[Jonathan Bernstein] Trumponomics is all about the short run

By Bloomberg
  • Published : Jul 23, 2018 - 17:07
  • Updated : Jul 23, 2018 - 17:07

It’s hardly a surprise that Donald Trump broke with longstanding presidential practice and publicly criticized the Federal Reserve for raising interest rates.

Trump told CNBC on Thursday that he was “not thrilled” with signals from the Fed that it planned to raise interest rates. “I don’t like all of this work that we’re putting into the economy and then I see rates going up,” he said. The White House issued a statement saying the president “respects the independence of the Fed,” but he seemed to repeat the criticism in a tweet on Friday.

His comments were just the latest evidence that he won’t respect any norms that require him to be restrained on anything, whether it’s telling the Justice Department whom to prosecute or asking an FBI director for a loyalty pledge or saying which UK politician would make a good prime minister. The bluster on the Fed is probably what everyone expected from this president, even though Bill Clinton, George W. Bush and Barack Obama had established a tradition of keeping their mouths shut out of respect for the central bank’s independence.

It’s unlikely that Trump’s complaints will have any direct effects. Fed Chair Jerome Powell is unlikely to be intimidated by a weak, unpopular president who doesn’t have a record of successful persuasion, even in situations where he has a lot more negotiating clout.

But the episode is a good indication of Trump’s economic policy: Emphasize short-term results, especially economic growth, over all else. That’s what he championed in 2017, supporting Republicans in Congress as they pushed a large tax cut and more spending. Earlier this year it looked as if he might have more balanced goals, but he’s decisively pushed for expansive fiscal programs and, now, monetary policy. The budget he submitted to Congress featured spending cuts, but that always seemed more likely to be the work of Office of Management and the Budget Director Mick Mulvaney, and Trump certainly didn’t fight for any of it when his budget landed dead on arrival on Capitol Hill.

Presidents are always looking for ways to goose the economy, and until about 25 years ago would prod the Fed to ease monetary policy, even during good times. In the past, however, pushing the economy into overdrive was a White House policy mainly reserved for presidential election years, most notably by Richard Nixon before the 1972 election. Trump doesn’t appear to think long-term; he’s gunning the economy from the start, or at least supporting policies to do so.

It’s a bit harder to understand what Trump is after with his trade wars, given that economists believe he is endangering growth. But this president believes, as he famously tweeted, that “Trade wars are good and easy to win.” For him, imposing tariffs is a policy designed for short-term (and perhaps also long-term) economic growth.

His preferred combination of loose fiscal and monetary policy -- of large federal budget deficits along with low interest rates -- also may run up against reality. The Fed isn’t just randomly imposing higher interest rates; its actions are a perfectly predictable (and, most economists would say, responsible) reaction to continued growth and those enormous federal budget deficits that Trump and congressional Republicans have created. And the Fed will follow this course as long as the central bank’s board is dominated by mainstream economic thought.

After all, the Fed’s “dual mandate” requires it to balance controlling inflation and encouraging low unemployment, and traditionally conservative economists and politicians have been particularly concerned about inflation. Trump? Not so much. Assuming a trade-off (as most economists do), he appears very willing to risk long-term inflation in the pursuit of short-run economic growth, even if the Fed could be forced to pursue more aggressive tightening down the line to contain inflation and could wind up risking a recession.

While Trump is willing to mouth off about the Fed, he’s been far less aggressive about using the best tool a president has to affect the central bank’s choices: nominations. Four of the seven seats on the Fed board are empty. Trump has made three nominations for the vacancies; two appear to be moving successfully, albeit slowly, through the Senate, but the third, the conservative economist Marvin Goodfriend, doesn’t seem to have the votes to be confirmed. And Trump hasn’t put any apparent effort into pushing his nominees through the Senate (and, for what it’s worth, Goodfriend’s reputation as an inflation hawk suggests he wouldn’t be on board with the comments Thursday).

For now, expect everyone involved to mostly ignore Trump’s latest jawboning. But if you want to figure out the president’s plans for the economy, always assume he’ll support whatever will give the most short-term gratification.

Jonathan Bernstein
Jonathan Bernstein is a Bloomberg Opinion columnist covering politics and policy. -- Ed.