June 22, 2016
Neil Irwin has an Upshot piece reporting on a study by Mark Zandi projecting that the Donald Trump agenda would be an economic disaster. The piece is a fair assessment (he sees Zandi’s projections as plausible, but certainly highly debatable), but it is worth making a couple of additional points.
First, much of the Zandi horror story is premised on the idea that the economy is at full employment and that any further stimulus from larger budget deficits would lead to higher interest rates and/or inflation. If folks believe this then they must also believe that stimulus from infrastructure spending would lead to higher interest rates and or/or inflation.
I am the last person to defend tax cuts for rich people, but I don’t do make-it-up-as-you-go-along economics. If you believe that the economy is actually well below full employment and that it would benefit from the boost given by an increase in the budget deficit, then this part of the Zandi horror story does not fit. (The argument that the rich won’t spend their tax cut goes the wrong way. The problem from deficits in this story is that they are creating demand in the economy. If the rich save all their tax cuts, then we don’t have this problem.)
The other point is that Zandi’s assumptions on the evil of Trump’s tariffs seem somewhat exaggerated as others, including Paul Krugman, have noted. More importantly, there is actually a serious policy that could be buried in the midst of Trump’s bluster.
It would be perfectly reasonable for the United States to try to negotiate a rise in China’s currency against the dollar. Yes, I know China is having troubles just now and has actually been trying to keep the value of its currency up by selling dollars. But its holdings of more than $3 trillion in reserves has the effect of keeping down the value of its currency against the dollar, just as the Fed’s holding of more than $4 trillion in assets has the effect of holding down interest rates. (Sorry, the logic is inescapable for those who don’t do make-it-up-as-you-go-along economics.)
Anyhow, it would make perfect sense to negotiate a path for a higher valued yuan. At the negotiating table it would be perfectly reasonable to threaten various forms of retaliation as pressure, including tariffs. It would also be necessary to put concessions on the table, since the U.S. can’t just dictate policy to China, even if Donald Trump is president. (When he makes me Treasury Secretary, my top candidates will be that China doesn’t have to pay Bill Gates for Windows or Pfizer for its drug patents, and that they need not worry about market access for Goldman Sachs.)
If China did raise the value of its currency, it would reduce the U.S. trade deficit, boosting demand and creating more jobs, especially in manufacturing. (It would also lower our budget deficits, making deficit hawks happy.) This is a perfectly reasonable policy which should not be banished from consideration because it is associated with Donald Trump. (I have no idea what Trump hopes to get from his tariffs on Mexico.)
Note: Typos corrected, thanks Robert Salzberg.
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