Wednesday, November 16, 2016

Mainstream Keynesian Criticism of Crazed Trump Economics

Donald Trump economics is far from Austrian school economics or just plain free market economics.

But it is even an internal contradiction when it comes to mainstream Keynesian economics, as pointed out by two of my favorite Keynesian economists, Ben Steil of the Council of Foreign Relations and Harvard Professor Martin Feldstein.

Steil sent out this tweet last yesterday:
In other words, basic Keynesian theory calls for more government spending when the economy is in recession. Trump is going to launch massive spending programs now. But some believe that Trump will appoint Fed members who will steer the Fed toward monetary restraint---which according to Keyensians is done when the economy is overheating and far from recession.

So what gives?

A Feldstein essay appeared yesterday in The Wall Street Journal.

He made this sound point:
Although there are local pockets of high unemployment, the economy as a whole is essentially at full employment with a 4.9% unemployment rate in October. The key to better jobs is increased business investment in equipment and research to raise labor productivity, supplemented by more skill training in firms and community colleges. Tax reform could induce U.S. companies to bring back some of the $2 trillion of profits held abroad and could provide incentives for firms to spend those funds on investment and training.

And then he makes this point from his Keynesian perspective, which is policy advice contrary to what Trump is expected to do:
 Although there appears to be bipartisan support for spending on roads, bridges and other infrastructure, this should be postponed until an economic downturn creates the need for fiscal stimulus. Meanwhile, it would be good to devote those dollars to reducing the national debt while drawing up specific investment plans to be ready during a downturn.
There will be no debt reduction under Trump. There will be massive infrastructure spending.

Even Keynes has to be spinning.



  1. Not sure to call this a silver lining but given the mainstreams poor performance in predicting recessions and governments inertia regarding new policy, Trumps tighter monetary policy and looser fiscal policy might by accident hit at just the right time (according to Keynesians). If the economy improves this will be attributed to Trump and we will be subject to Trumponomics for many years but no one will ever get the timing right again. I guess this would be more like a black swan on steroids.

  2. Trump's economic policy makes perfect sense, in his worldview. He will massively increase spending, while keeping tight monetary policy to keep inflation in check. So where will all the money come from? From his avowed economic extortion of American allies. Want access to American markets? Want American military protection? You better buy US Treasuries and prop up this massive increase in debt.

    He wants to apply the Saudi model on a grand scale. More than ever before, so-called sovereign nations will become nothing more than satrapies of the American empire, economically and politically. It's a big gamble. But, that's his plan.