The Stimulus That Isn’t

by Ramesh Ponnuru

Jim Tankersley reports in the New York Times:

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.

Tax cuts can expand the economy by increasing incentives to work, save, and invest, and infrastructure spending can expand it by adding to our productive capacity. The extent to which higher deficits themselves stimulate the economy, though, depends on how monetary policy reacts to it. If higher deficits bring inflation forecasts above the Fed’s target and it tightens money in response, then nominal spending and inflation should go right back to right around where they would have been without those higher deficits. The only reason you’d expect significantly higher inflation or economic output is if you think that the Fed will let fiscal-policy changes alter its target. It follows that the increased deficits will provide significant stimulus only to the extent that they change what the Fed considers acceptable–and that you’d get basically the same amount of stimulus if the Fed just changed its mind, without any increase in federal debt. 

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