Yes, there was probably a bit more than the usual dose of cray-cray in President Trump’s interview with The Economist yesterday. But I just can’t muster the energy to crack wise about all that, other than to point out than the bit about how China stopped managing their currency the day Trump won is over-the-moon ridiculous, as one mouse click reveals.* What galled me (and Matt Yglesias) was to hear Sec’y Mnuchin chime in right after Trump made that claim: “Right, as soon as the president got elected they went the other way.”
There are profound, existential questions about the consequences of being governed by people with such a tenuous grasp on reality, but I cannot deal with those questions right now.
Instead, I’d like to contemplate a bit of what Max Ehrenfreund writes about here, particularly about the future path of the budget deficit. I don’t take Trump/Mnuchin’s assertions too seriously, but they do suggest they’re uninterested in the parts of their tax plan that were in there to raise revenues, like ending interest deductibility or the border adjustment tax. They also talked about a tax repatriation scheme which, if it’s like past versions, also scores as a money loser.
When asked if he was OK with the deficit increase implied by all that, Trump said, “It is OK, because it won’t increase it for long.” The tax would trigger growth effects that would offset the deficit.
That’s not gonna happen. Yes, they’ll assume phony growth numbers and magic-asterisk-spending cuts to make the pools of red ink appear to be less deep. Congressional Republicans may impose smaller tax cuts than what I suspect the administration has in mind, though I don’t think they care much about deficits either. So we’re looking at larger budget deficits—I’d guess much larger—than are currently forecasted.
By the way, at this point in the interview, the President got into all that “priming the pump” stuff, but that’s not really their play here. Keynesian pump-priming is a temporary fiscal boost to offset a temporary demand contraction. It is designed to boost growth and jobs during the downturn, but we don’t assume that it will boost the economy’s underlying growth rate. Trump and Mnuchin, however, are claiming “supply-side” effects: tax cuts will boost investment, productivity growth, and labor supply, and thus raise the long-term, potential growth rate.
In this regard, they’re conflating Keynes, who’s been proven right, and Laffer, who hasn’t.
There’s yet another wrinkle to all this. To fit within the budget rules, the Trump tax cuts are probably going to have to sunset after some number of years (probably 10). Even in theory, for tax cuts to generate any supply-side effects at all—there’s no argument that they “pay for themselves”—they must be permanent. Investors and labor suppliers won’t change their behaviors if rates are just going to go back up outside the budget window. So, the budget rules are actually pushing Trump more towards “temporary” pump priming (though 10 years is not exactly temporary), even while their own scoring will be based permanent supply-side effects.
Again, this is all theory, about much of which I’m skeptical. But the official scorers—the Joint Committee on Taxation—will factor in this non-permanence and give the administration very little by way of growth effects. And if the deficits grow as large as I suspect they will, JCT will ding them such that their dynamic score could be negative on growth.
That said, criticizing Trump’s economic musings is like criticizing the architectural soundness of a five-year-old’s sand castle. It’s not real, so what’s the point? Just feels mean…
Anyway, you might think that all this tax-cut induced pump-priming will help push the unemployment rate down even further, and you might well be right, but don’t forget about the Fed. One thing they do over there is pay attention to federal fiscal actions with an eye to their impact on the macroeconomy. From a Goldman Sachs review (no link) of the Fed’s reaction to fiscal policy changes:
First, Fed staff updated their fiscal projections in real time, often before bills were even introduced, and had fully accounted for the impact of past packages by the time they became law. Second, FOMC participants updated their own fiscal expectations nearly as quickly. Third, participants began to cite fiscal policy changes in support of their views on appropriate monetary policy closer to the time the bills became law.
So, if the macroeconomy is around where it is now when these tax cuts come online, there’s a good chance that Fed will push back on any pump-priming by taking away the punch bowl. (Do you know what I mean by that? I just came up with it a couple of days ago and I thought it was good.)
I was talking with my friend Joe Gagnon about this stuff the other day, and he raised the possibility that more US demand and higher interest rates could draw in more capital, raise the value of the dollar, and worsen the trade deficit.
Sounds plausible to me, but the president isn’t going to like that.
*Speaking of Joe Gagnon, he and Fred Bergsten have a very important new book coming out–I read the proofs–any day now on currency conflicts and trade policy. On China, they clearly show that while China clearly depreciated their currency at various times to gain an export advantage, they have not done so since 2015. To the contrary, the helped us out in 2015-16 by selling dollars long before President Trump was even nominated.