Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Investors have… concluded that… very expansionary fiscal policy and major reductions in regulation…

…in sectors ranging from energy to finance to drug pricing will raise demand and reflate the American economy. The result has been a rise in real interest rates and inflation expectations, along with a strong stock market and a strong dollar…. [But] initial market responses… are poor predictors…. Rüdiger Dornbusch made an extensive study of… populist economic programmes…. Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics….

Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded…. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage…. [AND] the Trump tax reform proposals are too expensive. Many… only benefit the high-saving wealthy….

Trump’s global plan… rests on a misunderstanding…. The Mexican peso has depreciated about 10%… rais[ing] the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US… mak[ing] Mexico and other emerging markets much cheaper relative to the US for global companies… US workers, particularly in manufacturing, will see increased pressure. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics.

Populist economics will play out differently in the US than in emerging markets. But the results will be no better…