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.]