Warren: Trump tax cut means economy will get worse
The majority of economists agree that when unemployment is high, the best policy is to increase the deficit. Conversely, when unemployment is low, the best policy is to decrease the deficit.
Deficits stimulate the economy; there are good stimulus deficits, and poor stimulus deficits. The best use of deficit funding is money spent on infrastructure projects, as they lay the foundation for higher productivity in the future. In contrast, the worst use of deficit funding is policy that provides more money to wealthy people.
For example, if your net worth is $3 million and you get an additional $10,000 in tax cuts, there's less likelihood you'll spend much of that money versus the spending of a $10,000 tax cut windfall to someone whose net worth is only $10,000.
Deficits that build the economy's capacity (borrowing to invest in building freeways, high-speed railroads, basic research or education initiatives) are better than deficits that just create a temporary blip in spending (e.g., tax cuts).
The year before George W. Bush took office, unemployment averaged 4 percent, its lowest since 1969. What did President Bush do once he took office? He cut taxes to stimulate the economy. The result? The price of homes — assets — and the mortgage-backed securities that financed their purchase went up. A lot. This stimulus created a bubble, and bubbles always eventually burst. One year later, unemployment averaged 9.3 percent, an increase of over 5 percent. Stimulating an already strong economy turned out to be disastrous.
The first year of Donald Trump's presidency, unemployment averaged 4.4 percent, its lowest since President Bill Clinton's last year in office. What did the president and Republican-majority Congress do? Cut taxes to stimulate the economy. This could very well feed a bubble in asset prices — a bubble that will pop more spectacularly than it otherwise would have. Stimulating a weak economy can create a strong one; stimulating a strong economy can create a bubble.
The GOP was very much against increasing deficit spending during the Great Recession of 2008, yet are now creating a deficit in a time of low unemployment. Why?
For starters, it's possible they want tax cuts more than they want a healthy economy. Perhaps they really do think it's possible to live like the rich in banana republics, comfortable even when the larger economy is bad, and as long as they get their tax cuts they don't really care about the larger economy.
Second, it's possible they don't believe macroeconomic policy makes any difference, instead believing individuals make all the difference.
Third, they can't distinguish between individuals and a community when it comes to who should get a loan. It's true you don't want to loan to a guy who is out of work and you'd be happy to loan to a guy with a great job, but the guy who is temporarily out of work most needs the loan. It may seem safe to create more debt in the economy when times are good, but that stimulates spending that threatens to create bubbles.
What's the most likely outcome of the Trump tax cut? As history shows, the economy will get worse. Not immediately. Immediately it will get better because the start of bubbles is the best part. It's the busting of bubbles that is miserable.
Allen Warren is a Forest Grove resident.
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