Former Fed Pres: Trump Making Economic Sense

From Bloomberg View:

Donald Trump has offered up a number of questionable ideas on how to manage the U.S. economy. Some of his latest proposals, though, might make a lot of sense.

About a month ago, I urged the presidential candidates to explain what policies and leadership they would like to see at the Federal Reserve. So I was glad to see Trump address Fed-related issues in aninterview with Fortune magazine last week.

His key comments: “We have to rebuild the infrastructure of our country. We have to rebuild our military, which is being decimated by bad decisions. We have to do a lot of things. We have to reduce our debt, and the best thing we have going now is that interest rates are so low that lots of good things can be done that aren’t being done, amazingly.”

I read this as calling for two forms of fiscal stimulus. One is more spending, especially on the military and on infrastructure such as roads and bridges. The second is maintaining low taxes despite high levels of government debt (in other remarks, Trump has favored tax reduction). Both could have a beneficial effect on the U.S. and global economy, creating the demand for goods and services needed to get inflation and employment back up to healthier levels.

Much, however, would depend on the Federal Reserve’s response. If the Fed raised interest rates aggressively to keep inflation unchanged, then the removal of monetary stimulus could cancel out the effect of the added fiscal stimulus. If, by contrast, the Fed refrained from raising rates, the effect could be magnified: If households and businesses expected more inflation in the future, they would be more likely to spend on goods and services immediately.

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