Historically, a recession is overdue. Many assets are in a bubble right now. He has a few choices on how to deal with this.
Intervene with monetary and fiscal stimulus. Keep the doves at the Fed. Harangue congress to pass vast spending schemes. This path will be complicated by debt ceiling negotiations. Will the Republicans in congress back Trump’s wild spending dreams? Probably not, but I’m sure they can cobble together a bipartisan majority. If this is the path, what concessions will the Democrats demand?
I have no doubt that this could perpetuate the bubble and delay recession for up to a couple years. What will be the political implications of that?
Lance the boil. Harangue the centrists in congress and force them to make real cuts. Clean house at the Fed, blaming the doves for our woes, and appoint hard money guys. This will precipitate a recession by summer at the latest. Radically deregulate and cut spending. Witness huge growth.
Judging from the people Trump is aligned with, and the statements he has made post-election, he will take option 1. He may have already got the Ned Beatty talk.
There is also the possibility that people are just too freaked out and the recession takes place early next year regardless of what Trump does. Any predictions?
Monetary stimulus is a cause of income inequality. The second option would be a punch in the gut to the top earners, which is why it won’t happen.
“Job creation” is not an end. The ends are the satisfaction of consumer desires. Capital investment makes the satisfaction of consumer desires easier and cheaper. Unfortunately, monetary stimulus causes malinvestment, and the economy’s resources are diverted into capital investment that must be liquidated in the ensuing bust. Interest rates determined by the market limit malinvestment and cause the economy’s resources to be allocated in ways that better satisfy consumer desires.
And what do you think consumers are going to use to satisfy their desires if they don’t have jobs? Trickle-up works, trickle-down hasn’t worked at ANY point that we’ve tried it.
Trickle-Up
Give lower income people more money.
They go spend that money on stuff.
The price of stuff rises creating an opportunity to make a profit making stuff.
Facilities to make stuff are built - creating more jobs.
Many of those jobs are filled by people of lower income.
The people who funded step 4 make more money.
Repeat Steps 2-6.
OR
Give money to people of already high income.
They spend a small portion of it on stuff they don’t already own (much of it made overseas). The rest is “invested” in ways that don’t increase GDP or demand.
Very few domestic jobs are created, demand doesn’t increase noticeably.
The people in Step 1 make more money. Nobody else does.
How about matching the capital-gains tax rates to income, at levels above $1 million? How about using that increased revenue to fund the infrastructure projects Trump talked about but didn’t elaborate on how to pay for?
How about single-payer health insurance for all citizens, with governmental negotiation for treatment and drug prices?
My heart’s not very prone to fainting, nor is the part of my brain that can do arithmetic.
If you propose cutting white people’s social security and medicare, they’re going to string you up from the lamp-posts. Dubya might have been that dumb, but Trump isn’t.
So those cuts are out. And we need a huge, classy military, so cuts to the military are out. So I guess all the cuts have to come from the 10% of the budget that isn’t military and social security and medicare and medicaid. So…all of it?
Since the whole thread seems to take this as the key premise, cite?
[QUOTE=WillFarnaby]
Monetary stimulus is a cause of income inequality.
[/QUOTE]
A very misleading statement. Firstly, it obviously depends on what the monetary stimulus actually is. But secondly stimulus is not a structural change to the economy, it’s unlikely on its own to make a profound difference to something as fundamental as the distribution of wealth / incomes.
It sounds kind of pre-emptively excusing, i.e. if a recession hits, it won’t be because of any particular Trump or Republican policy, but because it was “due”.
WillFarnaby, please stop making these huge sweeping claims about economic theory and practice without providing citations to back them up. Your expertise on the subject is not a given, and has indeed been called into question many times before, quite justifiably. A great many unsupported statements here sound nonsensical.
First, I have two examples of drastic spending cuts that resulted in growth, post WWI and post WWII. We haven’t made meaningful cuts since then, so can you provide an example where it hasn’t worked? We also pulled back on government controls in both postwar periods.
I have no interest in brainstorming ways to pay for Trump’s half-baked schemes for national glory. I would be the least surprised person in the room if Trumpcare turned out to be a much more socialized “solution” than Obamacare. If Trump wants option 1, he will make concessions to the Democrats.
Yes. Like I said, option 2 won’t happen. Trump is not a free marketeer by any stretch.
Right, which is why Trump will be conventional and attempt to maintain the status quo with option 1. Of course this could still fail to delay recession as I said.
“If we assume that the final two quarters of 2015 will see positive growth, the most realistic prospect for the onset of a new recession will be in 2016, meaning that the current period of economic recovery will have lasted a minimum of 72 months (6 years). By post-War standards, by that time, the U.S. will have been overdue for another recession by 2 years. As things look now, it certainly appears possible, perhaps even probable, that a recession will either begin, or be well under way, in conjunction with the U.S. presidential election.”
"Kevin Warsh, a former Fed board member and one of the Brookings panelists, held a different view explaining that quantitative easing as a policy works purely through an “asset price channel” enriching the few who own stocks or other financial products (and not the 96% of Americans who receive the majority of their income through labor). "
But don’t worry:
"Former Fed chairman Ben Bernanke weighed in on the debate, arguing that “the distributional impact of monetary policy should not prevent the Fed from pursuing its mandate to achieve maximum employment and price stability.”
You don’t say. Imagine if George W. Bush had said “The distributional impact of my oil subsidies should not prevent the government from pursuing its mandate to promote the general welfare.”
On the contrary I stated that it would preferable for Trump and the Republicans to provoke the recession. Also I stated that if Trump continues the status quo, he could possibly delay the recession.
Who’s statements on economic theory haven’t been called into question. If they haven’t been, they’re not saying anything.
And notably the marginal tax rates on the highest-income earners were very high during those wars and only came down well after those wars were over, so there were periods of high taxation and spending cuts. If you think you can have the latter without the former (and the notion of putting millions of Americans back to work on “infrastructure” doesn’t suggest much of the latter), good luck. It’ll just create more deficits and debt.
So you admit that drastic spending cuts have led to economic growth? Do you have an example where there were drastic spending cuts and it didn’t work out well?
Well, in the 20th century, the only examples I can find of drastic cuts in spending (“outlays”), by which I mean a 20% or more drop in a single year are 1920, 1921, 1922, 1946 and 1947… i.e. the postwar periods you mentioned earlier. And during those years, the marginal tax rates on top-income earners were very high, so drastic spending cuts alone… don’t exist. If we want to see cases of spending going up without a corresponding hike in tax rates, just look at the Bush43 years - embarking on two major wars while cutting taxes - and the deficits were immense. Couple that with a lack of regulation enabling the housing crisis…
What spending cuts do you think Trump has in mind? What spending cuts would you like him to consider? Is raising taxes completely off the table? Is the notion of increased infrastructure spending still on the table? Is deregulation?
I’m not sure how you or Trump or anyone could make all that add up, unless you decide the deficit and debt are meaningless.
You’re missing the reasons why there was growth in those periods. It wasn’t due to spending cuts. It was due to the spending being done on infrastructure improvements that transferred easily to private sector growth. Also there’s the huge factor of the US being one of the only industrialized nation not badly damaged by the wars.
For examples of where spending cuts did not work out well, look at the 1980s through now.
When speaking of Federal spending it is important to understand where this “spending” occurs. Huge amounts of it today take the form of transfer payments to states and local governments, retirees, medical service providers, students and … rich people, to the extent that the government forgoes collecting the higher estate and capital gains taxes that it did in times past. A whopping $432 billion (when intra-governmental debt is included) is paid annually as interest on federal debt.
This is in very stark contrast to spending during World War II, which was for millions of tons of munitions expended across the seas, a distinction which makes much of OP’s argument misconceived.
Stocks and bonds may appear high-priced right now, but I know of no evidence that recessions appear “like clockwork.” There are various things that could provoke a recession but “being overdue” isn’t really one of them.
Speaking of “doves” at the Fed isn’t very helpful. For 36 years, the Fed has followed twin goals of containing inflation and maintaining employment. The present Fed would be delighted to boost interest rates if they weren’t afraid that would provoke recession.
(1) What exactly are the wild spending dreams of Trump? And what is the chance our GOP Congress will happily go further into debt to fund them? (This is my sincere question — I haven’t researched the plans, if any, of our new President.)
(2) “Lance the boil” seems an odd description for a plan to deliberately plunge the U.S. (and therefore perhaps the world) into recession! I do agree that recession and deregulation may be in our near future. However, the consequent “Witness huge growth” is so counterfactual as to be silly.
In his follow-up OP mentions that after World War II, spending switched from munitions exploded overseas to domestic goods. Yes, producing these domestic goods did lead to higher standards of living. But the spending today has the form of transfers to retirees, etc. who already spend on domestic goods (see my first paragraph). OP’s claim has no basis except the usual trickle-down idea — If we can confiscate $3000 from every retiree and health-care patient and give the money to the Koch Brothers, they will make America Great Again! :smack:
“Huge growth” like Enron’s stock prices. Deregulation always precipitates a crash and then a return to sanity (that is, regulation).
What, you think rat poison in the food is a good idea? It’s cheaper than organic, though, and keeps those pesky rats from eating all your stock.
Note: not actually advocating organic food there.
Regardless of Trump’s personal policies, the Republicans have a history of triggering a recession during or shortly after their presidencies for the past few decades. The severity of the recession depends entirely on factors that are impossible to predict. This all red government, coming on the heels of what was neigh-on a civil war between wings of the Republican party, is uncharted territory and impossible to read. Trump is just another wildcard thrown into the mix.
I do agree that recession and deregulation may be in our near future. However, the consequent “Witness huge growth” is so counterfactual as to be silly.