Republicans are pouring government stimulus into a steadily strengthening economy, adding economic fuel at a moment when unemployment is at a 16-year low and wages are beginning to rise, a combination that is stoking fears of higher inflation and ballooning budget deficits.
The $1.5 trillion tax cut that President Donald Trump signed into law late last year, combined with a looming agreement to increase federal spending by hundreds of billions of dollars, would deliver a larger short-term fiscal boost over than President Barack Obama and Democrats packed into their $835 billion stimulus package in the Great Recession.
The administration is also expected to soon roll out its $1.5 trillion infrastructure package, which would include $200 billion in new federal spending, offset by unspecified cuts elsewhere.
The question is how much added fuel is good for the economy.
Fears that the extra economic boost could spark faster inflation and prompt the Federal Reserve to accelerate the pace of interest rate increases appear to be at least partially driving the stock sell-off that has rattled markets during the last several days. Higher interest rates would raise federal borrowing costs as the United States continues to borrow heavily — the national debt has topped $20 trillion and annual deficits are creeping up toward $1 trillion.
Treasury officials said last week that the U.S. will need to borrow $441 billion in privately held debt this quarter, the largest sum since 2010, when the economy was emerging from the worst downturn since the Great Depression.
The added stimulus is drawing some quiet cheers from liberal economists, who say a fiscal shot at a time of low unemployment could boost typical workers’ wages in ways unseen for two decades. But it is raising alarms among fiscal hawks.
“This is exactly the wrong fiscal policy at the wrong time,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget. “We should be bringing down the debt and ensuring we have room for stimulus during downturns. Instead we are overheating the economy and selling out the future. It’s shortsighted and foolhardy.”
The threat of rate increases is a major reason some economists, including those at the congressional Joint Committee on Taxation, project only a modest boost in economic growth from the tax law over the next decade.
The tax cuts and spending increases could add up to more than $800 billion in additional federal deficits over the course of 2018 and 2019. Analysts project they will hasten the return of trillion-dollar annual budget deficits, and set the U.S. apart from other industrialized economies, which have reined in their fiscal expansions as growth picks up.
“In a world of deficit discipline,” Ethan S. Harris, the head of global economics at Bank of America Merrill Lynch wrote in a research note on Tuesday, “the U.S. stands out in terms of its deteriorating deficit.”
The Republican tax law’s $1.5 trillion deficit-financed price tag over the next decade is front-loaded. It will reduce federal revenue by $416 billion over this year and next, before accounting for additional economic growth, the Joint Committee on Taxation estimates.
Many corporations are showing evidence of that in their quarterly earnings releases, as companies like JPMorgan Chase & Co. and Verizon project billions of dollars in tax savings in 2018.
Administration officials say the law will spark enough growth to pay for itself, a claim that no rigorous outside analysis supports. They also say the cuts will not stoke inflation, because they will increase the supply of capital in the economy and lift productivity.
Economic modeling by the administration suggests growth from such tax cuts “does not put upward pressure on prices,” Kevin Hassett, the chairman of Trump’s Council of Economic Advisers, told CNBC on Tuesday morning. Still, he said, “it’s clear that the data are so strong that the markets are beginning to worry about Fed policy” and rising interest rates.
Republicans have not offered similar reassurances about deficit-financed spending increases. Those appear increasingly likely as congressional leaders work toward a deal to shatter caps on military and domestic spending, imposed in the back half of Obama’s first term to instill fiscal discipline, to help pave the way for a long-term spending package.
The likely spending increases include money for the military, domestic programs and disaster aid, along with a plan to shore up faltering multi-employer pension plans. The Committee for a Responsible Federal Budget estimates that those increases will cost more than $500 billion, and that congressional negotiators are mulling roughly $100 billion in revenue increases to offset them, yielding a deficit increase of $400 billion.
Those figures do not include any potential deficit spending from an infrastructure bill, which the White House hopes to push Congress to approve this year.
Obama’s American Recovery and Reinvestment Act included about $300 billion in additional spending for 2009 and 2010, according to the Congressional Budget Office, and slightly less than $300 billion in tax cuts and refundable tax credits. Adjusting for inflation, that would be a combined stimulus of about $675 billion in today’s dollars.Each of those amounts is lower than the comparable projections for the new tax law and the contemplated new spending increases.
The 2009 stimulus package was passed when the unemployment rate was almost twice as high as it is today, and the national debt was half what it is now. At that time, Republicans called it a dangerous borrowing spree.
“This bill sends us on a worldwide borrowing binge,” Rep. Paul D. Ryan of Wisconsin, now the House speaker, said in a floor debate in 2009. “We’re going to go out and borrow four times as much money this year than we ever have in the history of this country in a single year. This is not just a road to stagnation, it is a road to stagflation.”
Fiscal hawks say that assessment is more applicable to the economy today.
“We have a growing economy, the labor market’s tight, we don’t have a lot of idle resources,” said Matthew Mitchell, the director of the Project for the Study of American Capitalism at the Mercatus Center at George Mason University. “Basically, the very best argument for Keynesian economics doesn’t apply now. So it really is the time to be austere.”
While divided government in the last six years of Obama’s term limited spending, Mitchell noted, Republican control under Trump appears to be ripping them up. Democrats are helping to do that on the spending side. The spending agreements pending in Congress appear to be so large, in part, because Democrats have demanded domestic discretionary spending increases alongside large increases in military spending pushed by Republican defense hawks.
Democrats largely denounce Republicans for playing down deficit concerns now, after years of warning that government borrowing was holding the economy back. “There was a far greater need for economic stimulus in 2011 than today,” said Neera Tanden, a former Obama adviser who is the president and chief executive of the Center for American Progress think tank.
But some liberals welcome the extra fiscal juice and its potential to help workers who struggled in the slow-growth years after the recession.
Jared Bernstein, a liberal economist at the Center on Budget and Policy Priorities who was one of the Obama administration’s stimulus architects in 2009, opposed the Trump tax bill but supports efforts to stimulate the economy when unemployment is low, in hopes of boosting wage growth.
“There’s a kind of recklessness of Team Trump that could kind of rebound to the benefit of people,” Bernstein said in an interview, before alluding to the possibility that there are still workers outside the labor force who could be drawn back to work by a hotter economy.
“As long as there is still slack in corners of the labor market,” he said, “then this kind of fiscal stimulus of the economy near full employment is a kind of test I support.”