Fellow progressives: the macro-economy doesn’t care which party signs the stimulus check.

November 11th, 2016 at 10:54 am

I’m crunching on other stuff so this will be brief, but I’ve been reading a fair bit of commentary about how Trump’s fiscal plans–infrastructure investment and tax cuts–won’t help the economy; “they’ll be recessionary, they’ll deliver higher inflation and interest rates, they’ll force the Fed to move from brake-tapping to brake-slamming.”

I yield to no one in my concerns about the damage that could be done by the incoming administration and their Republican friends in the House and Senate. But some of this recent analysis seems driven more by political bias than economics.

The details matter, for sure, and let’s separate out an infrastructure plan from a big, regressive tax cut, sky-high tariffs, whacking Obamacare, and other bad ideas. But I and others have long argued that investment in neglected public goods–roads, bridges, water systems, airports, shipping ports, broadband, public schools, mass transit (DC Metro!)–would help generated needed demand in places that are still suffering from economic slack and could help boost lagging productivity as well.

That argument is not rendered invalid because Republicans pass the plan.

Of course, the plan matters. During the campaign, I’ve heard some characteristically muddled stuff from team Trump about leveraging private investment through tax credits, which implies infrastructure usage that spins off some kind of investor payouts–ie, user fees. Also, bridges to nowhere might create a few jobs but they won’t help the economy over the longer term.

So if we’re talking about either of those, I retract my endorsement of these potential public investments. But a smart infrastructure plan could help. And if it did lead to greater resource utilization, as I suspect it would–that’s the Keynesian point–and that in turn boosted inflation and interest rates, that’s a feature, not a bug. The very low levels of those variables in recent years have not been a signal that things are great; they’re symptoms of secular stagnation.

Yes, all this could lead the Fed to step up their rate hike schedule, which in turn, could lead to some ugliness between them and the new administration. But my hope is that they’d remain in data driven mode, allowing the economy to finally get to full employment. There are a lot of moving parts to these scenarios we’re all spinning out, and “wait-and-see” is a much more prudent path than “kill-it-before-it-grows.”

Finally, on numerous grounds, I’d strongly oppose the highly regressive tax cut I believe is coming. First, while it too would be somewhat stimulative, its impact will be wasted on tax cuts for the rich. Since they’re not income-constrained in the first place, they’re less likely to spend the marginal dollar they get from the cut, so the multiplier is low relative to a tax cut targeted at the middle class.

Second, trillions in “permanent” tax cuts*, infrastructure spending, and bumping up the defense budget (another Trump priority) will force strong pressure to cut spending in other areas that will inevitably ding the most vulnerable. We’re going to need more revenue in the future, not less.

So yeah, while a near-term rise in the budget deficit won’t bother me in the slightest if it’s money well spent/invested, a big, long-term jump in the structural debt would be both very bad news and very bad policy.

[*Like GW Bush, the Trump admin will pretend their tax cut will sunset in the budget window for scoring purposes, but their intention will be for it to be permanent, and they’ll stage the death scene from Camille when we actually try to follow the law they wrote and let the cuts sunset.]

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11 comments in reply to "Fellow progressives: the macro-economy doesn’t care which party signs the stimulus check."

  1. Smith says:

    Yes, others have noted that too. Here is a comment left on Krugman’s blog that points to exactly this scenario.
    Uhmm, the date shows it was left 12 hours ago, in the wee hours of Friday, so that anonymous commenter was not merely echoing something read here. Point being, if you know this, and others know this, it seems the Democrats don’t. Reagan redux. The elections were similar and now the results may be too. If Trump can avoid disaster, he’s been dealt a pretty decent hand. Slack in the economy ready for stimulus, he and the Republicans will take credit for it, the Democrats will be left in the dust. Economics will trump all other concerns, as they did in this election, inequality and conservatism would reign ascendant. Democrats will have no effective counter measures until like Bush or the Soviet Union, rot sets in, and mistakes pile up, and the thing collapses of it’s own weight.

  2. Rima Regas says:


    What we’ve lacked for the last two years is honest, non-partisan economic analyses. Thank you for calling them as you see them. Stimulatory policies are stimulatory policies. Fiscal policy is also just that. From what we know of what Trump, Ryan, and all the others want on the fiscal side, how much of a blunting effect would the fiscal stuff have over any kind of stimulus?

    Can we talk about the Fed under Trump?

  3. Bonsu says:

    Dean Baker and others have made similar points with respect to a stimulative infrastructure plan, but I suspect it will be structured along the lines of using public-private partnerships leading to the investor payouts you mentioned. Conservatives in the infrastructure business have been talking about their preference for those kinds of plans for some time and, in addition to denying him the economic benefits from it, I suspect that is why Republicans didn’t want to work with Obama on an infrastructure plan. So, yes, it would be good for all, but should progressives forever be doomed to always being the adults in the room and not consider the political implications of such plans? I don’t know if it is feasible, but I would delay going along with such a plan unless it satisfies the concerns you raised and can be used as leverage to minimize the damage on some program important to progressives that Trump wants to gut (Obamacare?). And how about focusing on gaining control in either the House or Senate next midterm and then work with Republicans on such a plan?

    • Smith says:

      Democrats have no effective means of blocking Republican tax cuts or infrastructure, even if they were cynical enough to try. Bernstein and especially Baker are probably underestimating the effect a faster growing economy could and would have on the American psyche. Look at history:

      The liberal Keynesian spending the Republicans previously blocked will revive the economy, but conservative policy of tax cuts, social spending cuts, less financial and environmental regulation, and larger defense spending will instead get the credit. If you think it was difficult to explain the weak economy on Republican obstructionism, try getting voters to understand Republicans controlling all three branches of government, including both houses of congress, don’t deserve credit for a stronger economy.

      Only if something blew up oil supplies, inflation spiked, the Fed responded, recession ensued (See first Bush’s presidency), could the grip of Republicans be broken.

      It won’t matter if inequality rises, the clearest evidence being Obama got reelected and Clinton almost elected with rising inequality even in a unnecessarily weak economy. Democrats had their chance the last eight years to sell Americans on the idea of Republican obstructionism, and they blew it. It wasn’t the issue in 2010, 2012, or 2016. Instead they said we were great. Was the economy great? Americans said no.

  4. Ben Groves says:

    Trump won due to the pro-immigrant/trade theocrat vote. They represented 23% of the vote and Trump/Pence got 81% of them.. Wowsers. Nobody factored that in.

    There is no mandate.

  5. Fred Donaldson says:

    If taxpayer money is involved, prevailing wage tests must be enforced. Otherwise the job growth will be to create big profits for companies and less than living wages for workers. However, if I wanted someone to supervise reconstruction of America, Trump would be the choice. You need a tough boss, not an apologist for roads that take a dozen years to build, while contractors milk the public with cost-plus schemes.

  6. Beth B says:

    If Trump follows Reagan’s pattern he will grow the economy with his spending but blow the debt sky high with the combination of spending and tax cuts. If the mainstream media follows its usual pattern the debt will somehow get blamed on Democrats – that is unless Democrats finally learn how to fight back against the right wing misinformation that the mainstream media has refused to debunk for years. I have rarely seen the MSM debunk Reagan’s Big Lie that tax cuts pay for themselves. This seductive free market fundamentalist fairy tale has been proved over and over to be wrong yet the public has no clue. People I know (Democrats included) have no clue that Reagan almost tripled the national debt but Clinton produced a surplus in part because of the Democrats’ tax increases. Tax increases that Republicans swore would destroy the economy. We did not hear about that because the MSM was too busy with the bogus Whitewater scandal. I was furious that as soon as the debt started coming down the media, including nightly news broadcasts, suddenly stopped covering the debt clock.
    When Gore campaigned on using the surplus to pay down the debt so that the upcoming shortfall in SS funding would be easy to meet the media, that had been so obsessed about the debt, mocked him for using the term “lawk bawx”. When Bush claimed that the surplus proved that we were overpaying taxes and need a huge tax cut, the previously debt obsessed media let it slide.
    This is just one of many examples of how biased the mainstream media’s coverage has been for years. Forget about Faux News, we need to pressure the MSM to stop allowing right wing propaganda to go unchallenged. They have done untold damage. The highly respected NY Times was the major source for the Whitewater lies, Judith Miller’s bogus WMD stories, Nd went so far as to use a book by Breitbart author Peter Schweitzer to attack the Clinton Foundation with bogus, easily disproven claims.
    Instead of a serious discussion about how to fight back against this destructive propaganda, Democrats will probably resort to their usual pattern of forming circular firing squads, pandering to the mainstream media, refusing to defend their policies despite overwhelming evidence to support them, etc. In fact they already are.
    Our founders understood that a democracy has to have a well informed citizenry to survive.

  7. Lee A. Arnold says:

    Reaganomics redux? The regressive tax cut is certainly a point that the voters do not understand. Since it comes along with stimulus, or comes as a stimulus, then the economy looks a little better for a few quarters or a few years, so we the hoi polloi are easily convinced that it works.

    But since the 1980’s the opportunities for domestic private investment in real business (“real” = “nonfinancial”) has mostly, steadily, tapered. (The result of long-term technological advance + shorter-term globalization, both of which displace domestic labor often on a life-long basis.)

    The richest recipients of the tax cuts do not know, or find, many other real businesses to invest in; and/or they are organizationally incapable of managing enough small-scale investments in small businesses. (I think that is a bigger problem than most pro economists appear to recognize, and encouraging a small business administration might help.) Thus, a “surplus” of investment funds with no place to park; thus, interest rates going steadily downhill since circa 1980.

    The “search for yield”, i.e. for better return on financial investments than the declining interest rate, thus led to the series of bubbles & bursts: deregulated savings & loans (immediately), high-tech stocks (late 90’s), mortgage derivatives –> house prices (2000’s).

    Interesting that this was all pretty much explained explicitly by both Keynes and Schumpeter, from different sides of the political spectrum, over a half-century ago.

    Where will that money go now? Into a revamped “small business” program that promises rentier-friendly higher rates? May not work anyway:

    Very interesting thing is that, the day after the election dooms TPP, China announces the writing of its own free-trade area. They’d love to shut-out the U.S., they are finally able to do it economically and technologically, and much of the 3rd World will be happy to attend the take-down of the Americans.

    Where will U.S. financial capital go? Into U.S. domestic small-business growth, which either has no purview to grow in world sales, and now, no trade agreement that will help them in world markets? Will Trump force them to stay invested in the U.S.? Will U.S. financial capital now flee the U.S. while they can — while they are still able to buy politicians in the few sunnier climes they see? (if Chinese trade officials haven’t gotten to those politicians already!) The few intelligent U.S. financial investors surely have no trust in the business sense of The Donald (although non-disclosure agreements may prevent them from saying much). He thinks he is going to snooker the Chinese but I imagine that the reality will be the reverse. This portends a long-term decline in the U.S., even after a big push into infrastructure.

    Jared, I would like to know if you see any holes in this argument. I am only trying to understand.

    I wonder if the British had a steady low interest rate for 100 years in the 19th Century only because they avoided dropping to zero by colonial business expansion? Not an option open to the US any more.

  8. dilbert dogbert says:

    A rethuglican stimulus will be focused on the blue states that went red and lock them red. The other aspect of a thug stimulus is using public monies to build projects later to be sold off to private companies at very low prices. Think toll roads and bridges.

  9. jonny bakho says:

    How likely is it that we get big tax cuts for the wealthy, smaller cuts to the middle class, no new infrastructure spending and cuts to the safety net that is a combination of stimulus and austerity?

    What is Trump’s infrastructure plan? No details Look for Ryan and the House to drive spending. Will a Trump administration even be capable of producing a budget? Or will that be left to Congress.
    The GOP TeaParty is pro tax cuts but anti spending on anything but defense.
    Will Ryan and his TParty pass an infrastructure spending measure? It is not guaranteed.
    If they want reelected they should.
    They should also raise the minWage to distribute the stimulus effects more broadly but that is a nonstarter

    The uncertainty is too great to make any predictions at this time.

  10. elkern says:

    I expect the Republican Congress to conveniently forget all that blather about Deficit Doom – like they did after Reagan & Bush II took office. The Tea Party dimbulbs will complain, but I doubt they will be able to block it.

    So, we can look forward to a hyuge hunka-hunka burning Keynsian Stimulation getting rammed through Congress (exactly what they deserve). That would have been exactly the right thing to do in 2009; now, though, the economy has warmed up a bit, so that Kensian Bulge will probably (a) overheat things, leading to inflation, and (b) create one or more bubbles.

    YES, public infrastructure is way overdue. Unlike Fred Donaldson (above), I don’t have any faith that Trump will direct it smartly. He’s an autotheist (OK, maybe just hyper-narcissistic), and he can be manipulated by flattery (look up “Bannon”). I see no indication that he has the patience for nut-and-bolts; he will leave those to someone else (Pence? Ryan? Who?) while he flits around the country, holding more rallies.

    Manufacturing has already been coming back to the USA, but with robots, and without unions. Small towns & cities in the Rust Belt will NOT see thousands of GOOD jobs – jobs that pay enough to support a family. But people didn’t vote for his policies (which were all over the map); they voted for the rich, famous guy who made them feel good by telling them that they matter, that they’re important.