The New York Times is reporting this week that President Trump sent “plenty of mixed signals on Fed policy, but that didn't make him wrong about interest rates.” The article lauds the president's willingness to ignore economic orthodoxy and says several recent policies have “been vindicated.”
It has become clear, the article says, that the U.S. economy can surpass what technocrats once thought were its limits: specifically, the jobless rate can fall lower and government budget deficits can run higher than was once widely believed, without setting off an inflationary spiral.
As a result, the experience of the Trump presidency — particularly the buoyant economy before the pandemic began — shows what is possible, NYT says. And, if Trump was able to ignore economic orthodoxy and achieve the best economic outcomes in years, it's worth asking how much value that orthodoxy held to begin with.
The article examines instances when the centrist conventional economic wisdom was employed and some where it wasn't. It asserts that “intellectual consensus lurked beneath many decisions based on the belief that it was essential “to check the pace of employment growth to reduce the risk of overheating.”
Yet from spring of 2018 to the onset of the pandemic, the U.S. experienced a jobless rate of 4% or lower, with no obvious sign of inflation and many signs that less advantaged workers were able to find work. Reality turned out better than the 2015 officials thought possible.
Since the 1980s, recessions have been rarer than they were in the immediate post-World War II era, but were followed by long, “jobless” recoveries that often “featured weak growth in workers' wages.”
It turns out that when you try to choke off the economy whenever it is starting to get hot, American workers suffer, the Times says.
Economists have referred to the period from the early 1980s through the 2008 financial crisis as “the great moderation,” because recessions were rare and mild. But with more years of hindsight, that period looks less like a success. “There's nothing particularly moderate or particularly great about the great moderation,” said Larry Summers, the Harvard economist and former Treasury secretary.
In effect, the last four years at the Fed have made clear both how much things have changed and how much they needed to. Janet Yellen (now President-elect Biden's Treasury secretary nominee) started the first of a series of interest rate increases in late 2015, and the current chair, Jerome Powell, continued them.
But the logic kept breaking down. Inflation kept coming in below the 2% target the central bank aims for, even as the jobless rate kept falling. It's not terribly clear what was necessary about the rate increases, as the president's harangues against Powell expressed vividly. Trump violated decades of precedent under which presidents didn't jawbone the Fed, which seeks to maintain political independence. But that didn't make him wrong about interest rates, the Times asserts.
A central question for President-elect Joe Biden will be: to what degree is the Trump-era economic success a result of policies that the next president might embrace, and to what degree was it just luck?
And, one view now is that deregulating major industries and lowering taxes on business investment — microeconomic strategies — are especially crucial to the economy's success. The Biden administration and Democratic Congress may view more aggressive regulation as a core goal, aimed at preventing corporate misbehavior, protecting the environment, and more.
For some, the macroeconomic lessons of the Trump years — those having to do with things like deficits, inflation and interest rates — won't be enough to recreate the 2019 economy. In this view, the microeconomic details of how the president governed will be crucial. However, the experts who will shape economic policy in the new administration seem eager to push for a post-pandemic economic surge reflecting the (macroeconomic) lessons of the last four years, the Times says.
Yellen was trained as a labor economist and once argued that “if inflation were to remain persistently lower, a more radical rethinking of the economy's productive potential would surely be in order.”
That radical rethinking now appears very much underway — including by Yellen, the Times says. She has argued that a high-pressure economy where unemployment is low and employers have to compete for workers improves upward mobility. “It is hard to overstate the benefits of sustaining a strong labor market,” Fed chair Powell said recently and the central bank's new policy language “reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”
In early 2017 when President Trump took office the CBO projected that by 2020 the government would need to pay at a 3.2% rate to borrow money for a decade. The actual rate is now just over 1%, even after a surge over the past week. While that reflects the pandemic-induced downturn, even at the start of 2020 the rate was 2%. The CBO's most recent forecast is that it will remain below 3% through 2029.
So, we will see. These are unusual times, and examining the recent past for clues to what to expect in the future seems prudent. Producers should watch closely as the new administration's policy trends are implemented, Washington Insider believes.