Krugman: Donald and the deflationists
U.S. political discussion has been dominated by the issue of Donald Trump’s wall — an issue on which Trump’s irrationality keeps surprising even his critics. So I don’t imagine that many people have heard about Trump’s nomination of David Malpass, currently an undersecretary at the Treasury Department, to lead the World Bank. But it’s a story worth following.
For one thing, while the U.S. traditionally gets to choose the World Bank’s president (Europe gets the International Monetary Fund), there will be a lot of opposition to Malpass, who has a history of being hostile to international institutions. Furthermore, the Malpass nomination highlights the remarkable character of Trump’s economic appointments.
Remarkable in what way? Well, remarkably bad. Every economist, yours truly very much included, gets it wrong sometimes. But Trump only seems to choose men who have been wrong about everything.
Beyond that, however, what’s remarkable is the extent to which this president consistently chooses economists whose ideology is at odds with his own professed views on policy.
These days, at least, Trump is an easy-money guy who wants the Fed to keep interest rates low. But he keeps appointing deflationists — men who opposed any attempt to rescue the economy from the financial crisis, who bitterly attacked the Fed for keeping rates low and demanded tight money even when we had very high unemployment.
Why does he do this? I’ll get there in a minute. First, let’s talk about who’s on the Trump team.
At the top of the list is Larry Kudlow, director of the National Economic Council. He has quite a track record; as one commentator put it, he “has elevated flamboyant wrongness into a form of performance art.”
Kudlow may be best known for his unflagging faith, in the teeth of the evidence, in the magic of tax cuts, as well as his dismissal of “bubbleheads” who predicted a housing crash. Less known is his 2008 praise for Bush officials for having the courage not to bail out Lehman Bros. Just hours after his encomiums, Lehman’s fall had plunged the whole world into financial meltdown.
Kevin Hassett, chairman of the Council of Economic Advisers, is another bubble denier, although his most famous prediction was in his 1999 book “Dow 36,000” (which, adjusted for inflation, would mean roughly Dow 55,000 today). More relevant to current policy, Hassett was among those who kept predicting, wrongly, that Ben Bernanke’s efforts to fight unemployment would cause runaway inflation.
And then there’s Malpass, also both a bubble denier and a Bernanke-basher. Much press commentary has noted his 2007 insistence, as chief economist at Bear Stearns, that there was no reason to be worried about the financial system. A few months later his own firm imploded.
But I think his most revealing piece of commentary was a 2011 screed against low interest rates and what he considered a “weak dollar” policy. A low rate policy, he declared, hurts the economy because it “discourages thrift,” while the weak dollar was bad for confidence, or something.
This was really bad economics. At the time, America had 9 percent unemployment, entirely because of inadequate private spending; to the extent that low interest rates were discouraging thrift and making people spend rather than save, that would have been a good thing, not a problem. And Malpass’ argument about the dollar was just incoherent.