It’s now
generally accepted that Trumpism will finally involve the kind of fiscal
stimulus progressive economists have been pleading for ever since the
financial crisis. After all, Republicans are deeply worried about budget
deficits when a Democrat is in the White House, but suddenly become
fiscal doves when in control. And there really is no question that the
deficit will go up.
But will this actually
amount to fiscal stimulus? Right now it looks as if Republicans are
going to ram through their whole agenda, including an end to Obamacare,
privatizing Medicare and block-granting Medicaid, sharp cuts to food
stamps, and so on. These are spending cuts, which will reduce the
disposable income of lower- and middle-class Americans even as tax cuts
raise the income of the wealthy. Given the sharp distributional changes,
looking just at the budget deficit may be a poor guide to the
macroeconomic impact.
Given the extent to
which things are in flux, I can’t put numbers on what’s likely to
happen. But I was able to find matching analyses by the good folks at
CBPP of tax and spending cuts in Paul Ryan’s 2014 budget, which may be a useful model of things to come.
If you leave out the
magic asterisks — closing of unspecified tax loopholes — that budget was
a deficit-hiker: $5.7 trillion in tax cuts over 10 years, versus $5
trillion in spending cuts. The spending cuts involved cuts in
discretionary spending plus huge cuts in programs that serve the poor
and middle class; the tax cuts were, of course, very targeted on high
incomes.
The pluses and minuses
here would have quite different effects on demand. Cutting taxes on
high incomes probably has a low multiplier: the wealthy are unlikely to
be cash-constrained, and will save a large part of their windfall.
Cutting discretionary spending has a large multiplier, because it
directly cuts government purchases of goods and services; cutting
programs for the poor probably has a pretty high multiplier too, because
it reduces the income of many people who are living more or less hand
to mouth.
Taking all this into account, that old Ryan plan would almost surely have been contractionary, not expansionary.
Will Trumponomics be
any different? It would matter if there really were a large
infrastructure push, but that’s becoming ever less plausible. There will
be big tax cuts at the top, but as I said, the push to dismantle the
safety net definitely seems to be on. Put it all together, and it’s
extremely doubtful whether we’re talking about net fiscal stimulus.
Now, you might think
that someone will explain this to Trump, and that he’ll demand a more
Keynesian plan. But I have two words for you: Larry Kudlow.
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