April 19, 2018
The Washington Post decided to give us “Finance 202” to tell us that tax cuts at this point in the business cycle are a bad idea. The gist of the argument is that the economy is approaching full employment, so there is little room left for further stimulus. The piece also tells us that because of increase indebtedness, the government will be less will positioned to provide stimulus to the economy in the next recession.
There are several points worth noting on this one. First, the Washington Post has no clue whether we are close to full employment right now. We know this because no one has a clue. The experts at places like the Congressional Budget Office (CBO) have been repeatedly proven wrong. Just four years ago, CBO put the non-accelerating rate of inflation rate of unemployment (NAIRU), the effective measure of full employment in conventional terms, at 5.4 percent.
The unemployment rate is now 4.1 percent with no evidence of rising inflation. As a result of the unemployment rate falling below CBO’s estimate of the NAIRU, millions of more workers have jobs, with the main beneficiaries being blacks, Hispanics, and less-educated workers. The tighter labor market has also allowed tens of millions of workers to get pay increases.
Given this history (we can tell the same story about the late 1990s boom and the mis-measurement of the NAIRU), how does the Post know that the unemployment rate cannot get down to 3.5 percent or even 3.0 percent? If this is possible, and we pursue policies that prevent the unemployment rate from falling (e.g. higher interest rates from the Fed or fiscal tightening by Congress) we will needlessly be keeping millions of the most disadvantaged from getting jobs and pay increases. Instead of the government fighting poverty and inequality, it will be causing it.
It is also important to note that we have already paid an enormous price for having deficits that are too small. We have needlessly kept the unemployment rate higher than necessary, with a cost to our children of a permanently smaller economy, to the tune of $1 trillion to $2 trillion annually. For some reason, the deficit hawks are never forced to acknowledge the enormous damage they have inflicted on the country.
The argument that the government won’t be able to have stimulus in the next recession because of the debt, ignores what is taking place in the world. Japan has a debt-to-GDP ratio of more than 200 percent, over twice the US ratio. Until recently, investors were paying the Japanese government to lend it money, as its long-term interest rate was negative in nominal terms. Japan’s inflation rate has consistently been near zero, although it recently has been inching up to its 2.0 percent target. In other words, there is little economic reason to believe that the US will not be able to finance stimulus in the next recession.
The Post piece does point to the political obstacles to stimulus, noting that only two Republicans voted for the 2009 stimulus. But the Republican opposition had little to do with debt levels. The big problem was there was a Democrat in the White House, as many Republicans, including Senate Minority Leader Mitch McConnell said explicitly.
This is not an argument for giving more tax cuts to rich people. However, the objection is that the money could be better used, not that the deficit is too large. Although there is one possible benefit to giving still more money to the rich after the massive upward redistribution of the last four decades; maybe they will explode.
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