Alan Cole applauds President Trump’s fiscal record — perhaps it would be better to call it the fiscal record of President Trump and the Republican Congress of 2017-18 — on the ground that deficits have not caused a dangerous increase in inflation or interest rates. Cole’s case raises two sets of questions in my mind.


First, how would the Federal Reserve have reacted if deficits had been lower? (How, that is, would it have reacted if Congress had restrained spending or refrained from cutting taxes?) Cole suggests that the economy would have been weaker in that case. The employment rate would, for example, be lower. Presumably inflation would also have been at least a bit lower. In that case, though, wouldn’t the Fed have done less to raise interest rates in 2017-18? (It raised the federal-funds rate 7 times, or 8 if you count the hike in December 2016.) And wouldn’t that combination of a looser fiscal and tighter monetary policy have left us in more or less the same position that we have been with respect to Cole’s concern (the amount of “money in the economy”)?

Second — assuming that the answer to that question is yes – would it be preferable to have had a lower deficit and lower interest rates (and lower expectations of future interest rates)? It seems to me that the answer to that question, too, is yes, if only because it would have meant that expected future taxes and federal interest payments would be lower.


I therefore conclude that the increased deficits of this period have been a mistake, albeit not a catastrophe.