Economist Paul McCulley told CNBC on Thursday he's had a "big ax to grind" with Washington for years over the need for more deficit spending, and it appears Republican Donald Trump may actually be the one to deliver.
The stock market rally since Trump won the presidential election has been reflecting that notion, argued McCulley, who said he voted for Democrat Hillary Clinton. "The market is essentially celebrating the end of fiscal austerity. And it just happens to be a vehicle of Mr. Trump. But the end of fiscal austerity is the key economic issue."
"My big ax to grind in recent years — not months but years — is that we needed to have more fiscal policy expansion, because we're in a liquidity trap," said McCulley, former chief economist at Pimco. He said too much responsibility has fallen on the Federal Reserve for growing the economy. "We needed some help with larger budget deficits."
"I've never had an issue with increasing the size of the budget deficit. I think it's been too small. I have zero problem with increased public investment and funding it with deficits," he said. "To the extent that Mr. Trump wants to do that, I think that is the right Keynesian policy."
McCulley was referring to the British economist John Maynard Keynes, who is often credited with the concept of deficit spending as a means of fiscal policy.
"My biggest complaints for the person I voted for, Mrs. Clinton, is that she said, 'I will not add a penny to the national debt.' That was basically putting you in a straightjacket of fiscal austerity forever," said McCulley, senior fellow in financial macroeconomics at Cornell Law School.
Trump has said he's willing to add to the national debt, currently close to $20 trillion, while interest rates were still historically low to address some of the nation's biggest problems, including fixing crumbling infrastructure to the tune of a trillion dollars.
The Fed has been taking stimulus steps designed to boost the economy since the 2008 financial crisis, including holding the key fed funds rate near zero percent for years.
Central bankers increased the rate by a quarter-point for the first time in more than nine years in December 2015, raising the new target from a zero percent to 0.25 percent range to 0.25 percent to 0.5 percent.
Now one year later, Fed policymakers are widely expected to hike again following their Dec. 13-14 meeting.