Democrats have long championed running budget deficits and ramping government spending to kickstart the economy. Now that Republicans are doing just that, Democrats aren’t so sure.
For years, the prevailing Democratic talking point was that expansionary fiscal policy — the idea that cutting taxes, increasing government expenditures, or both — is the best way to stimulate economic growth and put downward pressure on inflation. Now Republicans, during a period of near full employment and economic expansion, are hopping on board, cutting taxes and revving up government spending.
President Donald Trump signed a $1.5 trillion tax bill into law in December that slashed corporate, business and income tax rates. Congressional Republicans last week rolled back the 2011 budget austerity measures the party fought aggressively with former President Barack Obama’s administration to enact with a two-year budget deal that increases federal spending some $300 billion. Trump signed the bill into law Friday.
Despite enacting what Democrats have asked for and tried to push under Obama, Democrats aren’t thrilled with the Republican rollout, arguing that the policies either miss the targets or the timing is completely off.
Larry Summers, former Obama treasury secretary and Harvard president, argued in 2014 that normal market forces are likely not enough to sustain full employment, along with the stability of the financial markets, without significant, continued expansionary fiscal policy. Summers wanted the government to increase investment in infrastructure projects, which, he argued, would create jobs, thus reducing unemployment.
Much to Summers’ delight, the administration is planning to spend $200 billion to couple with $1.3 trillion from cities, states and private companies over the next decade to spur infrastructure projects around the nation.
Summers is somewhat happy with the administration’s jump towards more expansionary policy measures and their focus on infrastructure, but he thinks Trump and Republicans are missing the mark on the timing.
“Yes, I have favored more expansionary fiscal policy, and this is more expansionary fiscal policy,” Summers told The New York Times Sunday. “But it’s the wrong kind of expansionary fiscal policy, and it’s at the wrong time, at the rare moment when fiscal policy is likely to be almost entirely crowded out.”
Only time will tell if Republican’s move to use expansionary policy will help the economy maintain full employment and drive down inflation.
The U.S. economy is at roughly full employment with an unemployment rate of 4.1 percent as of Feb. 2., but there is some serious concern interest rates will rise in the coming months.
All major U.S. stock market indexes fell in the first weeks of February. The market shed more than $1 trillion in market capitalization in the days of trading this month as investors, for the first time in nearly a decade, believe that central banks around the world will pull back on their recession-era easy money policies and raise interest rates to ensure that rapidly growing economies don’t run too “hot.”
Expectations of higher interest rates globally are not simply a hypothesis on the part of investors. Central bank chiefs around the globe are signaling, or announcing flat-out, that they plan to jack up rates in 2018.
The Federal Open Market Committee announced in late January that they anticipates further rate increases in 2018, causing investors to believe the government will raise interest rates more than two times in 2018.
The Bank of England strengthened its economic forecast Thursday and announced it will likely have to raise interest rates both earlier and higher than it expected in November.
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