Donald Trump’s economic policy: Some decisions are understandable, others are incomprehensible

The fact that the United States is increasing the fiscal deficit when the country is in the vicinity of full employment is often criticised. However , if this fiscal deficit help s finance investments (corporate, in infrastructure) that increase US potential production, it makes sense , even at full employment : it can be financed (and the resulting US external deficit can be financed ) without any difficulty at low interest rates by attracting capital from the rest of the world. It is rather intelligent to let the rest of the world finance investments that boost US potential growth. The introduction of protectionism in the United States is, by contrast, difficult to understand. Observation s over the last 20 years seem to show that the substitutability between domestic production and imports is low in the United States. The main effect of customs tariffs is then an increase in the price of US import s ( and hence a decline in real income, rise in inflation and the risk of a rise in interest rates) without reduc ing imports in volume terms . So Donald Trump’s economic policy is a mix of the understandable and the incomprehensible.