The comment sections of my Trump posts continue to be a cesspool overflowing with alt-right idiocy.  One recent commenter suggested that perhaps Soros was funding those KKK groups that support Trump, just to make Trump look bad.

Commenters ask me to get back to macro, but when I do nobody pays attention.  My recent post on inflation attracted three comments (excluding my two responses.)

But they were good questions:

What’s the case for Trump not moving the Fed in a more dovish direction, either through persuasion or appointments. That could explain an increase in inflation expectations and preserves monetary offset. (Ant1900)

I responded:

I think the strongest argument goes as follows. The Fed normally aims for 2%, but falls short in recessions. So inflation (post-2007) averages a bit under 2%. Trump’s supply-side reforms will make a recession less likely. So [long term] inflation expectations rise, but remain under 2%.

That might seem a bit ad hoc, and I certainly don’t have any great confidence in this explanation.  But it does at least explain why TIPS spreads remain below 2% for both the 5 and 10-year T-bonds.  (The 30-year yield will almost always be higher due to tail risk.)

Another comment:

I completely agree that we are more likely to experience continued low inflation rather than some sudden increase. Infrastructure spending won’t do the job of increasing inflation. Japan is an obvious counter example of the effects of monetary offset. Yet the media and some commentators seem to forget this entirely. At the end, one risk we face is that we might end up having a more hawkish Fed that goes too far with the offset, with corresponding economic consequences.
My question: wouldn’t supply-side policies ease price pressures, leading cp to lower inflation and lower bond yields? To me, the observed increase in bond yields remains mysterious.   (Fran)

You’d think that supply-side policies would reduce bond yields.  After all, they tend to reduce inflation, other things equal, and lower inflation reduces bond yields.  In fact, successful supply-side policies actually raise bond yields, at least when the Fed is targeting inflation at 2%. If tax cuts and deregulation boost growth, the Fed will tighten enough to keep inflation at roughly 2%.  But even so, RGDP growth will increase. And because NGDP growth is RGDP growth plus inflation (2%), NGDP growth will also increase.  And this is why bond yields will rise—they depend more on NGDP growth than inflation.  People don’t notice that distinction when both move in the same direction (as in the 1970s, when both were high.)  But when NGDP growth slows and inflation rises (as in mid 2008) we see that it is NGDP growth that matters more for interest rates.

Here’s my take on recent market moves, FWIW.  A quick knee jerk fall on election night on fear of populist policies.  A rally over the next few days as Trump people sent out messages that the worst parts of the populism (expelling 11 million illegals, 45% tariffs, etc.) will be dropped, and tax cuts, infrastructure and deregulation will be promoted.  But note that markets have not moved up all that much; the bond yields still suggest slow growth ahead, and TIPS spreads still suggest slightly below 2% inflation.  It’s not a game changer, probably . . .

There are actually two ways of interpreting the modest market reaction:

1.  Supply-side policies are simply not that effective; they don’t boost growth as much as the advocates claim.

2.  The market sees only a very modest probability that Trump will enact major supply-side reforms, either because he doesn’t want to, or because Congress will water it all down.

Long time readers know that I’m a moderate supply-sider.  I think talk of boosting trend RGDP growth to 4% or 6% is silly.  But I am a supply-sider, and I do think that if the markets were 100% sure we’d dramatically cut taxes on capital (as Trump has proposed) and dramatically deregulated, then markets (and real bond yields) would have risen much more.  Thus I think it’s both.  Supply-side policies really can be fairly effective, even as they are much less effective than proponents claim, and there really is uncertainty about how much Trump will accomplish.  Thus here’s a conditional forecast.  If Trump really were to get a strong supply-side agenda enacted, markets would rally even more.

PS.  Trump’s proposed fiscal policy is still a populist horror show, which would balloon the national debt.  We still don’t know if Trump will back off on that, once his advisers (or Congress) recognize the price tag.  So don’t take these comments on the supply-side aspects of Trump’s plan as some sort of endorsement of the overall program.  And again, we are still in the speculation stage.

PPS.  I hope all those peacenik Trumpistas saw the Bolton for Secretary of State rumors.  He probably won’t get the post, but you gotta wonder how his name even came up.  The leading name is Giuliani.  Maybe somebody told Trump that Bolton is “tough”.  Loved Josh Marshall’s reaction:

PPPS.  Hey Trumpistas, don’t say I never do anything for you.  Here’s an article on the working class that you will actually like, showing how out of touch the elites are.  As for you elites, it’s a pretty good article, even if you don’t agree with it.

PPPPS.  Well doesn’t this inspire confidence:

President-elect Donald Trump has alienated many of the nation’s most senior national security officials and veteran foreign policy experts, leaving him with an apparent shortage of qualified Republicans willing to serve in his administration.

Trump’s transition team — many of whom are relative political outsiders who apparently didn’t realize that President Barack Obama’s entire West Wing staff would have to be replaced — are reportedly scrambling to fill Trump’s transition team before Inauguration Day.

But at least Trump’s not vindictive towards those who opposed him:

Eliot Cohen, a former State Department officer and Defense Department official who signed the August letter, also said it would not surprise him “in the slightest” if Trump had effectively blacklisted those in the national security community who had spoken out against him.

“If its true, I’ll wear it as a badge of honor, though,” Cohen told Business Insider on Monday. “And you can quote me on that.”

Cohen wrote last week that rather than move to Canada, Americans dismayed by a Trump administration should maintain “constant vigilance” over the US’s free institutions and “say yes” if they’re asked to work for him.

But by Tuesday morning, he’d changed his mind.

“After exchange [with] Trump transition team, changed my recommendation: Stay away,” Cohen tweeted. “They’re angry, arrogant, screaming ‘you LOST!’ Will be ugly.”

The Trump transition team didn’t respond to a request for comment on this story.

Lovely.  Of course none of this matters; Trump will be advised on strategy by his alt-right, self described “Leninist”, who wants to “destroy” the establishment.  What could go wrong?  Who needs experts?  “They got us into this mess.”  China did fine during 1966-76 with the experts sent to the countryside to feed pigs.

And how about this:

Retired neurosurgeon Ben Carson, a former 2016 Republican presidential candidate who is an adviser to President-elect Donald Trump, has opted against accepting a Cabinet position in the Trump administration, his spokesman said on Tuesday.

Carson, a popular writer and speaker in conservative circles, has been a close adviser to Trump and is a vice chairman of Trump’s transition team.

He has been mentioned as a possible secretary of health and human services or education.

“Don’t worry, Trump will be surrounded by experts.”

Before the election, I pointed out that the Chinese government was not holding down the value of its currency, indeed just the opposite.  Here’s the FT:

“There aren’t going to be trade wars,” Wilbur Ross, the New York investor and Trump adviser, told US media last week.

Mr Ross argues that Mr Trump’s widely-quoted campaign threat to impose a 45 per cent tariff on Chinese imports — seized on by economists as the potential trigger for a trade war with Beijing — has been misunderstood and amounts only to negotiating tactics.

Such a figure would be dependent on a finding that China’s currency, the renminbi, was undervalued by 45 per cent, Mr Ross says. The International Monetary Fund has called the RMB fairly valued while US officials point out any recent intervention by Beijing in currency markets has been designed to slow a market-driven decline, arguably to the US’s benefit.

Good.

In other news:

A global bond market rout intensified on Monday while the dollar strengthened as investors bet that US president-elect Donald Trump’s mix of economic stimulus and protectionism will herald faster growth and the return of inflation.

Since Mr Trump’s surprise win in last week’s election, investors have begun to question long-held consensus forecasts for subdued inflation and mediocre growth that underpinned a rally in bonds over the summer. Yields on US, UK, German and Japanese government debt are now rising from record lows.

“Markets are betting that Trump will implement much of his domestic agenda of a fiscal boost and deregulation while ditching most of his international agenda of protectionism and ‘America first’,” said Holger Schmieding, chief economist at Berenberg.

There are actually two questions here.  Why did bond yields rise after Trump was elected, and what is the “new information” that caused much of the increase to occur in recent days, not immediately after the election (as the EMH might seem to predict).  Is there any new information?

I’m not sure, but my best guess is that as Trump’s camp sends out signals that it will be more “supply-sider” and less “populist”, that boosts RGDP growth expectations, and hence bond yields.  Fiscal stimulus may also play a role, but my hunch is that a big infrastructure program was already a given, and that the new information relates to the hints that the supply-siders are dominating the populists.  (Or perhaps the populism was a scam from the beginning, a way to get downscale white votes: “There’s nothing wrong with Kansas that huge tax cuts for billionaire NYC property developers can’t fix.”)

The swamp will be drained, right into the pockets of Trump’s buddies.

PS.  Now I’ll put on my “Colombo” raincoat.  “There’s just one thing I don’t understand.  If this was the plan all along, then why not just go with Jeb!, Ted, or Marco?  Why did we need Trump?  Is it nothing more than Trump’s ego?  Nothing more than Trump deciding he’d win by running as a populist xenophobe, but then implementing Mitt Romney’s program afterwards?”

Update:  Some commenters whined, “Sumner, you told us Trump wouldn’t win”, when I actually told them he had a 20% chance.  Some people think 20% probability events never happen.  I encourage all my commenters who complained to play Russian roulette.  In any case, here’s the closing price at the Hong Kong Stock Exchange today, from Yahoo:

The odds of all 7 digits being identical are one in a million.  Those sorts of coincidences happen thousands of times every day, all over the world. When you see an academic study that says a finding is significant at the 95% confidence level (one in twenty odds of being due to chance), you should make a mental note not to trust the finding, unless confirmed by multiple follow-up studies.

Update:  Msgkings pointed out:

Wanna flip your lid some more? The actual closing yield on the 10-year UST today was 2.222% on the CBOE. Put that together with today’s Hong Kong close.

So that’s 11 digits, and a one in 10 billion odds of all digits being identical.  That will happen again in those two markets in about another 28 million years.  But will we still have the 10-year Treasury, 28 million years from now?  How about NGDP targeting?

Trump’s previous tax proposal seemed like some sort of joke.  The Trump campaign is coming out with a new tax plan tomorrow, and Stephen Moore gives us a preview of some of the highlights:

The heart of the plan is a 15% corporate tax rate.  That’s down from the current rate of 35%.  . . .   And then there will be a middle class tax cut.  Every time we’ve met with him, Trump has said, “I want it oriented toward the individual, helping middle class, and financially stressed out families.”  we’re running the numbers now, and the average middle class family will save somewhere in the neighborhood of $1,500-$2,000 a year on their federal income taxes. It eliminates the estate tax. It eliminates the marriage penalty. It eliminates the alternative minimum tax. About 90% of Americans would no longer have to itemize deductions because they would be able to take a standard deduction.

That sounds great, but of course we can’t afford it.  Interestingly, Moore did not mention any new income tax rates.  My prediction is that the new top income tax rate will be much higher than the 25% top rate proposed by Trump when he was trying to get the GOP nomination.  And it should be higher, given that Trump is not proposing that the income tax be replaced with a consumption tax.  (I say this despite the fact that the 25% top rate was the provision of his previous proposal that would have helped me the most.)  So the new plan will almost certainly be less bad than the old plan.  But it still seems unaffordable.  Moore then responds to questions about the revenue loss:

We will close loopholes on the corporate side. So stuff like investing and green-energy deductions will go away.  The plan will find a way to shift the way the corporate tax is implemented so that it would apply more to imports.  When countries like China, India or Mexico send products into the United States, we wanna tax those then, when American companies export our goods and services, we wanna reduce the tax on them. What we do now is we tax what we export, but we don’t tax what’s imported. This is called the Border Adjustable Tax, and so this will shift that.  When China sends $500 billion worth of goods and service to the United States there will be a tax applied.  This is not a violation of trade agreements. In fact, this is the way most other countries tax their business side, so we’re gonna skip to a border adjustable tax system that will help our exports, and reduce the trade deficit.

He’s right that other countries do things this way.  It’s a good tax proposal if you want to look like you are protecting us against imports, while actually still leaving the tax code neutral vis a vis foreign trade.  It would be like having a 10-cent tax on buyers of gasoline, combined with a 10-cent subsidy to sellers of gasoline.  And it will have little or no impact on the trade deficit.  But that’s good!

Q: Some people estimate the Trump tax plan alone will cost $10 trillion. What about the debt and deficits? Won’t all of this break the bank?

A. On the business side, most of the payoff is through closing loopholes. We do think it’ll generate more economic growth. It’s trickier on the individual side, because the vast majority of revenues that the government raises is not through the business tax, but through the individual income tax system. So we’re talking about some kind of a cap on deductions that people can take, especially wealthy people. This is not well known but there are dozens of loopholes and carve-outs in the tax system. Most of the benefits of those go to the highest-income people. Anyone who makes over $1 million will have most of their deductions phased out. They’re gonna pay a lower tax rate, but they’re gonna lose a lot of deductions. Hillary Clinton is running around the country saying it’s a $10 trillion revenue loss, but that’s not true. We’ve probably reduced the revenue loss to about one-third of that. We are also considering a sort of repatriation tax where companies are charged a small tax to bring the $2 trillion overseas back home. American companies like Microsoft, Apple, so many others have cash abroad.  They’ll be able to bring that money back for a tax of somewhere between 5-10%. that’ll bring a lot of that capital back to the United States and we’ll actually raise revenue. And there’s been some talk about using that money from the repatriation tax to pay for infrastructure spending.

I don’t see how the new plan will reduce the revenue loss to only one third of the $10 trillion (over 10 years) from the previous plan.  I’m skeptical, but we’ll see tomorrow.  Is he adding in growth effects (dynamic scoring?)  Is he counting the tax on repatriated profits?  That’s a one-time lump sum, not an ongoing flow.

Again, the types of reforms being proposed seem good, the problem is revenue. I’m all for eliminating the estate tax, the marriage penalty, the ATM, and replacing itemized deductions with a standard deduction, wherever possible.  I’d especially like to see high tax states like California lose the federal deduction for S&L taxes, even though that might hurt me in a few years.  The 15% corporate rate is also an improvement.  But I’m very skeptical about the numbers.  And the final line about using the repatriated money for infrastructure is just laughable.  We already have a sizable budget deficit, and Trump’s talking about massive tax cuts.  There will be no new money to spend!  The LA Times recently claimed that California’s high speed rail boondoggle is more likely to get built if Trump is president than if Hillary wins. Hillary won’t be able to get anything through Congress, and apparently Trump has a soft spot for really fast choo choo trains.  (FWIW, I support the proposed Dallas–Houston high-speed rail, and oppose the California project.)

Should we believe any of this?  You tell me.  Even Trump’s aides say the new tax plan is radically different from the old one, with just 1/3rd the revenue loss.  So we now know with 100% certainty that nothing Trump said about taxes before the convention can be trusted.  What about promises before he takes office?  I see no reason to take them any more seriously than the previous promises.

PS.  It’s been a while since I took public finance, but I seem to recall the proposed border adjustment tax would cause the dollar to appreciate by 10%. Is that right?

PPS.  I have a post on Fed policy over at Econlog.

Christina and David Romer are both Keynesian economists with impeccable credentials.  Thus I thought you might be interested in their views on monetary offset:

Massive demand-side stimulus in an economy closing in on its productive capacity would have one of two effects. First—and most likely—it would lead the Federal Reserve to raise interest rates, offsetting as well as it could the expansionary effects of the stimulus. Output would rise little, and the main effects would be on interest rates and on the composition of output between the components stimulated by the fiscal expansion and the components restrained by higher interest rates. Second, if the Federal Reserve did not respond, the result would be inflation. And if the stimulus were large enough to try to push the economy 10%, 20%, or more above its productive capacity, the inflation would be substantial.

This is from a report criticizing the Sanders economic plan, which suggested that the US growth rate could be raised to 5.3%/year.  Since October 2009, growth has averaged a bit over 2%, as unemployment has fallen from 10% to 4.9%.  Even progressives like Matt Yglesias admit that Sanders proposals would reduce the labor force participation for many groups:

Friedman assumes there will be no growth-slowing supply-side impacts of any of Sanders’s policies initiatives. You don’t need to be hostile to Sanders’s goals or policies to see that this isn’t the case. For example, if you make Social Security more generous while also giving people free health care and raising taxes, some people are going to retire earlier. This is a feature of Sanders’ agenda (early retirement is nice), not a bug. But by reducing the number of people in the labor force, it will slow the rate of GDP growth.

Sanders’s plan to make college free has the same feature. Reducing the price will increase the number of young people who go to school and decrease the amount of part-time work that college students do.

As an aside, Yglesias is still a bit too soft on Sanders, and way too soft on Trump.

And Sanders also has some interesting views on monetary policy:

Mr Sanders has bold plans for monetary policy and banking, too. He supports a movement headed by Rand Paul, an erstwhile Republican runner, to get politicians more involved in decisions on interest rates, because he thinks Fed policy is too tight. To loosen it, he would bar the Fed from raising rates when unemployment is above 4%.

In other words, hyperinflation!!  Have I changed my mind that Trump is even worse?  No, but this should help you to better understand just how much I despise Trump.

HT:  SG

Here’s my hypothesis:  When it comes to microeconomics the Dems are the “stupid party”.  When it comes to monetary policy, and just about all non-economic areas of public policy, the GOP is the “stupid party”.

How could we tell if I’m right about the Dems?  We know that economics is really, really counterintuitive.  It doesn’t seem logical that imports would be good for the economy, or that price gouging in a natural disaster would be good for consumers, or that regulations banning banks from charging fees on ATMS would be bad for bank consumers.  But they are.

So let’s suppose that Dems are like most people; they are not very good at economics. And we also know that they claim to favor the “little guy” and have contempt for “trickle-down economics”, which is the idea that sound economic policies will also benefit people at the bottom.

If my theory is correct, then you’d expect the Dems to favor trickle down policies whenever there were easily discernible “concrete steps” linking the subsidies for big business with the welfare of the common man.

Thus Dems would oppose a cut in the corporate tax rate, unless competition from overseas started to raise fears of jobs losses.  And even then they’d demand that any cuts in the top rate be offset by the closing of loopholes.  And that’s exactly what we observe.

Most importantly, Dems would favor subsidies for big business that seemed likely to directly create jobs, such as the Ex-Im Bank.  And guess what, there is far more support for the Ex-Im Bank (an almost perfect example of crony capitalism) among Dems than among the GOP.  Even when not at the zero bound, and hence not at a time where there might conceivably be a net gain in employment.  Stupid.

Another example is the GSEs, Fannie and Freddie.  These companies have traditionally been strongly supported by the Dems, despite their outrageous business model and obscene profits, because they were seen as helping the common man buy a house.  (As an aside, a portion of the GOP agrees with the Dems, but that’s because big business owns a portion of the GOP, not for ideological reasons. The GOP ideologues tend to oppose crony capitalism.)

What about the vast range of issues where the Dems oppose sound economic policies? My claim is that those are areas where the “concrete steps” helping the average guy are harder to see.  More counterintuitive.

I conclude that the Dems actually do favor trickle-down economics, when they understand it, they simply don’t have the imagination required to see the vast array of areas where deregulation, privatization, and tax reform would help the average guy. They can’t envision anything beyond concrete steps.

The current Ex-Im dispute is the “tell” that lets us see into the mind of Dems, to understand what’s actually motivating their supposed “anti-business” worldview.

Update:  A few additional points, based on some of the comments.  Some seemed to think this post was in some way defending the GOP.  It’s far more critical of the GOP than the Dems.  Take another look.  People are also confused about “trickle down economics”.  AFAIK no one ever advocated trickle down economics.  I assumed everyone knew that.  The title of the post was a joke.  “Trickle down” was a term of derision used against some of the early neoliberal policy reform advocates such as Art Laffer and Jack Kemp, who claimed that deregulation, privatization and cuts in high marginal tax rates would help everyone, including the poor.  Again, no one actually advocated trickle down, it was a term of derision by those who didn’t understand neoliberalism, who could not fathom how conservatives could actually believe that supply-side policies would help the poor.  So they simply imagined that conservatives must believe in “trickle down”, which (AFAIK) no one believes. Why else would they favor tax cuts for the rich?

One criticism I do agree with is that this post is stupid.  All my posts on politics are stupid.  Indeed all articles on politics not written by Scott Alexander are stupid. Talking about politics immediately lowers your IQ by 25 points.  That’s why Tyler rarely writes on politics, he’s too smart to write stupid things.

And yes, the previous paragraph is also stupid, sort of.

Fed meeting today.  Daniel Reeves sent me the following movie posters: