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Prospects for fiscal- and trade-policy flexibility dim a bit

This blogger puts on a reporter’s hat once again, with some tidbits from the press on prospects for macroeconomic policy in the coming years.

A report in the Financial Times suggests that the Wall Street faction in economic policy issues may be pushing aside Peter Navarro as a player with power on trade issues, at least within the White House. Within the current power struggle, Navarro’s point of view is described by the article as “nationalist,” though he represents the only view other than orthodox “free-trade” views within the administration, with the opposing group favoring instead (1) floating exchange rates or a “strong dollar,” (2) a passive “laissez-faire” approach rather than trade-policy activism, (3) trade agreements with few or no labor protections, (4) emerging-economy openness to investment, and other more-or-less standard “free market” positions. Floating rate views tend to be favored by banks, which make money betting on exchange-rate fluctuations and generally favor a low-regulation environment, and by retail behemoths selling imported goods. Of course, this group’s views on the dollar are not to be confused with chartalist and MMT (modern monetary) support of exchange rate flexibility, which forms part of a mostly different economic philosophy. AFL-CIO economist Thea Lee is quoted in the article as a representative of an alternative, pro-labor view. The White House maneuverings might indicate that the populist component of Trump’s agenda is losing momentum during the executive branch transition.

Meanwhile, the New Yorker notes in its first article of a mid-March issue that a constitutional balanced budget amendment is now a realistic possibility if one more state legislature turns to Republican control in elections to be held next year. In such a scenario, a constitutional convention could be called by two-thirds of the state legislatures, and a balanced budget amendment—“a lodestar of G.O.P. aspiration”–would almost certainly be among the amendments considered. Such an amendment “is not completely out of the question, owing to the fact that it is high on the agenda of many statehouse Republicans.” To be ratified, any amendments would have to be passed in votes in three-quarters of the states following the convention. The article argues against such a move. It would lead to disastrous spending cuts. It would also undercut the ability of the government to stabilize the economy by causing the looseness of fiscal policy to be positively correlated with economic growth. To a greater extent than most people realize, recovery from US recessions has depended upon automatic fiscal stabilizers and discretionary policies that work in opposition to cyclical forces. A balanced budget rule would bring austerity in the US to a level seen in places such as Brazil, where draconian new fiscal restrictions have been instituted, in the face of years of negative economic growth. The latter story has been well documented, by the way, in reports by Laura Carvalho in her own blog and elsewhere, including the New York Times.

Both U.S. developments bode ill for policies that are populist in the sense of promoting growth at the risk of some inflation. As unionist Lee knows, higher growth tends to work in favor of wage increases and employment of the least employable. Opposition to trade policy and fiscal conservatism reflect a preference to balance the budget, but to remain neutral about the current account balance (roughly, the balance of trade plus income payments). In the context of Republican rule, these moves obviously represent mostly a swing from one conservative view to another. Yet broadly speaking, the policies that are apparently on the ascendant work mostly against the interests of the bottom 90 percent of American households—a group broadly representing the poor and the middle class. They echo recent policies that have helped to bring run-ups in private-sector leverage that are unprecedented since World War II, along with a hollowing-out of US manufacturing. Moreover, they court a widening austerity trap, in which growth, tax revenues, and budget positions fall in a vicious cycle.

We have done some maintenance work on the blog and added links in our Assorted Links page to blogs maintained by Carvalho, Matias Vernengo, and Josh Mason. There you have some indie macroeconomic sites with analysis by an incredibly talented lot of fairly recent Ph.D.s. Mason has recently written for the Roosevelt Institute about non-investment uses of new corporate cash, while Vernengo has been posting abstracts of provocative Keynesian papers emerging from non-orthodox academe. Also, hat-tip to for a tip leading to a correction of a bad link on our Assorted Links page.


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