Thursday, December 15, 2016

Interest rates are up, and what is the real problem with that

Not by much. To 0.75%, and yes it wasn't necessary because we're not at full employment yet (Krugman thinks we're; his point is that wages are increasing again, but not that much and participation rates remain low). Two things worth mentioning. One is that Yellen agrees with Krugman, and that signals that the Fed doesn't get what's the current state of the economy. She said:
"I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. With a 4.6% unemployment and a solid labor market, there may be some additional slack in labor markets but I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not obviously needed to provide stimulus to get back to full employment."
Again, fiscal policy was needed to get a healthy recovery according to Clinton's plans, and it is also true under Trump. I know Trump won't expand the welfare net, quite the opposite, and some of his spending will help his businesses and his cronies. But some infrastructure spending will do some good. And it's needed.

The other important misconception is that Trump's possible fiscal stimulus won't work. Krugman says:
"Meanwhile, Trump deficits won’t actually do much to boost growth, because rates will rise and there will be lots of crowding out. Also a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America."
First, that's not crowding out per se. In other words, it's not that the use of funds by the government crowds out private investors. It's more like monetary policy will be used to counter the fiscal expansion. But the previous experience with contractionary monetary and expansionary fiscal (militaristic and welfare cutting and full of cronyism too), yeah the Reagan era, led to significant growth, with increasing income inequality.

I'm skeptical that interest rates will go up by a lot. But let's say I'm wrong and Yellen decides to do that, and Trump does expand military and infrastructure spending. That danger is not an overheating economy and too much inflation. It's increasing income inequality. Higher rates will make the life of workers and debtors (consumers, kids in college, etc.) considerably harder. The stimulus will create jobs, but not good manufacturing jobs with high pay. More McJobs. And yes, economic growth, which might help in a reelection campaign in 2020.

Trumponomics might just be Reaganomics on steroids, but Krugman misreads the main danger. The trade deficits didn't stop growth (and won't this time either). Besides the manufacturing jobs wouldn't come back even with a very large depreciation (we're not about to pay Chinese salaries in the US). It's inequality stupid!

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