The new Administration’s economic policy

Economic policy seems unlikely to be the main channel through which the new Administration damages the country and world.*  But this blog is supposedly about economics, so let me focus on that here.

Journalists and Wall Street types are trying to work through what policies will be put in place and what effects they might have. That is a tough task, because in many ways the situation is unpredictable.  But I think the forecasting job could be simplified a bit if we just abandoned the idea that there is a coherent economic policy, particularly in macro.

The president elect clearly has an agenda, which definitely overlaps with economic policy in some areas.  Items on this agenda include:

  • Reducing taxes, particularly at the high end.
  • Narrowing the social safety net, including by dismantling Obamacare.
  • Deregulating the banking system and preventing regulation of the shadow banking system.
  • Unwinding environmental protections.
  • Possibly simplifying the tax code, although this is more a priority of the Congressional wing of the GOP.

But when people speak of economic policy, they tend not to focus on those agenda items. Instead, they tend to focus on three issues that are more macro oriented.  The consensus seems to believe the following three things. First,  the Administration wants to reduce the trade deficit, in part by “renegotiating” trade deals. Second, they want to try to stimulate the economy with wider fiscal deficits, in part to finance a large infrastructure spending program. And finally, they want to influence the Fed somehow, although in which direction is quite clear, because the hard money rhetoric is by some accounts at odds with the fiscal approach.

As I see it, the main problem with this economic “policy” is that people are taking it seriously, and allowing it to distract them from other much more important — and scary — aspects of the new environment.   Let me cite just a couple examples, to give you a sense of what I am talking about. I am sure you can add more from memory.

The Wall Street Journal had a nice piece explaining that reducing the trade deficit would be difficult to achieve in an era of fiscal expansion. Bloomberg points out that the strong dollar is also going to make it harder to reduce the trade deficit, although I think that is basically the same point, and post-election the dollar has not really moved that far.

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The dollar is at an umpteen year high blah blah blah. It has moved 3% since election.

Not to be outdone or to fail to exaggerate, Business Insider claims that Wall Street is now afraid of a return to 1970s era stagflation.  Even though, Wall Street trades the 10-year CPI breakeven at 1.8%, which maps to a PCE inflation rate of 1.5-1.6%. As often I include BI in this stuff, just for fun. They truly are ridiculous.

I don’t think it is helpful – i.e. likely to allow you to anticipate events – to believe that the new Administration is actually committed to any of these so-called policies. Worrying about the trade deficit is just an excuse to blame “others” for perceived problems in the US economy. It fits neatly into the new Administration’s playbook of creating divisions to exploit for political purposes.

The idea of fiscal expansion doesn’t make much sense in an environment of near full employment and apparent escape from liquidity trap. If it ends up “stimulating”, it is likely just to be offset by the Fed. So its main effect will be to push up in interest rates.

The infrastructure angle might make sense on supply-side grounds, but take a look at this.  Deficit finance in this environment is probably mostly just a combination of political expediency and the old Republican objective of starve the beast.  That is, higher deficits now create pressure for spending cuts later. It has nothing to do with macro. And nor am I really alarmed by the macro aspect.

And finally, how the new Administration will pressure the Fed is an imponderable, at least to me.  The new guy will probably make a show of not reappointing Yellen, but beyond that I doubt they understand or much care about monetary policy, so long as it does not stand in the way of their agenda items.

To repeat a point I have a made a few times before. I have no interest in fake balance here.  In my view, the president elect is very bad news. But, to focus on what is admittedly the less important issue, I don’t think it is clarifying to think that the new guy has an “economic policy.”

Former director of the CBO, Douglas Holtz Eakin once said (pretty) memorably something along the lines of: The United States does not have fiscal policy; it has fiscal results. I thought that was a good point at the time, and the idea behind it probably applies very broadly in the current environment.

* For example, here is Noah Smith pointing out that a trade war with China would be less troubling than an actual war. And here is Reince Priebus not ruling out a Muslim registry.  And here is Talking Points Memo on how the new guy has already violated the constitution and will run a record corrupt Administration. Fake centrists like this guy are looking awfully foolish and weak post the election.