Current account deficits don’t matter

There are many things that we teach our undergrads, which then get forgotten (or rejected, if I must be polite) by professional economists.  The minimum wage costs jobs, low interest rates don’t mean easy money, trade with China benefits the US, monetary policy remains highly effective at zero rates, etc., etc.  I taught all these ideas right out of the textbooks I used, because I believe them.  And here’s one more: current account deficits are not a problem; they merely represent an imbalance between saving and investment in a particular region.  If we abolished CA deficits for all regions, down to the individual level, we’d have to abolish banks.  You want a house?  Save up some money.

A recent report by the Peterson Institute at least avoids the worst sort of mistake:

In the latest chapter of the saga over countries that seek unfair trade advantages from currency manipulation, the US Treasury has released a new report aimed at curbing the practice. Treasury is correct not to indict any countries for “currency manipulation” at this time but also to create a “monitoring list” of five major countries—China, Germany, Japan, Korea, and Taiwan—that could become “manipulators” in the future and thus require close surveillance. The objective is to deter countries from returning to past practices of manipulation, and the new Treasury report should be quite helpful in that regard. . . .

However, Congress should not have focused on countries that have a bilateral trade surplus with the United States. All that matters for the impact of currency manipulation on the United States is the multilateral current account balance of the manipulators. In today’s world of distributed production, country X may buy materials from the United States, process and sell them to country Y, which then assembles the final goods for shipment to the United States. Country X would have a bilateral deficit with the United States and country Y a bilateral surplus, yet either or both might be guilty of currency manipulation that distorts the overall US current account balance and economy.

That’s half right, the bilateral surplus doesn’t matter, but neither does the multilateral surplus.  There is no plausible harm that could come to the US from other countries running CA surpluses.  There are some vulgar old Keynesian models that claim that high saving policies, which can as a side effect lead to CA surpluses, could hurt the US by reducing global AD. Paradox of thrift. I hope no reader of this blog takes those theories seriously.  And as for the theory that current manipulation is a “beggar-thy-neighbor” policy, it is refuted every time an expansionary monetary policy move in Japan or Europe leads to a rise in global stock prices “despite” the accompanying currency depreciation.

We would underline the importance of Treasury’s decision to limit “allowable” current account surpluses to 3 percent of a country’s GDP. We at the Peterson Institute for International Economics have analyzed “fundamental equilibrium exchange rates” for years and have concluded that any imbalance above 3 percent of GDP, on either the surplus or deficit sides, is excessive and probably unsustainable; Treasury itself has often cited our estimates in its semiannual reports as authoritative. The staff of the International Monetary Fund has developed norms for current account positions that are even tougher, suggesting that both China and Japan should run no surpluses at all. There has been some discussion of defining a “material” (global) current account surplus at a higher level, perhaps 4 percent of GDP, and Treasury itself sought international agreement on such a norm at the G-20 meetings in Korea in 2010. Hence they are to be commended for concluding that “allowable” surpluses should not exceed 3 percent.

I find these proposals to be frightening, as they are based on a misunderstanding of basic international economics.  CA surpluses should be welcomed, as they suggest the surplus country probably has sound fiscal policy, and is not engaged in the sort of ruinous debt run-up that led Greece and Italy and Portugal into their current mess.  Most tax regimes strongly distort the saving/investment process, and hence even switching to a neutral treatment of saving and investment would often lead to a big CA surplus.  The rest of the world should try to copy Germany and Singapore.  We obviously won’t all end up with CA surpluses, but we’ll have more saving and investment, and hence faster economic growth.  If the zero rate bound is a problem, then raise the inflation target high enough so that it doesn’t bind.

To see what’s wrong with the 3% proposal, let’s look at the eurozone, which currently runs a 2.8% CA surplus.  That’s slightly under the proposed Peterson Institute limit, and hence not a problem.  But what about individual eurozone members, should we look at their CA balances?  Well, are they engaged in currency manipulation?  At first glance it would appear the answer is no, they don’t even have their own currency to manipulate. It would be as crazy to complain about the CA surpluses of an individual eurozone member as it would be to complain about the CA surplus of Massachusetts, (which is not actually measured (AFAIK) but would probably be at German proportions if it were.)

And yet, the report does name Germany as a country to watch, probably because its CA surplus is 7.7% of GDP.  But then why not pick on the Netherlands, at 9.7% of GDP? And why focus on individual eurozone countries, but not individual US states?  Believe it or not, it’s no longer enough to stop all “currency manipulation”, the CA surplus opponents now want to stop the sensible countries from being sensible, they want them to start running up large budget deficits.  After, all the recent Chinese case proves that this is not about currency manipulation.  China is working hard to prevent the yuan from falling, despite their large CA surplus.  Germany doesn’t even control their currency, and at the ECB they always push for a stronger euro.

It’s a myth that CA surpluses are some sort of “imbalance” that markets would correct if only governments would stop manipulating the currency.  Is Massachusetts manipulating the US dollar?  Indeed, without recent Chinese “manipulation”, the yuan would fall and their CA surplus would expand even further.  To their credit, the smarter Keynesians understand that the CA surpluses actually reflect saving/investment differentials, and can only be attacked with government policies aimed at reducing that imbalance, i.e. with tax cuts and/or higher government spending.

But in that case, Massachusetts is just as guilty as the Germans or the Dutch.  Maybe someone should put sanctions on Massachusetts’s products until my home state starts running a Puerto Rican-style fiscal policy.

In Australia they use Australian workers to build $400,000 condos on the beach, and then trade the condos to the Chinese in exchange for 400 HDTVs made by Chinese workers.  If both sides agree to this transaction, what possible harm could it do?  Can someone explain that to me?  But in the world in international economics, there is something sinister about this voluntary exchange, as it leads to a $400,000 CA “deficit” for Australia, and a “surplus” for China. What does that even mean? In America we might trade the mortgages on homes built with American labor, for Chinese goods. Again, there is supposedly something sinister about this normal business transaction. I don’t get it.

Of course it could be worse, in the world of American politics the transaction would be described as China “raping” the US.

PS.  Commenter HL suggested that Japan’s recent problems with an appreciating yen flow from the passage of this new law:

The latest step by Treasury was required by the Trade Enforcement and Trade Facilitation Act (the “customs bill”), which became law in February 2016.

I’m not sure if that’s true, but it’s interesting that Japan’s recent problems began in February.  In fact, the BOJ needs to drive the yen far lower, and thus they should say “to hell with the US”.  Unfortunately, they probably need to wait until mid-November to make that move.  And even then, the Japanese are too polite.  The others can ignore us, however.  We can’t touch the Germans as they are in the EU.  And China now has the world’s biggest economy; it’s too late to kick them around.  If Trump’s elected he’ll find himself kissing Xi’s ring.

Screen Shot 2016-05-02 at 4.31.19 PMPPS.  Over at Econlog I have a new post discussing the recent moves in the yen.

All states are purple states

Scott Alexander has a wonderful post reviewing Albion’s Seed.  At the end he discusses how four groups of immigrants from Britain still affect our culture today, particularly the red state/blue state phenomenon:

Before I had any idea about any of this, I wrote that American society seems divided into two strata, one of which is marked by emphasis on education, interest in moral reforms, racial tolerance, low teenage pregnancy, academic/financial jobs, and Democratic party affiliation, and furthermore that this group was centered in the North. Meanwhile, now I learn that the North was settled by two groups that when combined have emphasis on education, interest in moral reforms, racial tolerance, low teenage pregnancy, an academic and mercantile history, and were the heartland of the historical Whigs and Republicans who preceded the modern Democratic Party.

And I wrote about another stratum centered in the South marked by poor education, gun culture, culture of violence, xenophobia, high teenage pregnancy, militarism, patriotism, country western music, and support for the Republican Party. And now I learn that the South was settled by a group noted even in the 1700s for its poor education, gun culture, culture of violence, xenophobia, high premarital pregnancy, militarism, patriotism, accent exactly like the modern country western accent, and support for the Democratic-Republicans who preceded the modern Republican Party.

If this is true, I think it paints a very pessimistic world-view. The “iceberg model” of culture argues that apart from the surface cultural features we all recognize like language, clothing, and food, there are deeper levels of culture that determine the features and institutions of a people: whether they are progressive or traditional, peaceful or warlike, mercantile or self-contained. We grudgingly acknowledge these features when we admit that maybe making the Middle East exactly like America in every way is more of a long-term project than something that will happen as soon as we kick out the latest dictator and get treated as liberators. Part of us may still want to believe that pure reason is the universal solvent, that those Afghans will come around once they realize that being a secular liberal democracy is obviously great. But we keep having deep culture shoved in our face again and again, and we don’t know how to get rid of it. This has led to reasonable speculation that some aspects of it might even be genetic – something which would explain a lot, though not its ability to acculturate recent arrivals.

This is a hard pill to swallow even when we’re talking about Afghanistan. But it becomes doubly unpleasant when we think about it in the sense of our neighbors and fellow citizens in a modern democracy. What, after all, is the point? A democracy made up of 49% extremely liberal Americans and 51% fundamentalist Taliban Afghans would be something very different from the democratic ideal; even if occasionally a super-charismatic American candidate could win over enough marginal Afghans to take power, there’s none of the give-and-take, none of the competition within the marketplace of ideas, that makes democracy so attractive. Just two groups competing to dominate one another, with the fact that the competition is peaceful being at best a consolation prize.

If America is best explained as a Puritan-Quaker culture locked in a death-match with a Cavalier-Borderer culture, with all of the appeals to freedom and equality and order and justice being just so many epiphenomena – well, I’m not sure what to do with that information. Push it under the rug? Say “Well, my culture is better, so I intend to do as good a job dominating yours as possible?” Agree that We Are Very Different Yet In The End All The Same And So Must Seek Common Ground? Start researching genetic engineering? Maybe secede? I’m not a Trump fan much more than I’m an Osama bin Laden fan; if somehow Osama ended up being elected President, should I start thinking “Maybe that time we made a country that was 49% people like me and 51% members of the Taliban – maybe that was a bad idea“.

I’d like to emphasize the exact opposite point, how woefully inadequate the red/blue distinction really is.

1.  British immigrant groups were important, but are far from the entire story.  Thirteen percent of Americans are of African descent.  This group doesn’t fit neatly into either the red or blue culture.  Neither do the 18% who are Hispanics.  We also received a large number of Irish immigrants in the mid-1800s, and then even larger flows from Germany.  Then came millions of Italians, Jews and Poles, in the late 1800s and early 1900s.  Now we are receiving a large inflow of Asians.  Each culture overlaps with the red on some issues and the blue on others.

2.  Even within any state, there are big differences between the voting behavior of men and women, or married and unmarried women.  Some states are male red and female blue.

3.  There are huge urban/suburban/rural splits, within states.  In coastal California, Orange County voted red in 2012.  In Texas, the two most populous counties (Dallas and Harris) voted blue.  These two counties are a mix of urban and suburban.  Utah seems more like a Puritan-Quaker culture, and yet votes like a Cavalier-Borderer culture.  Maybe because I grew up in blue Wisconsin (home of Scott Walker and Joe McCarthy), I just don’t see the differences as being that large.

Red and blue America seems very different to us, but only because human beings are really good at noticing very slight differences.  Someone from Afghanistan would not notice much difference between (blue) Michigan and (red) Indiana, because there isn’t much difference.  Both have lots of farms, and cities with fast food joints, auto factories, and shopping malls.  Heck, even someone from Belgium wouldn’t notice much difference. But they vote differently.  (Or substitute Minnesota for Michigan, if you want to remove race from the picture.)

Yes, there are some extreme cases, as you’d expect in a country of 320 million.  Obviously coal country in Kentucky is really different from San Francisco, and both differ from Laredo.  But these are atypical; there is a huge middle ground in America, which prevents the sort of 49/51 split that Scott worries about.

In the future we will alternate between red and blue Presidents, because we are a purple country.  We achieved gay marriage and we will soon legalize pot and abolish the death penalty.  But we’ll also keep guns legal, keep emitting lots of carbon, and continue to lock up huge numbers of our citizens for use of hard drugs.  Each side can win on certain issues, because they can find enough supporters in the vast purple group in the middle.

On a related note, Bryan Caplan had a recent post that (in my view) exaggerates the differences between good and bad government:

I am deeply alienated from the society in which I live.  I regard our policies as criminal, and politicians of both major sides as evil people.  My assessment of our society’s opinion leaders is similar, though milder and less categorical.

Many thoughtful people I know regard my rejection of our society as childish.  Rather than defend myself, I have two questions for all such people.

1. In what actually existing societies would my alienation be morally justified?  Nazi Germany, I hope.  North Korea, I trust.  How about Saudi Arabia?  Putin’s Russia?  Napoleonic France?  The antebellum South?

I like this post, and I often feel that way, but I think it exaggerates the extent to which society has failed. For instance, I consider California to be one of our worst governed states.  Yet I hope to retire there because differences in quality of governance pale in comparison to other aspects of life in America’s various regions.  Like weather.

In one sense I agree with Bryan, people of the future will be appalled by our society, just as we are appalled by the Roman Empire.  On the other hand, perhaps the Roman Empire was an amazing achievement, offering the highest living standard for the largest number of people in any age up until that time, with the possible exception of the Stone Age (about which I know little—other than that it’s not called the Stone Age.) Maybe creating a good society is really hard, indeed harder than sending a man to the moon. I left an admittedly silly comment after Bryan’s post, trying to explain my views in glass half empty/half full terms:

I would NOT say that in all societies the glass is half full and half empty.

Rather I’d say that in all societies the glass is really, really large, much larger than we imagine when we think about the society. Indeed much larger than we are capable of imagining.

And I’d also say that in almost all cases this unimaginably large glass contains vast amounts of water, and vast amounts of air.

And I’d also say that when we think about a society we have a hard time making sense out of the proportions or air and water, because both portions are so vast. So our estimates of water and non-water reflect our mood at the moment.

I’d also apply this to Scott’s post.  Individuals and cultures differ in a vast number of ways.  We notice and blow out of proportion differences that are actually rather trivial, in the broader scheme of things.

PS.  But if Trump wins, I’m moving to Antarctica.

The Fed did monetary offset and the ECB did not

Who just posted this right-wing market monetarist interpretation of recent events?

Well, the euro area has had a (slightly) shrinking population aged 15-64 since 2008, while the US has not (although our growth is slowing). How does this affect the picture, and what changes?

Europe still does badly, but not by as bad a margin as the raw numbers say:

Photo

CreditAMECO database

Furthermore, the shortfall doesn’t start right away. Things really go off track only in 2011-2012, when the U.S. recovery continues but Europe slides into a second recession. That’s also when the euro area inflation rate slips definitively below target, where the US rate doesn’t to the same degree:

Photo

CreditEurostat, FRED

What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.

Policy improved after that, with Mario Draghi’s “whatever it takes” stabilizing bond markets and a leveling off of austerity. But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels, pushed inflation down by around a percentage point, and created enduring weakness — because it’s really hard to recover from deflationary mistakes when you’re in a liquidity trap.

Surprisingly, it was Paul Krugman. I’m thrilled, I just wish he’d given us credit for writing lots of posts almost exactly like this one.

And as far as all you Keynesian commenters who complained when I said we’d done as much austerity as Europe, and the real difference was monetary policy, what do you say now?

And all you Keynesian commenters who insisted the ECB could not have offset fiscal austerity because the eurozone was at the zero bound (it wasn’t) what do you say now?

Is Krugman just as clueless as we are?

PS.  People sometimes ask me if I’m depressed that I’ve been unable to get the Fed to do NGDPLT.  I try to be polite, but My God!  We MMs have succeeded beyond our wildest dreams.  An increasing number of famous economists favor NGDP targeting. An increasing number of people acknowledge that monetary policy was actually too tight in 2008.  The idea that the Fed offset fiscal austerity in 2013 has increasing support.  Japan switched policy in 2013, and their CPI is up about 4% (there’s much more work to be done, but previously they were in deflation.)  MMs developed the idea of negative IOR, and then major central banks start adopting it.  Even better, asset market responses to negative IOR announcement are consistent with MM predictions and inconsistent with the heterodox views you get in the financial press.  We predict 2 rate increases in 2016 when the Fed says there’ll be 4, and now the Fed predicts 2.  I could go on and on.  And remember, within the economics profession we are a bunch of nobodies.  If this is failure, I can’t wait for success.

HT:  Michael Darda

PS.  Here’s a screen shot of the PP presentation I’ve been giving for years (I believe I originally got the graph from David Beckworth.)

Screen Shot 2016-04-30 at 5.16.11 PM

Beckworth interviews Taylor and Cochrane

Each day my time management spirals more and more out of control.  If only there were 73 hours in a day.  And now there are new “must listen to” podcasts by Tyler Cowen and David Beckworth.  I finally caught up with David’s two most recent offerings. After starting off his podcast series interviewing me, he dug up a couple of obscure economists named John Taylor and John Cochrane.

Not surprisingly, the Taylor interview focused on the Taylor Rule.  I have mixed feelings about this rule.  I do think that something close to the Taylor Rule (not exactly the same) largely explains the Great Moderation.  However, after 2008 I became increasingly disillusioned with this approach, for a couple reasons.  First, it’s hard to know what to do when rates hit zero.  And second, it looks like the equilibrium real interest rate might be more unstable than we had assumed.

I still favor the concept of policy rules, but would prefer an instrument with no zero bound issues, such as Singapore’s exchange rate instrument, or the quantity of base money, or even better, the price of NGDP futures contracts.

For me, the most interesting part of the interview was the discussion of David’s “monetary superpower” theory of the Fed, which Taylor thought had a lot of merit.

The Cochrane interview was focused on the Fiscal Theory of the Price Level, and not surprisingly I have a lot of reservations about this idea, except for countries like Zimbabwe or Venezuela, where it’s clear the fiscal authorities are the dog and the central bank is the tail.  In the US, however, I believe it’s exactly the opposite. Let me respond to a few of Cochrane’s points, and apologize ahead of time if I’ve mischaracterized his views.

1. Cochrane contrasts the FTPL with traditional monetary theories, which imply that a swap of base money for government bonds has important macroeconomic effects. He suggests it’s more like exchanging two fives for a ten dollar bill, just swapping one government liability for another.  But if so, why is it that open market operations (OMOs) clearly do have important macro effects?  The Fed used OMOs to keep inflation close to 2% during the Great Moderation.  Asset markets respond to changes in monetary policy (even before IOR in 2008) in a way that suggests it has powerful effects on the economy.  Global stock indices can move 2%, 3% or even 5% in just minutes after an unexpected quarter point change in the fed funds target.  And until 2008, those changes in the fed funds target merely reflected the impact of OMOs.  So I don’t quite get the FTPL.

2. Cochrane says that in the FTPL the entire future path of government debt matters, not just the current level of debt, and contrasts that with what he calls the M*V = P*Y approach, which (he says) focuses on the current money supply.  But in modern monetary models (market monetarist or New Keynesian) the entire future path of the money supply matters for current prices.

3.  He doesn’t think 30-year T-bonds are currently a good investment, because he’s pessimistic about our future fiscal policies.  And he doesn’t think the Fed would be able to prevent the future inflation that would result from a debt situation that deteriorated sharply.  I’m also pessimistic about our fiscal situation, but believe the Fed can offset the effects of deficits.  Hence I don’t expect much inflation.  My views are consistent with current market expectations, whereas Cochrane seems to have doubts about market efficiency, at least in the case of 30-year T-bonds.

4.  I also read the historical record differently than Cochrane.  I don’t believe the FTPL can explain either the onset of the Great Inflation, or its end.  I don’t believe the common myth that LBJ ran big budget deficits during Vietnam.  I would note that LBJ raised taxes in 1968, and yet inflation continued to rise, because it’s monetary policy that drives inflation.  I also don’t agree with Cochrane’s view that Reaganomics made the deficit situation look better after 1981, because it increased expected future growth. Reaganomics led to much bigger budget deficits, and so if I had believed in the FTPL, I would have forecast higher inflation in 1981, not the much lower inflation we actually got.  Unlike Cochrane, I don’t believe that Reaganomics unleashed a surge in real economic growth, even though I am a fan of Reaganomics, and believe it did lead to higher growth that we would have had under alternative policy regimes.

Screen Shot 2016-04-30 at 2.19.53 PM

To clarify, I believe growth rates in many other developed countries fell below US levels after 1982, precisely because their policies were less neoliberal.  Thus in criticizing Cochrane’s claims about Reaganomics, I’m actually starting from a much more sympathetic position that someone like Paul Krugman.  To summarize, I do not believe that the FTPL offers any explanation for the onset of the Great Inflation, or its end.  Monetary policy clearly explains the onset (base growth rates soared), and can also explain the end with a bit more difficulty (money growth was strong in the early 1980s, as lower inflation led to a one time rise in velocity.)

John Cochrane favors the same sort of market approach to monetary targeting as we MMs favor.  His specific suggestion was something like Robert Hetzel’s 1989 proposal to target TIPS spreads, although you could also use CPI futures prices.  He basically views this as a more sophisticated version of the gold standard, which has always been my view as well.  Unlike Cochrane, however, I believe the CPI is essentially meaningless; it doesn’t track anything meaningful in any economic model.  (No, it’s not the average price at which stuff sells.  The CPI is based on hedonics, which have no role to play in macro.)  Thus I think the most useful definition of the “value of money” is 1/NGDP, that is, the share of nominal output that can be purchased with a dollar bill.  That’s the variable I want stabilized, along a 3% or 4% per capita growth path.  To his credit, Cochrane favors level targeting, and so do I.

Oddly, Cochrane and I end up with fairly similar views on the optimal monetary policy, despite having radically different views on the theory of money.  Indeed I favor having the Fed use OMOs with ordinary T-bonds as a way of stabilizing NGDP futures prices, and as far as I can tell Cochrane doesn’t think OMOs do anything. Unless I’m mistaken, Cochrane thinks the gold standard only worked because central banks promised to buy and sell unlimited amounts of gold at the legal price, or at least something other than T-bonds.  (To head off objections from George Selgin, you don’t need a central bank; private banknote issuers can also assure redeemability into gold.)

In contrast, I believe the central bank could have pegged the price of gold merely using OMOs with Treasuries.  Alternatively, in the 1990s the Fed could have used the Taylor rule without buying any bonds at all.  It was the liquidity effect from monetary injections that caused fed funds rates to change, and hence the Fed could have bought and sold gold or zinc to target fed funds prices, and used that instrument to keep inflation close to 2% via the Taylor Rule. In other words, it’s all about the Fed’s liability (base money); the asset side of the balance sheet hardly matters, at least when not at the zero bound, and hence when OMOs are small in size.

PS.  Over at Econlog, I have a new post discussing a NBER study that is critical of the New Keynesian claim that artificial attempts to raise wages can be expansionary.  Their result supports my claims in The Midas Paradox.

PPS. George Selgin is putting together a very nice series on monetary economics.  The second entry discusses the demand for money, and why the price of money and the price of credit are two entirely different things.

Stop Making Sense

Narayana Kocherlakota has a new post entitled, “Trump Starts Making Economic Sense”:

About a month ago, I urged the presidential candidates to explain what policies and leadership they would like to see at the Federal Reserve. So I was glad to see Trump address Fed-related issues in an interview with Fortune magazine last week.

His key comments: “We have to rebuild the infrastructure of our country. We have to rebuild our military, which is being decimated by bad decisions. We have to do a lot of things. We have to reduce our debt, and the best thing we have going now is that interest rates are so low that lots of good things can be done that aren’t being done, amazingly.”

I read this as calling for two forms of fiscal stimulus.

That’s funny, I read the statement “we have to reduce our debt” as calling for austerity. Of course the second half of that sentence is a call for fiscal stimulus.  I attribute the contradiction to either:

1.  Trump having an IQ in the 80 to 85 range, or . . .

2.  Trump being a shameless demagogue.

I would also point out that Mr. Trump was actually discussing fiscal policy, not monetary policy.  That’s a distinction I worked really hard making in my economics classes, back when I taught at Bentley.

Kocherlakota continues:

Another question is whether Trump would be comfortable with the Fed pursuing an inflation target higher than 2 percent (such as the 4 percent target suggested by Professor Larry Ball of Johns Hopkins University). This has been advocated as a way to give the central bank more ammunition to fight future recessions (by generating higher nominal interest rates, it would provide more space to lower them before hitting zero). But it would also give the Fed more room to support fiscal stimulus of the kind suggested by Trump.

I’m not quite sure what Kocherlakota is trying to say here.  The whole point of raising the inflation target to 4% is so that you don’t have to use fiscal stimulus in the first place, not as a way of “supporting” fiscal stimulus.

Undoubtedly all these things that make no sense to me are perfectly clear in the mind of The Donald.  Recall that Trump will pay off the national debt in 8 years, a “making sense” proposal that Kocherlakota does not comment on.  Nor does he comment on the fact that Trump will achieve this miracle by shielding entitlements from cuts, sharply boosting spending on the military and infrastructure and reducing the top tax rate to 25% percent (all while raising taxes on “the rich”) and eliminating taxes entirely on 75 million Americans.  What’s the secret sauce that will make this all possible?

Trade

PS.  People have offered three explanations for the rise of Trump, struggling blue-collar workers, trade and immigration.  All three are false.  The Economist reports that Trump voters are skewed toward the over $100,000 group.  A new poll shows surging support for the claim that immigrants help the country.  And other polls show surging support for the view that trade is an opportunity, not a problem.

Sorry Pat Buchanan, the rise of Trump is not about your issues—it’s not about Making America Great Again.  He’ll drop your issues the day he takes office.  It’s about Making Donald Trump Great Again.

PPS.  People think I’m exaggerating when I compare Trump talk to a baby’s “ga ga” talk.  I’m dead serious.  Read this sentence 100 times in a row, until you have it figured out:

We have to reduce our debt, and the best thing we have going now is that interest rates are so low that lots of good things can be done that aren’t being done, amazingly.

Yes, reducing the debt by borrowing more would be amazing.  

Trump says:

I know words, I have the best words

Yes, Trump has some excellent words.  But he does not yet have sentences with meaning.  He needs to work on that before becoming President.  Not just words, words that are grouped together to produce meaning.

Just once, I’d like to hear Trump say:

I am familiar with many terms, I possess a quite sophisticated vocabulary.