Keynesian Without Cause

I’m in one of my wheelhouses (fiscal policy and economics) again today. I want to discuss the subterfuge and contradiction of the Trump Tower Tax Cut. Let’s explore.

I was actually educated as a supply sider but became a Keynesian after college. That economic philosophy is named after the British economist John Maynard Keynes who guided Franklin Roosevelt to get America out of the Great Depression. One of the main principles of Keynesian economics is that a federal government that controls its own monetary policy can spend its way out of a recession/depression. In fact in those trying economic time often only the federal government has the ability to borrow and spend sufficient funds to have the desired economic impact. The initial destination of the funds has to be the class of consumers that will immediately spend the money. In recent years Nobel prize winning economist Paul Krugman succinctly expressed this part of the theory with the phrase, “My spending is your income and vice versa.” It’s more complicated than just that, but that explanation is sufficient for today’s purposes.

Both the destination and stated motivation of the Trump Tower Tax Cut are erroneous and in my opinion deliberately deceitful! What Trump and the Republicans are proposing to do is increase the debt by $1.5 trillion (plus the interest on that borrowed money). They then want to turn around and give most of it to those who need a passport to visit their money and corporations who are already sitting on record cash; in simple terms those who are not likely to spend it.

Trump runs around the globe citing how great the economy is under him. In all honesty there is some credibility to his claim. (If you remember back in January I predicted the economy would initially continue to improve under Trump.) The stock market is setting records, (not a true indication of how things are on Main Street). Unemployment is at its lowest point in years. Consumer confidence surveys are getting their most optimistic results in some time. In other words, what is the motivation for a huge pump priming program. (Despite his claims to the contrary it is well documented that Trump did not invent the term “pump priming” earlier this year as he embarrassingly claimed in an interview with The Economist who called him out on it.)

The Trump Tower Tax Cut is a massive spending program! As President Obama tried to teach the masses governments can spend via the tax code. A massive tax cut is a voluntary reduction in revenue which has the same net effect as spending – the government has less money in either case.

So why are Trump and the GOP attempting to do something so expensive and unwarranted? In addition to Trump’s personal greed and the perceived need to provide a return on investment for their donors there is another hidden agenda – political self-preservation.

The $1.5 trillion is a cap on how far the Congress has legislatively constrained itself on increasing the deficit in the next ten years and it has prohibited any future increases after then. So the Republicans have spent all the money available (mainly to give themselves and their donors a huge tax break). That will force future Congresses to either remove the cap (politically a very risky move) or cut programs to trim spending (also very unpopular). What programs do you think Republicans are targeting?

Here is where the political preservation comes in. It appears the Republicans are expecting to lose one or both chambers in 2018. They are hoping the Trump Tower Tax Cut will effectively be a poison pill that will doom a sufficient number of Democratic members in 2020 and beyond so that they will quickly reassume majority status.

Greed and self-preservation; two pretty powerful motivators! If the Republicans can force Democrats to cut social safety net programs in the process, that is all the better in their minds.

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