Thread: Stimulus here, Stimulus there, Stimulus everywhere!

nebish - 2/13/2018 at 03:40 PM

Tax cuts, increased spending from budget cap deal and potentially an infrastructure deal! Is it all too much, is this the right time, can the economy properly digest and capitalize on it and what about deficits?

From last week:

quote:
The Republican Fiscal Stimulus Could Be Bigger Than Obama’s

By JIM TANKERSLEYFEB. 6, 2018

WASHINGTON — 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 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 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 over 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 United States 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 United States 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 & Company 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 boost productivity.

Economic modeling by the administration suggests growth from such tax cuts “does not put upward pressure on prices,” Kevin Hassett, the chairman of Mr. 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 Mr. 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 multiemployer 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.

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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.

Mr. 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,” Representative 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 Mr. Obama’s term produced constraints on spending, Mr. Mitchell noted, Republican control under Mr. 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,” Mr. 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.”

https://www.nytimes.com/2018/02/06/us/politics/republican-fiscal-stimulus-d eficits-inflation.html



[Edited on 2/13/2018 by nebish]


LeglizHemp - 2/13/2018 at 04:00 PM

so much for fiscal conservatism


StratDal - 2/13/2018 at 04:19 PM

Personally, the tax cut was not a good idea considering it wasn't budget neutral. Also, permanent cuts for the wealthy showed clear favoritism by the president. If it were me, I'd have done something milder 3-5% across for everyone for a two-three years. Not major savings but some.

I don't agree with the $76 billion increase for military spending either. It needs to be cut back significantly. Sure the military will complain but it always has and always will regardless of what is budgeted.

I'm concerned about inflation. The president seems to live in the here-and-now and doesn't consider long term consequences.

When it comes to deficits and debt, I'm reminded of a quote by the late George Wallace, "There isn't a dimes bit of difference between a Democrat and a Republican."


nebish - 2/13/2018 at 04:24 PM

The "cost" of the tax cuts, a measure on the anticipated loss of personal and corporate income tax revenue, being $1.5 trillion over 10 years, which is "only" $150 billion a year. Nobody has put an estimate on what the economic activity, or the macro-economic effect, will net - which really is key to the overall impact. The larger the economy grows the more potential tax revenue there is to be had. With a $19.739 trillion GDP, 1% growth on that figure is $197 billion - so the goal is to increase GDP by more than the assumed loss on the tax side. The question is what would the growth of GDP be without the tax cut and what will it be with the tax cut? Can they boost it enough? It will be interesting to see what happens to the IRS tax receipts going forward. I think it is a safe bet that in a growing economy the IRS will actually get more money with lower rates. We'll see what the numbers show in the coming years.

So on one hand you deal with revenues and receipts coming into the federal government and then you have outlays and expenses by the federal government. Rather than just looking at FY IRS tax receipts, it is much harder to measure how government spending impacts the economy and if the offset to deficit spending is surpassed by economic growth. The budget cap deal opened the door to $400 billion in new spending over the next 19 months (since FY 2018 is 1/3 over already) - considerably more than the tax cuts 'cost' on a per year basis and if you combined the two there could be a $500 billion deficit for just FY 2019! Congress raised the caps by more than the White House had seeked. Nobody wants less money in their budget to work with, but it felt like hyperbole when Secretary Mathis' said that the sequester has done more damage to the US military than any enemy could've. Defense is critically important, that doesn't mean you just throw money hand over fist at it. The DOD is highly inefficient without any fiscal requirements to cut or save money. The beast that is Washington needs to eat and very very very few people working there are actually committed to putting it on a diet. But what will the economic boost will be?

It's alot of money in the economy and here comes an infrastructure plan. I'm actually skeptical on whether or not both parties can come to any kind of terms on what that plan does and what it looks like. I wasn't sure how $200 billion could become $1 trillion, not it is supposed to become $1.5 trillion.

Stimulus in a shrinking economy is one thing, we've done that before with Bush and with Obama. But when is there a reference point to what happens in a growing economy? I assume we all share the same sentiment, I just hope it all works, because if it doesn't...

[Edited on 2/13/2018 by nebish]


StratDal - 2/13/2018 at 04:35 PM

quote:
The "cost" of the tax cuts, a measure on the anticipated loss of personal and corporate income tax revenue, being $1.5 trillion over 10 years, which is "only" $150 billion a year. Nobody has put an estimate on what the economic activity, or the macro-economic effect, will net - which really is key to the overall impact. The larger the economy grows the more potential tax revenue there is to be had. With a $19.739 trillion GDP, 1% growth on that figure is $197 billion - so the goal is to increase GDP by more than the assumed loss on the tax side. The question is what would the growth of GDP be without the tax cut and what will it be with the tax cut? Can they boost it enough? It will be interesting to see what happens to the IRS tax receipts going forward. I think it is a safe bet that in a growing economy the IRS will actually get more money with lower rates. We'll see what the numbers show in the coming years.

So on one hand you deal with revenues and receipts coming into the federal government and then you have outlays and expenses by the federal government. Rather than just looking at FY IRS tax receipts, it is much harder to measure how government spending impacts the economy and if the offset to deficit spending is surpassed by economic growth. The budget cap deal opened the door to $400 billion in new spending over the next 19 months (since FY 2018 is 1/3 over already) - considerably more than the tax cuts 'cost' on a per year basis and if you combined the two there could be a $500 billion deficit for just FY 2019! Congress raised the caps by more than the White House had seeked. Nobody wants less money in their budget to work with, but it felt like hyperbole when Secretary Mathis' said that the sequester has done more damage to the US military than any enemy could've. Defense is critically important, that doesn't mean you just throw money hand over fist at it. The DOD is highly inefficient without any fiscal requirements to cut or save money. The beast that is Washington needs to eat and very very very few people working there are actually committed to putting it on a diet. But what will the economic boost will be?

It's alot of money in the economy and here comes an infrastructure plan. I'm actually skeptical on whether or not both parties can come to any kind of terms on what that plan does and what it looks like. I wasn't sure how $200 billion could become $1 trillion, not it is supposed to become $1.5 trillion.

Stimulus in a shrinking economy is one thing, we've done that before with Bush and with Obama. But when is there a reference point to what happens in a growing economy? I assume we all share the same sentiment, I just hope it all works, because if it doesn't...

[Edited on 2/13/2018 by nebish]


Well said Nebish. Thanks.

Regarding the infrastructure plan, I completely agree with you. It's going to bounce around and back and forth from one to party to another. What will happen is a lot of the infrastructure will get fixed when it HAS to. It's not the "sexy" thing people like to spend money on (think of fixing your house vs going on a vacation). I just hope that it's done before a tragic disasters occur.


Sang - 2/13/2018 at 06:34 PM

Went to an event that my financial planner holds every couple of months to look at what is happening to the economy and all the underlying numbers. GDP is up this year, but the forecast for the next few years is for it to be about the same as it has been - around 2%. They expect a bump this year because of the effects of the tax cut, mostly on corporations. There may be a spending boost this year, and we are 70% a consumer economy.

There were some dark clouds - the savings rate for the US is very low - people are using credit and not putting enough money away. The spread between the 2 year and the 10 year bond rates is low, and has been an indicator of a recession in the past... we just don't know when.....

There are some fears of the economy overheating, but for the most part they don't see inflation changing very much. They expect the fed to adjust.

Since I have been going to these meetings, GDP, CPI and the bond rates have all been hanging around 2% - and they don't see much changing.

The scary part is that the economy is about $17 trillion, and we have a $20 trillion debt - which is uncharted territory...... and everything Trump is proposing is going to make that worse.

When you have a $17 trillion dollar economy, it takes a lot to move any of the indicators......


pops42 - 2/13/2018 at 08:17 PM

When Obama did it: "America was being destroyed by a socialist" "Our children's future is being destroyed!" Now, its "The greatest thing ever"


2112 - 2/13/2018 at 10:31 PM

quote:
When Obama did it: "America was being destroyed by a socialist" "Our children's future is being destroyed!" Now, its "The greatest thing ever"


It's the typical. Every run up of the deficit is under the Republicans. Then once a Democrat gets elected all of a sudden the deficit and debt become a major issue. The deficit goes down every year under a Democrat (while the debt continues to increase), then it's tax cut time and another increase in spending. Republicans ignore the deficit until another Democrat gets elected, then rinse and repeat. Dick Cheney once said that Reagan proved that deficits don't matter, but he left off the part "until a Democrat gets elected."


nebish - 2/14/2018 at 12:59 AM

I'm glad you posted here 2112, it reminded me that we'll have to be looking at tax revenue as a % of GDP in the coming years as you pointed out before rather than simply the raw receipts.

I would like the Senate budget process to actually work like it is supposed to. They haven't passed a full FY budget 7 out of the last 15 years. And if Congress can't cut spending, or atleast cut the growth in increased spending, then atleast the sequester forced it upon them. But now they decided to make up for lost time and get all caught up in 2018/2019.


http://www.crfb.org/blogs/budget-deal-would-bust-original-bca-caps

It is a quick and steep increase. Republicans had to have their defense spending and Democrats had to have their domestic spending taken care of.

Who voted for what? Blaming the Republicans again for this one too?

It passed the Senate 71-28, with more Democrats voted for it (37 - including Angus King) than Republicans (34). More Republicans voted against it (16) than Democrats (12 - including Bernie).

It passed the House with 167 Republican yeas to 73 Democrat yeas and 67 Republicans voted against it to 119 Democrats in the nay column. Most of the Democrats I believed did not vote for it based on lack of DACA provisions or commitments for a debate on DACA.

The tax cuts you can hang squarely on the Republicans, but the 2 year budget deal reached last week was bipartisan, because spending isn't just a left or right problem, it is a Washington problem.


nebish - 2/14/2018 at 01:28 AM

Thanks for the comments Sang. I think GDP is in the 19 trillion range, but your point about debt - GDP ratio remains.

And none of this is going to work if we stay in the 2% GDP range and we will be in trouble.

Take if for what it's worth, he's part of the rose colored glasses crew, Mulvaney said that capital expenditures they've seen were way up earlier than they anticipated. He also said they project $350 more in tax revenue in 2027 than CBO...for what it's worth.

The thing that we all know with projections is there are so many unforeseen and unexpected and even unrelated events that impact the economy and the business cycle.

I'm literally excited and hopeful for further economic growth. Our local steel mill (foreign owned) that supports the oil and gas industry is hiring and putting on a 3rd shift. Starting wage is just under $20 with full benefits. But then again, we've been in expansion for so so long now, how long can it last?


nebish - 2/14/2018 at 05:30 PM

Some reference data to compare future years against:

https://www.irs.gov/statistics/soi-tax-stats-irs-data-book

FY 2016 total returns and forms processed 244 million, $426 billion in refunds
Total Collections $3,333,449,083
- individual $1,815,819,135
- corporate $345,552,427
- other (employment, estate, excise) $1,172,077,521

With this link you can change the data and time period you want for different results as a % of GDP (the 2112 prior supplied source):

https://www.usgovernmentrevenue.com/downchart_gr.php?year=1900_2010&uni ts=p&title=revenue%20as%20percent%20of%20gdp

"Total direct revenue" includes everything with social security and other ad volurem taxes which for 2016 was $6.1 trillion. https://www.usgovernmentrevenue.com/breakdown_2016USrt_19rs1n

Using total direct revenue, the recent peak was 35.74% in 2000 and again 35.72% in 2007. 2016 it was 33.01%

Getting more specific with the categories: "income tax" as a % of GDP peaked in 2000 at 14.19%. The next high was 2007 at 13.02%. 2016 was 12.27%. "Business and other" taxes peaked in 2001 with 3.01% and again at 2.86% in 2010. 2016 was 2.79%.

Will be interesting to see what the FY 2017 data looks like....if you are into this kind of stuff.


nebish - 2/16/2018 at 05:17 PM

I just wanted to circle back to something from the original NYT article I posted. At the end, comments from Jared Bernstein. It shows, you don't have to like the policy, but you can look beyond your own personal feelings and see some potential good that may come out of it. Mr Bernstein clearly then is not a politician.

quote:
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,” Mr. 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.”


There is still some "slack" in the labor participation rate.


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