Should-Read: Olivier Blanchard: In Light of the Elections: Recession, Expansion, and Inequality

Should-Read: Disagreeing with Olivier, my chances of success are surely less than 50-50. Nevertheless…

As I read the evidence, the short-run fiscal multipliers (1) from government purchases are rather high, (2) from transfer payments to the liquidity-constrained are moderate, and (3) from high-income tax cuts are next to zero. At the moment it looks like effectively all of the Trump fiscal initiative to be will take the form of (3). Some of it will be direct tax cuts. The rest will be tax credits to businesses that are not currently cash-constrained but rather, at the margin, in the share buyback business.

But they will produce a stronger dollar.

Thus I expect next to no effective fiscal stimulus. I expect a larger capital inflow (trade deficit). And I am told we now expect the trade war to start soon.

Thus I do not see why Olivier Blanchard is so optimistic. Where is he coming from? What does he see that I do not?

Olivier Blanchard: In Light of the Elections: Recession, Expansion, and Inequality: “What happens to the US economy depends mainly on the balance between macroeconomic and trade measures…

…Larger fiscal deficits, as a result of both higher infrastructure spending and corporate and personal tax cuts… will lead to higher spending and higher growth for some time… [and] higher inflation….

Will the Fed indeed clamp down on demand and increase interest rates to pre… Trump the candidate criticized Fed Chair Janet Yellen for being too dovish…. To the extent that both growth and interest rates are higher, the dollar is likely to appreciate, leading, ironically, to larger US trade deficits…. This leads me to trade….

The pre-election program emphasized the use of tariffs to reduce imports and reestablish a “level playing field.”… Things could quickly escalate…. And… as fiscal deficits lead to larger trade deficits, the pressure to reduce them through more tariffs, as misdirected as that strategy is, will likely increase. So, in the end, expansion or recession will depend on the balance between macroeconomic and trade measures. My own guess is the first will dominate…