Wednesday, January 11, 2017

The World Bank on Trump’s Fiscal Stimulus

Did this news account properly capture what the World Bank said? If so, I have some quibbles with it. First up a line that makes sense but needs further comment:
President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the U.S. economy, lifting growth around the world, although uncertainty about his trade policies adds to the risks, according to the World Bank.
As the U.S. economy grows, the story is that we import more from abroad. If this also leads to dollar appreciation, then net exports further turn negative which means the rest of the world enjoys increases in net exports. Assuming the U.S. economy is still below full employment – which I believe – this is good news for us even as we see a higher trade deficit. And it would certainly be good news for Europe. But now to the second paragraph of this story:
The Trump administration could squander the economic gains of fiscal stimulus if it imposes new trade barriers that provoke retaliation by other countries, the Washington-based development lender said Tuesday in the latest update to its global economic outlook.
I’m sorry but this is just bad writing. Squander for who? Trade protection allegedly shifts aggregate demand away from the rest of the world towards the U.S. So yea- it would squander the gains for Europe but it would increase even further aggregate demand for the U.S. Of course one could argue that Europe needs aggregate demand expansion even more than we do. The better argument is that a trade war might end up being net export neutral. The same might hold if the Trump trade protection led to dollar appreciation. But this is not the same thing as saying the fiscal stimulus would be squandered.

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