Monday, March 5, 2018

The Coming Trump Price Inflation?

The Washington Post economic columnist Robert J. Samuelson looks at things from a Keynesian perspective but in his most recent column, he is correct in featuring a number of Trump policy steps that could lead to an explosion in price inflation.

The Keynesian warnings about the policy steps are off a bit, but the warnings, themselves, are justified. Trump's policies will limit the supply of economic goods and likely result in the Federal Reserve monetizing a good chunk of government spending. All of which is very likely to lead to accelerating price inflation.

Samuelson writes:
We tried this in the ’60s and ’70s, and it failed abysmally. It led to double-digit inflation, frequent recessions and public demoralization. No matter. Trump is moving toward this sort of inflationary system by raising the economy’s demand and constricting its supply.

Here’s Trump’s check list.

First, pass a large tax cut financed by more borrowing. Check. The Tax Cuts and Jobs Act will reduce taxes by $1.5 trillion over a decade and be financed by larger deficits.

Second, increase government spending without, of course, offsetting extra demand with higher taxes (see above). Check. The recent budget plan is estimated to raise federal outlays by another $1.5 trillion over a decade.
Third, reduce government regulations, making it easier to begin new investment and construction projects. Check. This, too, would raise demand, though estimating how much is hard.

Fourth, limit competition from foreign workers and businesses by restricting immigration and imports. Check. From the border wall to rescinding Deferred Action for Childhood Arrivals, the administration has been anti-immigrant. Likewise, it has been protectionist; last week Trump announced new tariffs on steel and aluminum imports.
Well. it is not exactly about raising demand but raising the amount of money demand because more dollars are likely to be printed by the Fed under Trump and  Samuelson's step three is not a real problem. Deregulation leads to the production of additional goods and services. The other points are problems for the economy, however, because they either shrink the economy or boost deficits that will end up gouging money out of the private sector one way or another. Indeed, the possibility is very real that, as in the '60s and '70s, the Fed may monetize a good portion of the debt resulting in an explosion in price inflation. 

Heed, Samuelson's warning here just ignore how he gets to the warning.

 -Robert Wenzel 

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