The Republican tax cut is a big, fat failure

The Republican tax cut is a big, fat failure.

It has achieved none of the things that Republicans promised it would. It didn’t reduce deficits. It didn’t target the middle class. And it didn’t win goodwill with voters.

Yet, for some reason, President Trump wants to do it all over again . . . in the next nine days, no less.

Last week the Treasury Department reported that the federal budget deficit swelled by 17 percent, or $113 billion, from fiscal 2017 to 2018. This is noteworthy, and not only because Republicans usually claim to despise deficits (at least, they do when Democrats are in charge).

It also reflects a massive decoupling of the business cycle from the federal budget.

Usually, as the economy improves, deficits shrink. That’s because people earn more money, causing them to pay more in taxes and enroll in fewer federal safety-net programs. This relationship between deficits and the economy has generally held true for the past 70 years, except during times of war.

Worry About Debt? Not So Fast, Some Economists Say

U.S. deficits may not matter so much after all—and it might not hurt to expand them for the right reasons

Now, some prominent economists say U.S. deficits don’t matter so much after all, and it might not hurt to expand them in return for beneficial programs such as an infrastructure project.

“The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”

Mr. Blanchard, also a former IMF chief economist, delivered a lecture at last month’s meeting of the American Economic Association where he called on economists and policymakers to reconsider their views on debt.

The crux of Mr. Blanchard’s argument is that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable.

.. Interest rates will likely remain low in the coming years as the population ages. An aging population borrows and spends less and limits how much firms invest, holding down borrowing costs. That suggests the government will not be faced with an urgent need to shrink the debt.

Mr. Blanchard stops short of arguing that the government should run up its debt indiscriminately. The need to finance higher government debt loads could soak up capital from investors that might otherwise be invested in promising private ventures.

Mr. Rogoff himself is sympathetic. “The U.S. position is very strong at the moment,” he said. “There’s room.”

.. Some left-wing economists go even further by arguing for a new way of thinking about fiscal policy, known as Modern Monetary Theory.

MMT argues that fiscal policy makers are not constrained by their ability to find investors to buy bonds that finance deficits—because the U.S. government can, if necessary, print its own currency to finance deficits or repay bondholders—but by the economy’s ability to support all the additional spending and jobs without shortages and inflation cropping up.

Rather than looking at whether a new policy will add to the deficit, lawmakers should instead consider whether new spending could lead to higher inflation or create dislocation in the economy, said economist Stephanie Kelton, a Stony Brook University professor and former chief economist for Democrats on the Senate Budget Committee.

If the economy has the ability to absorb that spending without boosting price pressures, there’s no need for policy makers to “offset” that spending elsewhere, she said. If price pressures do crop up, policy makers can raise taxes or the Federal Reserve can raise interest rates.

“All we’re saying, the MMT approach, is just to point out that there’s more space,” she said. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”

 .. By continuing to run large deficits, says Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, the U.S. is slowing wage growth by crowding out private investment, increasing the amount of the budget dedicated to financing the past and putting the country at a small but increased risk of a future fiscal crisis.

Market interest rate signals can be misleading and dangerous. By blessing the U.S. with such low rates now, he says, financial markets just might be “giving us the rope with which to hang ourselves.”

The one way Donald Trump might be like George H.W. Bush

The effect of Bush’s 1992 loss on the current GOP cannot be overestimated. The object lesson for the GOP was that neither preparation nor accomplishment mattered as a metric for political success. The two salient facts for Republicans were:

(1) Bush compromised with Democrats to reduce the budget deficit, thereby reversing his pledge not to raise taxes and alienating the GOP base; and

(2) Bush lost in 1992.

Newt Gingrich supplanted Bush as the GOP standard-bearer. This paved the way for political success and policy disasters.

Donald Trump can do one useful thing for the modern GOP: He can lose in 2020. Trump’s control over his party has already wobbled a bit after the midterms. And as CNN’s Harry Enten noted last week, Trump is laying the groundwork for that kind of ignominious failure:

The difference between Trump’s net economic approval rating and net overall approval rating is astonishingly high when put in a historical context. I looked up every single president’s overall and economic net approval ratings right around each midterm since 1978.

No other president has done this much worse overall than his economic ratings would suggest. On average, their overall net approval rating has actually run 17 points better than their economic net approval rating. Trump is running 27 points worse. The only president to come close to Trump’s negative differential was Bill Clinton in 1998. That was when Clinton was getting impeached….

Trump’s tweets, attacks on the media and improvisational style may be fodder for his base, but they don’t seem to be working on the electorate at-large. A Monmouth University poll earlier this year found that the vast majority of Americans said Trump ran a less conventional administration than normal, and by a 21-point margin, they said that was a bad thing.

If Trump loses in 2020, then maybe the modern GOP would start tacking back toward the style of George H.W. Bush and his aspirations for a kinder, gentler nation.

The Global Impact of a Chinese Recession

Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.

CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.

.. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.

Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.

.. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.

.. instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.

.. a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates

.. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.

.. Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism.

.. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.

.. A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.