GOP grants a liberal fiscal wish, but left has misgivings
For years, many liberal economists have argued that a little more federal spending and a higher budget deficit would create a stronger economy.
Now, they’re getting their wish, or at least a fun-house mirror version of it. All it took was total Republican control of the government.
The fiscal austerity that drove the budget deficit from around 9 percent of GDP in 2010 to 3 percent in 2016 has, for practical purposes, been abandoned. First, Republicans passed a $1.5 trillion tax bill in December that sharply cut rates on businesses. Then last week they made a deal to undo budget caps demanded by the Republican House in 2011. President Donald Trump signed that bill Friday.
This sudden reversal has the economists who have long argued we should run the economy a little hot — that is, stimulate it using the government’s power to tax and spend — in something of a quandary.
“It’s a very weird and conflicted feeling,” said Jared Bernstein of the Center on Budget and Policy Priorities, who worked in the Obama White House. “On some level I should be happy, and I am sort of happy right now, but with some nontrivial caveats.”
He and others in this boat don’t at all like the composition of this particular easing of fiscal policy. It is focused on tax cuts for businesses, rather than on investment in roads and bridges or worker training. The latter would be the kinds of steps more likely to have long-term payoffs and to benefit working-class Americans, they believe. (A big chunk of the additional spending will go toward the military.)
Liberal skeptics of this new age of anti-austerity also don’t like the timing. Bernstein, no one’s idea of a deficit hawk, notes that never in its modern history has the United States run deficits as large as those now on the horizon while the unemployment rate was as low as it is now. That creates the risk that the government will have less capacity to respond to future recessions.
But those misgivings aside, this mix of budget-busting policies will provide the best test in years of some ideas that have percolated among economists, especially but not exclusively on the left. The former Federal Reserve chairman Ben Bernanke, originally a George W. Bush nominee, spent years imploring Congress to spend more money in the near term to try to boost growth, to little avail.
The case for a more expansionary fiscal policy varies depending on the individual, but arguments have included that it might:
Spur more jobs at higher wages.
Coax people who had dropped out of the labor force to look for work.
Fuel higher productivity growth.
Mitigate a global shortage of safe government bonds.
Help break the United States out of a prolonged cycle of sluggish growth and financial booms and busts.
For example, Larry Summers, the Harvard economist and former adviser to Presidents Barack Obama and Bill Clinton, has been a leading advocate of the idea that “secular stagnation” has taken hold. The idea is that the economy is in a self-reinforcing pattern of low growth, low inflation and low interest rates, and that overreliance on the Federal Reserve’s interest rate policies to try to spur growth has fueled financial bubbles.
To escape that trap, Summers urged government to make large-scale investment in infrastructure. That investment, he said, would create jobs for men, a demographic that has disproportionately dropped out of the labor force. And it would improve the long-term economic potential of the United States, taking the pressure off the Fed’s interest rate policies to achieve growth.
He argues now that the policies that the Trump administration and Congress have reached, while directionally the same as those he advocates, won’t get the job done and carry risks.
“Yes, I have favored more expansionary fiscal policy, and this is more expansionary fiscal policy,” Summers said. “But it’s the wrong kind of expansionary fiscal policy, and it’s at the wrong time, at the rare moment when fiscal policy is likely to be almost entirely crowded out.”