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Trying to Make Sense of Why Republicans Can't Make Sense of Deficits

It's not clear whether Republicans have given up on caring about the Economy or if their ideology blinds them to what even sharp high school students can see. What I do know is that a horde of friends who - presumably fed by Fox news or other conservative news outlets - were loudly fretting about deficits during the recovery are now mum about the deficits that will follow from Trump's new tax cut.

One of the simplest things we know about economies is that when unemployment is high you should increase the size of deficits and when unemployment is low you should lower the size of deficits. This is so obvious that it hardly merits mention and yet Republicans seem to miss this point. I don't know if it is because of a paradigm filter, crass disregard for the larger economy, or simple opportunism that comes from disregarding any goals but tax cuts.

Deficits stimulate the economy. That said, there are deficits that are good stimulants and deficits that are poor. The best deficit comes from spending money on things like infrastructure that will leave an economy more able to grow. Ideally, a deficit stimulates the economy short term and lays the foundation for higher productivity in the future.  The worst deficit just adds more money to wealthy people who are unlikely to spend much of it. (If your net worth is $3 million and you get another $10,000 in tax cuts, you are less likely to spend any of that money than someone whose net worth is $10,000.) Good or bad, a deficit stimulates the economy, although to different degrees.

As trade makes up a bigger part of the economy, deficit spending it more likely to drive up asset prices like stocks and homes; rather than see a rise in the price of apples, you might see a rise in the price of Apple stock.

(Yes there are other factors. No I'm not going to cover those here.)

Why does this matter? Well, you can't just say that it is good or bad to increase the size of a deficit. If you suffer from high unemployment, increasing deficits is great; if you are enjoying low unemployment, increasing deficits is bad. Atop that, deficits that build the economy's capacity (borrowing to invest in building freeways or high speed rails or 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%, its lowest since 1969. It seems safe to say that the economy was at full employment. What did George W. Bush do once he took office? He cut taxes to stimulate the economy. What happened? The price of homes - assets - and the mortgage back securities that financed their purchase went up. Spectacularly. This stimulus created a bubble and bubbles burst. The year before Bush took office unemployment averaged 4% and the year after he was in office it averaged 9.3%. Stimulating an already strong economy turned out to be disastrous.

The first year of Trump's presidency, unemployment will average 4.4%, its lowest since Clinton's last year in office. What does Trump do? He is cutting taxes to stimulate the economy. This could 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 Republicans who hollered about deficits during the Great Recession are now creating a deficit in a time of full employment.

It seems as though Republicans like deficits in good times and hate them in bad times.

The question is, why? This is not a difficult concept to grasp and yet Republicans refuse it.

I can only think of a few reasons.

One, they want tax cuts more than they want a healthy economy. 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.

Two, they don't believe that macroeconomic policy makes any difference, instead believing that individuals make all the difference. (It is true that individuals make a difference; some do well in bad economies and some do badly in good economies. It is not true that recessions hit because the percentage of lazy people in an economy suddenly doubles, because of changes in individual behavior. The strategies to get near the top of a group are different from the strategies to move a group's median income up.)

Three, they can't distinguish between individuals and a community when it comes to who should get a loan. It is true that 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. In that sense they are right that deficits are "safer" when the economy is good. But of course debt is very different for an economy than it is for an individual or household. Even a household engages in deficit spending when times are bad and pays down debt when times are good; if you are unemployed you borrow from your savings or friends; if you are fully employed you save. The banker may rather loan to the guy with a job but it is the guy who is temporarily out of work who 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 will be the result of the Trump tax cut? The economy will get worse. Not immediately. Immediately it will get better because the start of bubbles are the best part; it's the busting of bubbles that is miserable.



This post first appeared on R World, please read the originial post: here

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Trying to Make Sense of Why Republicans Can't Make Sense of Deficits

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