How did Trump deliver his boom?

It’s been the norm for the US budget deficit to blow out when unemployment rises (as tax revenue falls and jobless claims go up) and decline when unemployment falls. Thanks to Trump’s fiscal stimulus it’s now blowing out when unemployment is collapsing and looks to be on its way to 5% of GDP. This raises three risks. First, it may mean higher than otherwise interest rates and bond yields as the Fed may have to raise rates more than would otherwise be the case to stop the economy overheating and the Government’s competition for funds results in higher bond yields. So far there is not a lot of evidence of this with US bond yields remaining relatively low – presumably held down by low global bond yields and trade war fears – but its still a risk as US inflationary pressures rise.

Second and more fundamentally it begs the question of debt sustainability when the next recession arrives given US public debt is already around 100% of US GDP. Finally, US fiscal stimulus by adding to the US savings-investment imbalance is adding to the US trade deficit and so is completely inconsistent with his trade policies. Even if there was a completely level playing field on world trade America will still have a trade deficit!

The Keynsians wanted fiscal stimulus to fight secular stagnation and wealth imbalance and Trump gave it to them, though not exactly in the distribution that they wanted with fat corporates the big winners.

It would have been a much better idea for Donald to deliver low income tax cuts which would also have delivered a boom but one that could run longer as the supply side responded with investment to match rising demand. In turn that lifts wages so on and so forth. The Trump way is a one-off hit to corporate margins that sets up a fiscal cliff in 2020.

Before then he will need to find some new kind of public spending or his boom will go bust.