Trump and the Federal Reserve: Governing with transparent purpose

Listening to the rhetoric of President Donald Trump over the past 19 months, if I were to summarize the role of government, it is to defend national borders, sustain an environment that creates jobs, and be impactful in driving up stock market values.  Mr. Trump has effectively drowned out the Republican congressional leadership to the point where I don’t care what Senate Majority Leader Mitch McConnell or Speaker of the House Paul Ryan’s views on what the government’s role is supposed to be.

Under my interpretation of public administration, the buck, when it comes to governing, begins and ends with who is in the White House.  It is the Executive who enforces the law and interprets the law every day given a particular problem.  An argument can be made that during the run-up to the 2020 presidential election, the views of Mr. Trump’s challengers will take on some importance as voters compare the record of Mr. Trump with the promises of his Democratic challenger, but Americans have a way to go before the Democrats settle down on a few contenders and beginning pushing their messages before the electorate.  All we have right now are the whispered names of Andrew Cuomo, Elizabeth Warren, Joe Biden, and, yes, Hillary Clinton.

I suspect that none of the above named Democrats will be serious contenders in the spring of 2020 anyway.  Listening to the roll call of potential presidential candidates is like believing that the baseball team leading their division eight weeks into the season will be in the World Series much less holding the trophy.

In my lifetime, Mr. Trump has been the most transparent of presidents when it comes to the factions that he promotes.  Mr. Trump has been consistent and clear with his America’s economy first message. He took Mr. Trudeau out to the woodshed during the renegotiations of the North American Free Trade Agreement.  He kept his word on pulling the United States out of the Paris accords on climate change and the Trans Pacific Partnership Agreement.  He will not enforce the mandate that taxpayers are required to purchase health insurance, facing penalties if they don’t.  These initiatives are driven by a philosophy of American economic nationalism with the hopes of creating incentives for American businesses to repatriate jobs and cash to America’s shores.

He’s recently been transparent about the most important engine in the American economy: the Federal Reserve.  Mr. Trump disapproves of the Federal Reserve’s increase in the target for its federal funds rate, even though the Federal Reserve’s independence gives the central bank the okay to thumb their noses at the President.  The federal funds rate is the interest rate at which the Federal Reserve’s member banks may lend each other money overnight.  Changes in the fed funds rate seep into the overall economy in the form of mortgage rates, credit card rates, and interest rates on bonds.  Higher rates raise the costs of borrowing making it tougher for businesses to invest in growth including hiring more labor.

Higher rates mean that the economy’s “labor to tax conversion mechanism” becomes less efficient.  The labor to tax conversion mechanism is that layer of the economy where companies convert human resources into tax dollars by adding labor to payroll and collect and transmit income, payroll, and social security taxes to the Treasury.  Tax dollars are collected by the U.S. Treasury and either deposited for future spending on public programs or to service the debt.

But as I alluded to before, companies will feel constrained by interest hikes as they see revenues and profits reduced by higher costs for doing business. This may mean, depending on the business, a move toward automation in order to reduce labor costs.  Taking labor off of payroll means removing a head that could be taxed.  Will government have to apply some type of alternative tax applicable to an artificial intelligence that replaces a human intelligence on a factory line?

Going back to transparency, neither Mr. Trump or any leading Democrats have clearly demonstrated an ability to describe to the American public how their current economic environment works.  Neither begin any of their discussions on the economy with a discussion on capital or describe how the central bank is still the only game in town and the relationship to and importance of the central bank to all Americans. Mr. Trump has come the closest which means at this time he is the only elected official that gets it.

 

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One thought on “Trump and the Federal Reserve: Governing with transparent purpose

  1. The balance sheet tells a different story. The company (ie the US) cut down its income ie taxes and borrowed a heap more money (ie the national debt) and in the short term has the cash to get more into employment. Say what? If a company I had shares in had a CEO who did that, the shareholders would fire the CEO! Look up the “US Debt clock”… and pause a little.
    The latest blip on the share market is indeed a first sign of trouble ahead. If the economists are right (over a thousand of them wrote a warning letter to Mr Trump), increasing the debt, putting up the tariffs, losing trade deals and wrecking other nations economies may not turn out well in the long run despite yours and Mr Trump’s optimism. A shame about the rolled steel prices in the US (up 40% plus).
    At least fewer can now access health care so the hospitals may not be so crowded. On the other hand Mr Trump has ratcheted up the arms race, weakened NATO, told Iran that their denuclearisation programme is no longer part of the treaty, plans to abandon the only treaty that had reduced nuclear weapons, by making threats, encouraged China to increase its weapons development, given the green light to the NRA and reduced aid to countries where the US armed allies are bombing communities out of existence eg Yemen.
    And how are we today. At least they have caught the Trump supporter who sent the letter bombs. The Synagogue shooting might have been worse. But I don’t know if you are comfortable that the US community is now deeply divided! And surely not all is entirely well. Gun crime is still high. Somehow Mr Trump’s announcement last election that the violence in the US community stops “right now” hasn’t quite filtered through to the nutters who are now allowed to buy guns with fewer controls.
    The really good news is that if you have shares in armaments you will make some money before the bombs start to fall.

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