Is any bit of positive fiscal impulse worth the money?
// Jared Bernstein | On the Economy
I'll be brief because I'm on vacation this week in an undisclosed location, but the hotel has solid wifi and the family's still snoozing away, so let's quickly talk a bit of fiscal impulse (FI).
The discussion starts with 'G' in the GDP identity: Cons+Inv+Gov't+Net Exports. An increase in G raises GDP, all else equal, and that's positive fiscal impulse (FI). It's nothing more than "the delta"–the change–in fiscal policy from one period to the next.
What can be confusing to people is that it's not the level, it's the change. So, if you're stimulus program spends $150 bn in year one and $100 bn in year two, FI in year two is negative.
I raise this because I'm encountering progressives who are compelled to be at least somewhat supportive of wasteful, regressive tax cuts, like those proposed by Trump, or the ones I just wrote about in Kansas, that happen to spin off some positive fiscal impulse. While we're closing in on full employment, there's still slack in the job market, such FI could help absorb remaining slack.
That's true, but there are two relevant questions: bang for the buck (multipliers), and the impacts of the cost of the tax cuts.
The Kansas cuts–particularly the zeroing out of the pass-through income–are instructive as these cuts have very low bang-for-buck in terms of jobs or incomes for middle and lower income folks. They just lower taxes for those who are already "highly liquid," i.e., they've got a bunch of money already and giving them more shouldn't be expected to boost spending (C) or investment (I) much. And since states must balance their budgets, they constrain G as well.
In terms of poor targeting, Trump-style cuts are similarly lame in terms of growth effects, as I discussed recently re the GW Bush tax cuts in the early 2000s. However, because they involve deficit spending–as I'm sure you've seen, the federal gov't can run deficits–they will generate some positive FI, which we could use.
But at what cost? The opportunity costs are twofold. First, there's the cost of tapping small versus larger multipliers: were team Trump to spend the money on infrastructure or target those with high consumption propensities, the FI would be stronger (btw, it should be noted that multipliers are smaller when the Fed's raising rates, albeit slowly and by small increments, than when they're lowering them).
Second, "permanent" tax cuts will mean a worsening of the revenue shortfall I've long worried about (the scare quotes are there because the R's may build some BS cliff into their tax plan to accommodate arcane budget rules, but the intention is permanence). That will provide an excuse for whacking Medicaid, Medicare, Social Sec, and much other spending that's important to the poor and middle-class. And yes, those folks are income constrained, so that part of 'G' gets spent and feeds back into growth.
To be clear, I'm not worried about higher budget deficits because I fear they'll crowd out private borrowing and lead to higher interest rates. That's not at all my reason for opposing a big tax cut. And I'm confident that even a highly regressive cut will generate some needed FI.
My reason for opposing such cuts, in the nation or in the states, is that they do little to boost demand and they whack desperately needed revenues. And while I recognize the argument that "hey, this is the best we're gonna get from team Trump," I will not go gently into that good tax fight.
Hey, I'm #10 on this list of allegedly influential economists. I've got no idea what that means, but I'll take it!
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