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.
Demand-side policymaking is the task of charting a course between these two different kinds of failure. The Trump administration has pursued a loose policy so far, the kind you would take if you were more worried about jobs than about inflation. It cut taxes by $1.5 trillion, without cutting spending overall. Along the tight–loose continuum, this is not far from the policies of President Obama. Obama’s priorities tilted more toward spending increases than tax cuts, but both presidents pursued both means of loosening fiscal policy.
Their choices were correct given the circumstances. Both presidents inherited economies in which far too many able workers were out of work. In 2007, more than 80 percent of working-age adults were employed. By the depths of the recession, their share had fallen to about 75 percent. The fiscal policies of the Obama and Trump administrations released more money into the economy, jointly bringing the number back to nearly 80 percent. This was the right thing to do.
In fact, one could argue that there is still more room to go. Is it not at least worth trying to achieve a prime-age employment level of 82 percent, which the U.S. economy reached between 1999 and 2000?
Both presidents endured criticism for their loose policy. Obama was criticized by many on the right and center, though liberals supported his stimulus efforts. By the time Trump took office, many liberals had changed positions to join the conservative deficit hawks. The proportion of prime-age adults who were employed stood at 78 percent, and the hawks thought that Obama had accomplished most or all of the recovery that would be possible and that deficit reduction would now be appropriate.
But Trump discarded the apparent Republican orthodoxy favoring tight policy, disregarded these critics, and increased budget deficits, ultimately bringing some wavering hawks on board. The employment rate has continued to climb.
The most traditional sign that a loose policy has backfired is rising inflation. It would suggest that, rather than putting people back to work, the money released into the economy had simply bid up the prices of existing goods. However, inflation has not risen past the Federal Reserve’s traditional 2 percent target.
Critics of loose policy may respond that its ills can be delayed but that, eventually, they will come due. While we cannot know the future, we can look at what markets are expecting. One sign of Trump’s loose policy backfiring would be a rapid run-up in interest rates over the next few years. This would show that the Federal Reserve needs to increase interest rates substantially to curb inflation, or even that bondholders doubt the nation’s ability to repay its debts.
If markets expected this, longer-term U.S. bonds such as the ten-year Treasury note would see higher interest rates. However, there is no sign of such a development in bond prices. At this time, the ten-year yield sits only barely above that of the two-year, suggesting that markets expect rate hikes to slow down in the medium term, not speed up. Markets do expect turmoil, and they do seem to dislike many of Trump’s policies, but they are not fearing an inflationary spiral.
It is hard to tell exactly why Trump is more dovish than previous GOP policymakers. Perhaps it is because of his background in real estate, which is notoriously sensitive to macroeconomic conditions. Perhaps it is just a case of a stopped clock’s being right twice a day. Or perhaps populists such as Trump see opportunities that many professional economists and commentators miss. For all their faults, populists are truffle pigs when it comes to sniffing out cases in which cries of “You can’t do that!” are backed by little to no adverse consequences.
Someday, conditions will change such that a Trumpian affinity for looser policy becomes wrong. When inflation rises but employment seems to have peaked, the deficit hawks will have their day. But dovishness was needed in the recent past, and Trump got the policy right.
This article appears as “To Ground the Deficit Hawks” in the March 25, 2019, print edition of National Review.