"Fund" and games with fiscal policy
By Scott Sumner
I recently did a post suggesting the new political divide in the world is not small and big government, but rather open and closed societies. A new Bloomberg article reminded me about how far to the left the GOP has moved on issues like federal spending and the deficit:
Donald Trump on Tuesday proposed a plan to rebuild U.S. infrastructure that costs “at least double” the amount that Hillary Clinton has floated, in what would amount to a massive new government program.
Asked on Fox Business Network how much he’d spend, the Republican presidential nominee said, “Well, I would say at least double her numbers, and you’re going to really need more than that. We have bridges that are falling down. I don’t know if you’ve seen the warning charts, but we have many, many bridges that are in danger of falling.”
Clinton’s plan, which is estimated to cost $275 billion over five years, calls for setting up a national infrastructure bank to help fund large-scale projects, an idea that President Barack Obama advanced only to see it stall for lack of Republican support.
Trump was vague when asked how he’d pay for his much larger plan.
“We’ll get a fund. We’ll make a phenomenal deal with the low interest rates,” he said.
So that’s at least $110 billion/year, but “we’ll get a fund”. In fairness, the federal budget is awfully big, so this single item is not that dramatic a change—unless viewed in context:
1. Trump opposes cuts in Medicare and Social Security. This means that these programs will rise rapidly as a share of GDP.
2. Trump wants to eliminate Obamacare, without denying health care to low-income people. To me, that suggests a bigger Medicaid program. Again, it will rise as a share of GDP.
3. Trump wants to rebuild the military.
4. Trump wants to do much more for veterans.
5. Trump wants a more aggressive war on terror, and war on drugs.
6. Trump wants a big beautiful wall on the southern border.
Now let’s talk about the deficit. In the past, candidates who proposed such big spending increases were usually Democrats (although, ex post, the GOP often increased spending too). The Democratic proposals generally involved tax increases. Trump favors:
1. A massive tax cut for affluent taxpayers, bringing the top rate down to 25%. That’s the lowest top rate since the 1920s, when federal spending was 3% of GDP.
2. A massive cut in corporate taxes, with the top rate falling to 15%.
3. Removing 75 million lower income people from the tax role. Instead the IRS will send them a letter saying, “I win”
4. Eliminating the estate tax.
And we already have a pretty big deficit for the 7th year of an expansion. Trump has also promised to pay off the entire national debt in 8 years. I’m not quite sure whether that includes the “fund” that will pay for all of this infrastructure spending, maybe someone can ask him.
If you combine this with Hillary’s long laundry list of programs, what can we infer? I think it’s fair to say that fiscal policy is likely to become highly expansionary over the next decade. I suppose that might not be the case if divided government continues, but even then I’m not so sure a grand “deal” won’t follow the election. The same is occurring in places like Britain, where the new “Conservative” government is moving away from austerity. Japan’s conservative government is also doing fiscal stimulus, although the fine print suggests it’s pretty small. (On the other hand, Japan’s baseline deficit is large, even before the stimulus.)
In New Keynesian models an increased expectation of future fiscal stimulus is expansionary right now, unless offset by monetary policy. Since we see no evidence of fast NGDP growth in the bond markets, I think it’s fair to say that either people don’t expect fiscal stimulus, or they think the Fed will offset it. My hunch is that the Fed will raise rates enough to keep inflation from exceeding 2%, and hence any fiscal stimulus will not be expansionary.
Here’s more evidence that the gap between the parties on government spending is shrinking:
Rory Cooper, a Republican strategist who opposes Trump, called his proposal “essentially the Obama stimulus argument” and added in a Twitter post, “Half trillion tax dollars toward mythical projects to ‘create jobs.’ Nearly every Republican member of Congress voted against this in 2009.”
I don’t mean to suggest that there are no areas where infrastructure spending is needed. I do worry though that if you look at policy areas one at a time (college debt, universal pre-school ed., infrastructure, clean energy, etc., etc., you end up with lots of programs that seem nice in the abstract, but at a cost that adds up to a real burden on the debt. Right now interest rates are low. But what if we boost the national debt to 200% or 300% of GDP, and rates rise?