In Praise of Donald Trump’s Loose Fiscal Policy

President Trump’s demand-side economic policy so far has been successful, and his demand-side views are an improvement on the views of Republicans in the recent past. His willingness to increase budget deficits, often in the face of criticism from deficit hawks across the political spectrum, has put people back to work and has been an unalloyed good for the country. In contrast, the worries of his budget’s critics have not materialized, and there is no sign that they will in the future.

It may be surprising that Trump has been successful in this area; he has made plenty of erratic statements on economics generally and demand-side economics specifically. For example, he has a habit of criticizing the Federal Reserve chairman, who is supposed to be independent of politics, and he has made plenty of contradictory or false statements about the size of his tax cut. Critics of his demand-side approach are sober-minded and serious. Despite that, Trump’s actual policies have been reasonable, successful, and a move in the right direction.

Demand-side policy is about money. A government can issue its own currency, and it can make choices about when to release money into the economy or when to hold it back. Any state issuing a currency has to make some choices in this area. Both releasing money into the economy (a “loose” policy), which can be done through deficit spending and holding interest rates low, and pulling it back (a “tight” policy), which can be done by closing deficits and raising interest rates, have their strategic uses.

Economists over a century of study have found that economies tend to fail in two kinds of ways. The first is when there is too little money in the economy. In this situation, people sometimes end up without work — not because they cannot produce, and not because their talents are not desired, but because their would-be customers don’t have enough money to pay them. This is tremendously painful: Generations can permanently lose earning potential, and suicide rates even can rise in times of higher unemployment. Such a problem can be remedied by loose policy, releasing more money into the economy in order to employ more of those able would-be workers.

The second mode of failure is when there is too much money in the economy. In this situation, there are few able but unemployed workers left but lots of extra money “looking” for things to buy. In this case, producers raise prices, often rapidly, which frustrates consumers and financial markets alike. Unchecked, this trend can accelerate into hyperinflation and the eventual collapse of the currency. But it can be remedied by tight policy, which brings currency back home to its issuer and stops the overflow.

 Read more at National Review

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