For those of us who’ve spent the last few years arguing that the economy is underperforming and could use an extra boost from federal spending, this is a surreal and slightly bitter moment. Republicans, who spent the critical early years following the Great Recession demonizing Barack Obama’s stimulus as “government waste” and pushing for budget cuts, have decided that now is a good time to splurge. Having already passed a $1.5 trillion tax cut, they agreed early Friday morning to a budget deal that will increase Washington’s spending by about $300 billion over the next couple years.
This deficit binge might turn out to be good for growth, at least in the short-term. But politically, it’s a bit galling. Republicans did everything in their power to hobble the economy when it needed help. Now they’re poised to take credit if it gets red hot thanks to the sort of free spending they spent years pretending to oppose.
Nobody knows for sure what this combination of tax cuts and budget increases will mean for growth. Keynes taught us that a temporary surge of government spending could revive a weak economy by raining money on families and businesses when the private sector is clammed up. But when the economy is already running near its full capacity, deficits are less helpful, and possibly even counterproductive. The government may end up hiring workers who would have had jobs anyway, and the extra cash sloshing around may just lead to inflation. If the Treasury has to start offering higher interest rates in order to finance its debt, meanwhile, it could put a crimp on businesses by making it more expensive to borrow and operate.
The economy is much closer to firing on all cylinders today than it was a few years ago, which suggests stimulus is going to be less effective now than it would have been then. Some analysts, including the Congressional Budget Office, think we’re already operating more or less at top speed. But that conclusion rests in part on the shaky assumption that the economy was permanently scarred by the recession, and that it’s impossible to make up the ground we’ve lost since then. I disagree.
The simplest way to think about this issue—whether we’re in great shape and therefore the stimulus could be counterproductive, or we’re not yet in great shape and the stimulus will help—is to look at the job market. On first glance, it seems to be doing well. The official unemployment rate is low, and wage growth might finally be starting to pick up its pace (though it’s a little premature to say that for certain). But on closer inspection, it looks like there still might be some lingering weakness left over from the recession. The fraction of Americans between the ages of 25 and 54 who are employed—which at this point may be the best stat for judging the labor market—is still below its pre-recession peak. That suggests there is a decent number of men and women in their prime working years who could be in a job, even if they aren’t technically being counted as unemployed right now.
That’s a big part of why I’m an optimist about what the GOP’s new splash of spending might do. Things are not quite as good as they could be. And the extra stimulus may speed us to actual full employment. As far as professional estimates go, the researchers at Evercore ISI think the tax cuts and new spending could push growth to 2.7 percent next year; without those policies, they estimate it would be just 2 percent.
So, yes, this all could be welcome news for workers, both in the near-term, and maybe longer. However, I am not so sure it will be great for our politics.
Forget the GOP’s obvious hypocrisy on spending—ever since the Bush era, it’s been clear that elected conservatives do not really care about deficits, except insofar as they make a handy club for whacking Democrats. Instead, worry about the lessons Republicans might draw from this experience. During Obama’s presidency, the GOP’s mania for spending cuts—and its ability to wring budget concessions out of the president—was an anchor on the economy at a critical moment when millions were suffering from the aftermath of a financial catastrophe. Yet, the party suffered precisely zero political consequences. Instead, they’re in power in part because of the slow, post-crises economy at the end stages of a recovery that could help them hold onto Congress in 2018. Moreover, its clear that nobody actually expects them to make good on their rhetoric about fiscal prudence. They’ve abandoned it pretty much without punishment. Pushing austerity during a downturn and priming the pump when the economy is near full health might turn out to be an incredibly canny political strategy, even if it may have been unplanned. If there ever comes another time when sabotaging the economy might work to Republicans’ advantage, they have every incentive to do it again.
One more thing
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