The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive (tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.

 

[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

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