born-again advocates of hard money now that Trump is on the other side.

Democrats denounced Mr. Trump’s comments, saying they showed his disregard for the traditional independence of the Fed and his desire to use its powers to help him win re-election. “There’s no question that President Trump is seeking to undermine the…independence of the Federal Reserve to boost his own re-election prospects,” said Senator Ron Wyden of Oregon, the top Democrat on the Finance Committee.

Notwithstanding what I wrote a few days ago, I agree with Sen. Wyden on this point.

Though I definitely don’t recall him expressing similar concerns when Obama was appointing easy-money supporters to the Federal Reserve.

To close, here’s what I said back in October about Trump’s Keynesian approach to monetary policy.

I also commented on this issue earlier this year. And I definitely recommend these insights from a British central banker.

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