Tyler Cowen wrote an interesting post, Which macroeconomic theories will rise and fall in status because of Donald Trump?, that explored the potential rise or fall of macroeconomic theories under the Trump administration. I decided to jump on the bandwagon and offer my suggestions. Here are his choices and comments.

1. “The multiplier is high.”  That seems ready to decline in status.

2. “Even wasteful expenditures can boost demand and help pull us out of secular stagnation.”  Ditto.  “We need to do stimulus right” will make a comeback.  And I see “the distributional effects of stimulus really matter” lurking around the corner.

3. “Tax cuts aren’t as good as government spending.”  That actually may rise in status, especially if Congress gets the bargain they want — lots of tax cuts — rather than what Trump wants.

4. The notion of how a credibly irresponsible leader can improve macro performance won’t get cited as much.

5. Austrian-like theories of how there can be a boom in the short run, yet with great long-run dangers, will return to prominence, albeit with modifications to the original Austrian story.

6. Criticizing countries with trade surpluses will decline in status.

7. The efficient markets hypothesis will decline in status.  It imposes too much discipline on our judgments of leaders and their policies.  The more certain we are of our own judgments, the more that evidence contradicting those judgments should be downgraded.  Right?

My Choices For Macroeconomic Rise Or Downfall

1. Zero Interest Rate Policy(ZIRP). We have sufficient evidence to conclude that a Zero Interest Rate Policy does not stimulate the economy. ZIRP stabilizes a financial crisis when it is timely, targeted, and temporary. It is not a substitute for a good, long term monetary and fiscal policies.
2. Financial Engineering. The zero interest rate policy encouraged many companies to borrow money to buy back stock. Now the Federal Reserve is planning to raise interest rates. How are these self liquidating companies planning to raise sales without borrowing even more money?
3. Wall Street Bailout of 2008.  The longer we go with stagnant wages and slow GDP growth the more the bailout resembles Japan’s Lost Decade. Hopefully, if we have a recession our policy leaders will not continue to borrow failed ideas from the Japanese.
4. All Bubbles Matter. The Wall Street bailout did not reduce the systemic risk posed by the derivatives market. Now we get to watch the European Union deal with the systemic risk posed by Deutsche Bank and multiple Italian banks. At some point we have to admit Keynesian economics is more prone to bubbles than Austrian economics.