Trump's choices: Ukraine, Fed mistakes

 

Gordon L. Weil

Making policy is a matter of making tough choices.  As two current cases show, there’s a lot of room for error.

Ukraine vs. Russia

Almost four years ago, Russia invaded neighboring Ukraine, seeking to gain territory and install a puppet regime there.  To the world’s surprise, Ukraine halted the Russians and regained much lost territory.

Under the Soviet Union, Ukraine was under Moscow’s total control.  Historically, the Russians had treated Ukrainians as second-rate subjects.  Even after the collapse of the Soviet Union, Russia broke successive agreements to respect Ukraine’s independence.

Under President Biden, the U.S. opposed the invasion and supported the Ukraine government.  Relying heavily on that support, Ukraine pushed Russian forces back. What Russia’s Putin had planned as a rapid and complete victory turned into a protracted war.

European nations, alarmed by the Russian land invasion, which they fear as a potential threat to themselves, also support Ukraine.  Like much of the world, they recognize Russian aggression as a breach of the rules-based world order that followed World War II.  But they lack the military resources and intelligence capability that the U.S. deployed. 

As president, Trump revealed a different view.  He ignored the historical relations between Russia and Ukraine and Russia’s repeated violation of its non-aggression agreements.  He saw the conflict as a matter of territory and causing an unnecessary loss of life on both sides.  He believed that the war could be easily ended.

Trump concluded that Russia’s superior strength would make it the ultimate victor.   Ukraine, dependent on American aid, could be forced to surrender territory and independence, but could survive a while longer.  Zelenskyy would not agree.  Trump angrily stopped all but intelligence support; Europe has been forced to step up.

Trump can either help Russia by promoting a deal including its demands for a weakened Ukraine or help Ukraine by backing its resistance to the invasion that is gradually weakening Russia.  This is the American policy choice, one in which aggression could either be ignored and rewarded or rejected and punished.

Though the U.S. claims it is the only entity in the world that could foster an accord between the two sides, Trump has apparently failed to recognize that even the U.S. cannot bring about a deal.  Russia’s Putin will not relent in his ambition as long as Russian resources permit.  Ukraine’s Zelenskyy will not surrender his country’s independence.  The U.S. may just walk away.

Trump has made his choice, based on an inadequate understanding of Ukraine and European history.  But it is a false choice, because ultimately, it is not his to make.

Jobs vs. inflation

The Federal Reserve has been given two tasks:  to limit inflation and to promote full employment.  An independent board, it seeks to find a balance between these tasks by carefully controlling the supply of money in the American economy.  It usually follows its own economic analysis and judgment, immune from short-term political demands.

Political action on the economy, usually reflecting presidential policy with congressional approval, takes place through fiscal policy – setting the level of government spending and the taxation and borrowing to cover it. 

Thus, one of the two elements of government economic policy is dominated by political considerations and the other is based on economic analyses, insulated from politics.

Congress has assigned the Fed its independent role, but presidents may be tempted to try to influence it to align with their political goals.  When they try to control the Fed, conflict is inevitable. 

Trump wants lower interest rates, which he believes will stimulate the economy, assisting him redeem some of his campaign promises.  He is unconcerned about the inflation that an overly aggressive policy could cause, eroding the value of the dollar.

He believes that his upcoming choice of a new Fed chair can produce his desired result.  His Fed would lower interest rates to emphasize job creation over controlling inflation.  He would replace the Fed’s effort to meets its dual responsibilities with his choice in favor of one of them.

By setting interest rates and using other measures to control the money supply, the Fed can have a direct and immediate effect on inflation affecting individuals and businesses. Because they rely on credit, their costs may immediately rise or fall.

Job creation is less direct.  By lowering employers’ interest costs, the Fed may assume they will increase investment, potentially creating jobs.  But companies may pocket gains rather than investing them or might employ more automation.  In short, the Fed’s job creation efforts are less direct than its anti-inflation moves and resemble trickle-down economics.

The Fed’s obvious answer is to make a balanced choice.  Trump’s choice is to override its independence.   If the Supreme Court backs him, which seems unlikely, he could have his way and end the independent role of the central bank.