National Post (National Edition)
Donald’s Keynesian coup
TRUMP MAY HAVE A GUT INSTINCT FOR THE INFRASTRUCTURE TO MAKE AMERICA GREAT AGAIN.
The OECD recently handed an endorsement to Donald Trump’s plan for massive infrastructure spending. It forecasts U.S. GDP growth for 2017 at 2.3, the highest among G7 countries, with Canada in second place and not far behind. Stock markets are booming, in Europe as well as North America.
Trump’s grand plan has already raised inflationary expectations, long-term interest rates, and House Speaker Paul Ryan’s eyebrows. It is a program that dare not speak its left-wing name: “Keynesian Fiscal Stimulus.”
Among conservative economists, the adjective “Keynesian” conjures up sordid nightmares of socialism or worse. For Tea-Party Republicans it is a red flag almost as dreadful as communism. Never mind that Lord Maynard Keynes himself, the 20th century’s most celebrated mainstream economist, touted his 1930s prescription of deficit spending as a short-term prophylactic to prevent capitalism from self-destructing by creating employment and wages that would inject spending into the private sector.
Donald Trump may know nothing about Keynesianism — it wasn’t at the top of the curriculum when he studied real-estate economics at the Wharton Business School — but he has a gut instinct for what could put the tired, hungry and poor in America’s Rust Belt back to work. And, hopefully, he has a gut instinct for the kind of infrastructure that might Make America Great Again.
President Obama had the same instincts, but every infrastructure bill that he introduced was shot down by a hostile Congress. Trump will be blessed by an all-Republican congress. His challenge will be to persuade a House led by a clever and persistent Paul Ryan, who is committed to deficit reduction.
Trump is nothing if not pragmatic. If we were advising him on how to spend on infrastructure without running deficits, we would suggest he listen to the respectable mainstream economists across the political spectrum who are now advocating “helicopter money.” This is a term coined back in the 1960s by Milton Friedman, who in the mid-20th century articulated a brand of macroeconomics that was considered the antithesis of Keynesianism.
Yet Friedman’s bottom line was not dissimilar from Keynes’s: He simply suggested that to stimulate a stagnant economy, it is necessary to generate spending. Where he differed from Keynes was to suggest that spending might better be generated by putting money directly into consumers’ hands — metaphorically dropping cash from helicopters — rather than relying on government borrowing, which might “crowd out” consumer and business spending because it would raise interest rates.
The modern means by which money could be injected into the economy is not of course by dropping it from helicopters but by mandating the central bank — in this case the Federal Reserve — to buy bonds and thereby create money explicitly for the purpose of financing a government project — in this case infrastructure.
In the old days, the worry would be that that would be inflationary. But a near-decade of so-called Quantitative Easing, in America and then Europe and now Japan, in the context of a global economy where China and Germany supply the world’s saving, has proved that worry wrong. Ironically, persistent worry of the past decade has been that inflation has been too low, not too high.
And the beauty — cosmetic though it may be — of monetizing old borrowing rather than creating new borrowing to finance government spending (commonly called “printing money”) — is that it would not lead to larger deficits. If infrastructure spending is financed by “printing money” rather than expanding fiscal deficits, Paul Ryan and his ilk might well see Beauty rather than the Beast.
Traditionally, “printing” money has been held to create inflation. But in today’s rich world, higher inflation is devoutly wished for. In recent years, the developed world — not just Japan, but Europe and North America — has quite correctly agonized about the dangers of deflation, and prayed fervently that it can meet its “inflation targets,” typically about two per cent.
Some Keynesian economists — notably Nobel laureate Paul Krugman — have long argued for a target closer to four per cent. Moderately high but nevertheless stable rates of inflation allow wage increases to proceed but be partially passed into profits by way of price increases. It is a way of satisfying the legitimate claims of labour without shutting down businesses.
And now, over the past few weeks, the world’s central banks are vocally breathing easier because the deflation-ogre seems to have backed off. The reason is the prospect of Trump’s putative and probably inflationary plan for massive infrastructure spending, the plan that dares not speak its Keynesian name.
If Trump seeks the advice of pragmatic economists, rather than ideologues on the right or left, he may well find an avenue to resuscitate the Rust Belt while at the same time making America Great Again.