Krugman Gets His Alien Invasion – And Gold Bugs Get Paradise 


Nobel Prize winning economist and uber-liberal New York Times columnist Paul Krugman likes to illustrate his philosophy by noting that the threat of an alien invasion would help the economy by stimulating government spending.



Well, last week’s election gave Krugman and the rest of the Keynesian establishment their alien invasion (Trump and company being only partially human when viewed through Beltway-culture eyes). And sure enough, it’s resulting in massively-higher government spending.

Infrastructure is phase one:

Donald Trump Proposes to Double Hillary Clinton’s Spending on Infrastructure

(New York Times) – Donald J. Trump took a step to Hillary Clinton’s left on Tuesday, saying that he would like to spend at least twice as much as his Democratic opponent has proposed to invest in new infrastructure as part of his plan to stimulate the United States’ economy.
The idea takes a page out of the progressive playbook and is another indication that the Republican presidential nominee is prepared to break with the fiscal conservatism that his party has evangelized over the past eight years. 
“We have bridges that are falling down,” Mr. Trump said on the Fox Business Network.  
“We have many, many bridges that are in danger of falling.” 
Mrs. Clinton has called for $275 billion in infrastructure spending over five years. That would include the creation of a national infrastructure bank, which would be given $25 billion to support loans and loan guarantees. In sum, the plan would support about $500 billion in spending on infrastructure. 
Senator Bernie Sanders of Vermont, who competed against Mrs. Clinton for the Democratic nomination, also wanted to outspend her on infrastructure, calling for a $1 trillion investment over five years. 
Asked how he would pay for $800 billion to $1 trillion in infrastructure spending, Mr. Trump described a strategy that has been favored by liberal economists over the years.  
He said he would create an infrastructure fund that would be supported by government bonds that investors and citizens could purchase. 
“We’re going to go out with a fund,” he said. “We’ll get a fund, make a phenomenal deal with low interest rates and rebuild our infrastructure.” 
He added, “We’d do infrastructure bonds from the country, from the United States.” 
If Mr. Trump’s call for more spending sounds familiar, that could be because Lawrence H. Summers, who was President Bill Clinton’s Treasury secretary and the director of President Obama’s National Economic Council, has been saying the same thing. At a Democratic National Convention round table last week in Philadelphia, he said the United States should invest between $1 trillion and $2 trillion in infrastructure over the next 10 years.
And of course now that Washington is a Republican town, defense spending will soar:

Trump Win Lifts Defense Stocks On Expected Trump Push For Military Buildup

(TheStreet) – Shares of industrial stocks tracked the broad market higher with defense stocks leading the way while materials and manufacturers trailed close behind as investors reckoned President-elect Donald Trump will focus on strengthening the U.S. military.
Lockheed Martin ( (LMT) ) rose almost 6%, Raytheon added 7.5%, and other defense contractors including Northrop Grumman ( (NOC) ) and General Dynamics (GD) rose more than 5% each on the prospect of a Trump presidency and, as importantly, Republican control of both houses of Congress.

Meanwhile tax cuts – which are, in Keynesian terms, a form of spending – are of course high on the wish list:

Trump and Congress Both Want Tax Cuts. The Question Is Which Ones.

(New York Times) – Several economic issues divide many Republicans in Congress from Donald J. Trump, the Republican president-elect. Free trade versus tariffs to limit imports. Immigration reform versus a border wall. Cutting Social Security and other benefit programs versus protecting them. 
But one economic matter unites just about every member of the Republican party: support for tax cuts, particularly for those at the top of the income ladder. 
Whatever fault lines have emerged during this campaign, the belief that lower taxes targeted at “job creators” will unleash a roar of economic growth crosses them.  
Both Donald J. Trump and Paul D. Ryan, the House speaker, have released tax proposals that hark back to the supply-side programs of the Reagan and George W. Bush eras, promising that the multitrillion-dollar cost will be more than offset by the extra revenue flowing into the Treasury from the growth that will follow. 
“Tax reform is the thing that always unites Republicans,” said William Gale, a co-director of the nonpartisan Tax Policy Center and a former economic adviser to President George H.W. Bush. “I would guess that that’s Item 1 on the congressional agenda.” 
While sweeping tax cuts were never a crusading theme of Mr. Trump’s, they have long been near the top of Mr. Ryan’s agenda. And Mr. Trump has suggested he would be happy to let Congress take the lead.

 Some thoughts

The above proposals have antecedents in Eisenhower’s construction of the interstate highway system in the 1950s and Regan’s tax cuts and defense build-up in the 1980s, both of which were seen as successes at the time.

There’s just one problem. Those programs were enacted when debt levels as a percentage of GDP were miniscule compared to today. Since borrowing, like any other activity, tends to become less effective with overuse, ladling another few trillion on top of the hundred or so trillion already owed won’t accomplish much. In economists’ terms, the “marginal productivity of debt” has plunged as total debt has soared, which implies that we can now borrow infinite dollars and get virtually zero new wealth.

gdp-to-debt

But it’s possible that massive increases in government borrowing and Fed currency creation will generate the inflation that Keynesians love and conservatives don’t seem to understand. If so, a falling dollar would – in the best-case scenario — bring back the stagflation of the 1970s.

Which, readers of a certain age will remember, was a great time to own gold and silver.

gold-1970s
silver-1970s

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