The Most Important Thing Biden Can Learn From the Trump Economy <font color="#6f6f6f">The New York Times</font>
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The Most Important Thing Biden Can Learn From the Trump Economy
A “hot” economy with high deficits didn’t cause runaway inflation.
For all the problems that President Trump’s disdain of elite expertise has caused over the last four years, his willingness to ignore economic orthodoxy in one crucial area has been vindicated, offering a lesson for the Biden years and beyond.
During Mr. Trump’s time in office, it has become clear that the United States economy can surpass what technocrats once thought were its limits: Specifically, the jobless rate can fall lower and government budget deficits can run higher than was once widely believed without setting off an inflationary spiral.
Some leading liberal economists warned that Mr. Trump’s deficit-financed tax cuts would create a mere “sugar high” of a short-lived boost to growth. The Congressional Budget Office forecast that economic benefits of the president’s signature tax law would be partly offset by higher interest rates that would discourage private investment.
And the Federal Reserve in 2017 and 2018 took action to prevent the economy from getting too hot — driven by models suggesting that an improving labor market would eventually cause excessive inflation.
accusing the Fed of keeping them low to help President Obama; and some of his Federal Reserve appointees were monetary hawks (though not those who managed to win Senate confirmation).
But the experience of his presidency — particularly the buoyant economy before the pandemic began — shows what is possible. It may not have been the best economy ever, as he has repeatedly claimed, but it was easily the strongest since the late 1990s, and before that you have to go back to the late 1960s to find similar conditions.
news media, including some scathing attacks.
“Put simply, Blinder is ‘soft’ on inflation,” wrote the Newsweek columnist Robert J. Samuelson. Without adequate anti-inflation conviction, “Blinder lacks the moral or intellectual qualities needed to lead the Fed.”
“I was pilloried for suggesting that we might get below 6 percent on the unemployment rate,” Mr. Blinder, a Princeton economist, said recently.
Phillips Curve,” which describes the relationship between the jobless rate and inflation. As applied by a generation of central bankers, it was treated as a useful guide to setting policy. If the unemployment rate went too low, the logic went, inflation was inevitable, so central bankers needed to prevent that from happening.
When Fed leaders raised interest rates in December 2015, for example, their consensus view was that the long-run unemployment rate — the goal they were ultimately seeking — was 4.9 percent.
If the job market kept improving, then-Fed Chair Janet Yellen said at the meeting where that interest rate increase was decided, “we would want to check the pace of employment growth somewhat to reduce the risk of overheating.”
Yet from spring of 2018 to the onset of the pandemic, the United States experienced a jobless rate of 4 percent or lower, with no obvious sign of inflation and many signs that less advantaged workers were able to find work. Reality turned out better than the 2015 officials thought possible.
Since the 1980s, recessions have been rarer than they were in the immediate post-World War II era, but they have been followed by long, “jobless” recoveries. Much of that time has featured weak growth in workers’ wages.
she said, “a more radical rethinking of the economy’s productive potential would surely be in order.”
That radical rethinking is now very much underway — including by Ms. Yellen.
“Allowing the labor market to run hot could bring substantial benefits,” Ms. Yellen said in a speech at the Brookings Institution in 2019. She said that a high-pressure economy — one where unemployment is low and employers have to compete for workers — improves upward mobility. She added: “We’re seeing that in the current expansion. Those who are least advantaged in the labor market — those with less education and minorities — are experiencing the largest gains in wages and declines in unemployment.”
Mr. Powell, who will lead the Fed for roughly the first year of Mr. Biden’s term and then will be either reappointed or replaced in February 2022, has also become a vocal enthusiast for avoiding these mistakes of the past.
In the strong pre-pandemic labor market, he said in an August speech on the Fed’s new policy framework, “many who had been left behind for too long were finding jobs, benefiting their families and communities, and increasing the productive capacity of our economy.”
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