The Trump administration’s advice to Malaysia

In a recent post I discussed John Cochrane 's reaction to the Treasury department's criteria for "currency manipulation". John's post included a link to the report , which contains some quite odd recommendations that raise additional question marks. Consider the following:

Malaysia’s external rebalancing in recent years is welcome, and the authorities should pursue appropriate policies to support a continuation of this trend, including by encouraging high-quality and transparent investment and ensuring sufficient social spending, which can help minimize precautionary saving.

This is bizarre on multiple levels:

1. What business is it of the US government to give Malaysia advice on its economic policy regime? Did they ask for advice? How would our Congress feel if the Malaysian government instructed it on how to conduct our fiscal policy?

2. It is even more surprising to see this sort of advice coming from a Republican administration. Isn't the GOP always warning us that the Democrats will waste lots of money by boosting spending on social services (as with Obamacare)? Doesn't the GOP believe that saving is a virtue? Why encourage Malaysia to minimize saving? Doesn't the GOP reject Keynesian "paradox of thrift" arguments? It seems like this report could have been written by Bernie Sanders. Where is Larry Kudlow?

3. Hasn't the Malaysian economic model been quite effective, with high rates of saving fueling rapid economic growth? The IMF estimates that Malaysia's per capita GDP is now over $30,000 in PPP terms, which means that Malaysia is transitioning from developing country to high income country. On the Heritage ranking of economic freedom they are number 4 in East Asia, trailing only Hong Kong, Singapore and Taiwan. Why encourage Malaysia to pursue a policy of more government spending?

Trump officials might argue that high rates of saving boost the Malaysian current account. But why is that bad? Why should we care about the Malaysian current account?

Let's say I'm wrong, and that a big current account surplus somehow did help Malaysia at the expense of the US. In that case, shouldn't the Trump administration recommend that the US adopt the sort of policies that boost our current account, i.e. policies that boost US saving while reducing US investment? Instead, the Trump administration is pursuing exactly the opposite policy--a high investment/low saving policy regime, tailor made to generate big current account deficits.

To summarize, the Trump administration (and to be fair previous administrations as well) are recommending that Malaysia abandon its highly successful policy regime and adopt the sort of policies that Republicans ridicule when suggested for the US. They do this not because it will help Malaysia, but because they wrongly believe it will help the US. In fact, just the opposite is true. A prosperous, fast-growing Malaysia will buy more America films, more America jets, and more American high tech products. Growth is good for everyone.

If we believe that Malaysian CA surpluses will somehow depress aggregate demand in the US, then we can and should offset this with an adjustment in Fed monetary policy. Indeed if the Fed is targeting inflation then this offset will occur automatically.

And given our striking ineffective fiscal regime, which has dramatically boosted the budget deficit during a period of economic boom (exactly the opposite of what textbooks recommend), who are we to give advice to other countries on fiscal policy?

HT: dede

The post The Trump administration's advice to Malaysia appeared first on Econlib.

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