To anyone serious about economic analysis, it should be obvious that we don’t need Keynesian stimulus at the moment. The unemployment rate is at 4.6 percent, which is about as close to full employment as it gets. The economy is producing more than 175,000 jobs each month, with many industries complaining they could add more if there were trained workers to hire. Wages are rising faster than they have in a decade, and faster than productivity is rising. Corporate profits and share prices are at record levels. And thanks to aggressive bond buying (and bond holding) by the Federal Reserve, monetary policy is still extraordinarily accommodative. Keynes himself would never have suggested that this is an appropriate time to use the government’s taxing and spending powers to boost the economy. In fact, seeing the developing bubble in stock and real estate markets, Keynes probably would be recommending a budget surplus right about now.
It is true that factory utilization is still a bit below its historical average, but you would expect that in a de-industrializing economy. And while parts of the country are still suffering from that deindustrialization, there is no evidence that a burst in government or private spending will, to any substantial degree, make its way to those communities, their unemployed and under-skilled workers or their uncompetitive companies. In the jargon of economics, their problems are structural, not cyclical. That’s a harsh reality, but a reality nonetheless.
At this point someone will surely point to the several million working-age males who have dropped out of the labor market and are now said to spend their days watching porn and playing video games. This has been a decades-long, secular decline that remains poorly understood. Some of the presumed causes are worrisome: low wages for unskilled workers, an increase in disability claims, more black market activities, an epidemic of drug addiction and the increase in incarceration rates. Other factors are more likely to be celebrated: more stay-at-home dads with wives who are working and earning higher pay, more people going back to college or earning advanced degrees, more Wall St. and tech millionaires retiring to the beach. None of these trends, however, is likely to abate with a sudden boost of fiscal stimulus.
I will be the first to acknowledge that this is a fine time to ramp up spending on infrastructure, given how much public disinvestment and deferred maintenance there has been, and given how cheap it still is for the government to borrow money to pay for it. But there is a real danger that if we try to build too much too fast, a good chunk of the money will be frittered away on construction cost inflation, particularly if the Trump administration makes good on its pledge to deport the very people who are willing and able to do the work. At this point in the economic expansion, the justification for infrastructure investment is not to provide short-term stimulus, but rather because the investments will make the economy more productive in the long term.
There is also no convincing case for tax cuts, despite the bipartisan enthusiasm for them Federal tax burdens have been declining for more than 30 years, and remain well below those in other advanced economies. Certainly the rich don’t need a tax break—they’ve been raking it in big time for decades. Nor, for that matter, does the middle class. Many middle-class households don’t pay much in the way of income taxes, and those that do would prefer to see the money used to provide universal pre-K or free college tuitions for their kids, or better infrastructure to speed their daily commutes or bigger Social Security checks when they retire. As for the poor, since they don’t pay income taxes, they won’t benefit from tax cuts unless Republicans develop a sudden itch to increase and expand the earned income tax credit.
Liberals are quick to jump in here and argue that tax cuts for the middle class and poor are necessary to offset the increasingly unequal incomes that the labor market is generating. In fact, the U.S. tax code is already about as progressive as those in Europe or Japan. To make the American system as progressive as those other countries, however, we would need to raise tax rates, not lower them, and use the additional revenue to provide more services and income support to the poor and middle class. Or we would need to adopt labor laws and norms of business behavior that would force markets to distribute incomes on a more egalitarian basis. There is only so much we can expect the tax code to do in offsetting the inequality generated by a market economy.
Politicians who are rushing to cut taxes or increase spending should fess up that they are doing so for political or ideological reasons and not try to justify it on the basis of a weak or failing economy. The economy is doing just fine, thank you, which is more than can be said about our politics.
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