Donald Trump and the “F” Word

If there’s one belief that enjoys broad, bipartisan support, it is that the U.S. faces a debt crisis. Democrats and Republicans routinely bemoan America’s irresponsibility and immorality by claiming it is borrowing from the “bank of China” and leaving that debt for our children and grandchildren to repay. Donald Trump threatens to challenge that paradigm by aggressively using the “f” word.

The “f” word is fiscal stimulus.

Through his proposed $1 trillion infrastructure plan, to be spent over 10 years, along with other spending and tax policies, Trump is tossing aside the notion that the federal government could face bankruptcy or an inability to service its debt. The question is how much stimulus we can afford.

Stephanie Kelton provided answers to that question as part of a panel discussion at the Harvard Law School on December 2. She is a professor at the University of Missouri in Kansas City, and previously served as chief economist for the Democrats on the U.S. Senate Budget Committee and as an economic advisor to the Sanders 2016 presidential campaign.

Kelton spoke only about Trump’s economic agenda and did not discuss (or endorse) any of his other proposals.

Deficits exploded after the financial crisis, Kelton said, and it quickly became a core topic of conversation, particularly as Spain, Greece, Ireland and other European countries experienced crises. Fiscal policy was not an option in the U.S. because of the perceived debt crisis, and our primary tools were monetary policy and the Fed, she said. The Fed did what it could, starting with interest rate cuts before turning to unconventional methods like quantitative easing, buying mortgage-backed securities and Treasury bonds, with the hope of driving down rates and creating consumer demand. It used “forward guidance” to encourage investors to take positions that would stimulate growth.

But none of this created the robust economic expansion that was needed. Since the financial crisis, GDP growth has averaged less than 2%. So while this is the longest recovery on record, it is also the slowest of the post-WWII era.