There have been some interesting arguments made about the low-flation, low growth phenomenon in the United States. Some say it’s because both productivity and population growth is slowing, and not really about monetary policy. Others say it has to do with expanded inequality, rich people hoard, leaving crumbs for others, etc…

I don’t find any of the arguments much more than perhaps superficially plausible points. For instance, the nature of “rich” people is the same as it’s always been; there has always been hoarding and crumb chasing.  I am not so sure what makes this now the most pressing economic problem of our generation.

For population growth, it’s truly slowing. It is not just slowing, it’s shrinking at about -.03% annual rate of change, a trend that started around the turn of the century and undoubtedly was worsened by the Great Recession, as shown in the graphs of natural log population rate of change and active persons over the age of 15 and over below.

If I were to imagine a scenario where monetary policy plays no role in population growth, even though it’s difficult to explain the mass exodus of population starting in 2010 as related to baby boomer demographics, and I assume that the shrinking population phenomenon were entirely due to “structural” factors, and everyone in the economics field accepted that stable NGDP growth is imperative to economic stability, what would rational monetary policy look like under these conditions?

One might assume that if people are leaving, whatever the cause, there would be less spending in the economy, and NGDP would be naturally pulled down (surprise!). And if the central bank were bent on stabilizing NGDP growth, perhaps the monetary response would be opposite to effectively slashing the base as we have seen occur over the last 12-18 months.

The other side of this thought experiment would say that people leaving, whatever the cause, would decrease the demand for money and shrink potential, and in order to prevent stoking inflation, because of slowing of population growth, or slowing of the ability of the supply side to expand to soak up monetary easing, and the productivity argument, taking more workers to produce the same value of goods as time goes on means we need less money.

If I then suppose a simple scenario that the Fed held the base constant and the economy is at potential, and everything else remained the same as population growth declined, I would expect to see dollar exchange rates falling. Constant base, declining population and therefore declining demand for dollars, lower growth, with lower productivity, prices rise over time.

The puzzling thing about the population and productivity problem argument is that at least two elements of the scenario aren’t anywhere within recent experience: inflation pressure or falling exchange rates. But we do have falling NGDP, historically low LFPR, fairly stable below target inflation, and a robust dollar while the Fed effectively slashes the base with RR’s. And there other things missing like rising velocity and economy at potential, which are essential to make the rest of the argument valid in my view.

This is not to say that there isn’t anything “structural” in the mix to explain slow growth. Obviously there is, given the markets Donald Trump put. But how much of this slow growth relies on other factors besides terrible monetary policy that has no intention of allowing the economy to reach potential remains to be seen. Should everything at the Fed remain the same, Donald Trump will fail to deliver for the simple reason that his intent to create more potential in a world where the Fed is afraid of realizing potential, makes no real difference, except to the downside as he exacerbates the population growth problem, and the need for more NGDP growth becomes dire. Without a shakeup at the Fed, his efforts will amount to nothing more than rearrangement of the deck chairs on the Titanic, and the oil market has this painful expectation of Trump’s ability to “Make America Great Again” pegged.

PS: How about this nonsense from Trump economic adviser Anthony Scaramucci:

Scaramucci said global economies are still battling deflation largely because of a movement toward fiscal austerity that followed the 2008-2009 global economic crisis. “While easy-money monetary policies have exacerbated the income divide, central bankers handcuffed by political dysfunction have had little choice but to provide extraordinary accommodation,” he said. “Business people like Mr. Trump understand you can grow yourself out of excessive debt.”

I really thought that inflation was caused by extraordinarily easy MP… it is impossible to be extraordinarily easy with MP and still have to battle deflation unless it really isn’t so extraordinarily easy. And how does one “grow out of debt” with tight money? This man makes no sense.