The Trump administration, in thinking that youre going to be bailed out by growth,is following in the footsteps of governments that couldnt control their indebtedness, says Harvard economist Carmen Reinhart. Standish Mellon Chief Economist Vincent Reinhart, Carmens husband and sometime collaborator, points to a 1991 essay, The Macroeconomics of Populism, by Rudiger Dornbusch and Sebastian Edwards. An initial burst of growth brings a sense of vindication to a populist regime, the writers found, but its soon followed by bottlenecks, inflation, and budget deficits, until it becomes clear that the government is in a desperate situation. Trump likes to point out that Obama presided over a huge increase in the federal debt. But it made sense for the government to run deficits during and immediately after the 2007-09 recession. With its deep pockets and solid credit, the U.S. used that deficit spending to offset retrenchment by households and businesses, thus preventing an even deeper downturn. Now that the unemployment rate is below 5percent, theres less scope for stimulus. At least thats the Federal Reserves position: Even before Trump has revealed his budget, the Federal Open Market Committee has indicated its on track to raise interest rates three times this year to prevent inflationary overheating of the economy. The levees holding back red ink are softer than usual.
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