On Monday afternoon, the Washington Post reported that the Trump administration is pondering a temporary payroll tax cut in an effort to guard against a deceleration in the economy headed into the 2020 election.
Administration officials were keen on playing down the news, presumably because giving it too much weight would risk spooking already nervous consumers.
In addition to what, for now anyway, counts as the official statement (i.e., “Cutting payroll taxes is not something that is under consideration at this time”), a senior official claimed the payroll tax cut wasn’t being seriously pondered, while another claimed all talks regarding what might be done to counter a downturn were merely hypothetical and that there is no urgency.
In our own coverage, we noted that during the debate over Trump’s tax cuts, critics argued the administration should save its ammo; that exhausting America’s fiscal capacity when it wasn’t necessary would saddle the country with a large deficit, leaving no breathing room when the economy finally decelerated.
The following visual captures that perhaps better than any other (and we’ve used this on a number of occasions over the past year):
The stark divergence in the two lines over there on the right-hand side is unparalleled in modern US history. That represents Trump deploying pro-cyclical fiscal stimulus – ballooning the deficit despite an already hot labor market and even as the economy is doing well.
As the chart header from Goldman notes, this is “unusual”.
Last week, Treasury said the budget gap widened to $866.8 billion in the first 10 months of the fiscal year. That’s up 27% from the same period a year earlier, and already in excess of the full-year figure for last year, which was itself the largest deficit since 2012.
When Trump started down that road, some worried that the “logical” (or “illogical”, depending on how you want to look at it) next step was for the president to start bullying the central bank, demanding rate cuts to compliment pro-cyclical fiscal policy. Sure enough, that’s what happened. Trump has been openly calling for rate cuts and for a restart to the large-scale purchase of US debt (i.e., arms-length deficit financing by the central bank) for the better part of a year.
Fed officials are reluctant to countenance this push for the marriage of monetary and fiscal policy in the interest of deliberately overheating the economy. As we put it on Monday following comments from Boston Fed chief Eric Rosengren, the reason monetary policymakers think this kind of overtly pro-cyclical policy lean might be dangerous is precisely because it is right out of the banana republic playbook, a characterization which becomes even more apt when you note that the country is run by a would-be strongman who recently deployed debt-funded fiscal stimulus late in the cycle.
But while the “banana republic” jokes are all too easy to make (and while the Photoshopped visuals of Trump in a military uniform are highly amusing), it’s worth noting that there’s something contradictory about lambasting the Europeans (read: Germany) for their steadfast refusal to spend in the face of evidence that a downturn is coming while simultaneously maligning the US president’s policy prescriptions.
Indeed, there’s a sense in which Trump is simply ahead of the curve, as silly as that might seem. He is, willingly or not, advocating for a form of modern monetary theory (“MMT”) something we’ve been keen to point out here before. Consider these passages from “As Trump Cheers ‘100% Correct’ John Williams, Don’t Forget The MMT Connection“:
The irony, then, is that Donald Trump, Bernie Sanders and Alexandria Ocasio-Cortez are to a certain extent on the same page when it comes to whether the Fed should directly assist the government in stimulating the economy. Of course, there are differences between the president and his liberal rivals in terms of what kinds of stimulus are desirable, but even there, there are overlaps (e.g., infrastructure projects and a desire for more job creation even as unemployment continues to fall below NAIRU).
Although it often gets lost in the shuffle, all of the above is critical when it comes to understanding Trump’s Fed attacks in context. It’s by no means clear that Trump is apprised of the extent to which he’s effectively championing MMT, but if you’re a believer in modern monetary theory, the president’s Fed attacks, however uncouth, dangerous and dictatorial, are not, in fact, wholly misguided.
Put this in the context of rampant rumors about fiscal stimulus in Germany. Paul Krugman (laugh as you will) wrote a good piece this week amid the cacophony around a possible fiscal package out of Berlin.
“The Europeans, and the Germans in particular, treat themselves badly, with a ruinous obsession over public debt and the costs of that obsession are spilling over to the world as a whole”, Krugman said, before recapping the backstory. To wit:
Around 2010, politicians and pundits on both sides of the Atlantic caught a bad case of austerity fever. Somehow they lost interest in fighting unemployment, even though it remained catastrophically high, and demanded spending cuts instead. And these spending cuts, unprecedented in a weak economy, slowed the recovery and delayed the return to full employment.
While debt alarmism ruled both here and in Europe, however, it eventually became clear that there was a crucial difference in underlying motivation. Our deficit hawks were, in fact, hypocrites, who suddenly lost all interest in debt as soon as a Republican was in the White House. The Germans, on the other hand, really meant it.
That last bit about Republicans being hypocrites when it comes to fiscal rectitude is on full display at the White House, where notorious budget hawk Mick Mulvaney is now chief of staff.
Over the past several months, it’s become abundantly clear that Germany, by refusing to abandon the “black zero” fiscal policy, is imperiling not only itself, but also the rest of the world, and while Trump focuses squarely on European monetary policy, he might do well to zoom in on the Germans’ obsession with deficits, although that would undermine whatever tenuous claim he has on caring about America’s fiscal situation.
“Most of the costs of German fiscal obstinacy fall on Germany and its neighbors, but there are some spillovers to the rest of us”, Krugman goes on to write, adding that “Europe’s problems have contributed to a weak euro, which makes US products less competitive and is one reason American manufacturing is sliding”.
Have a look at the following two charts:
It’s easy to look at those and claim that the US is on a ruinous path. But look at the European economy – stuck in neutral and rapidly succumbing to “Japanification”.
If Stephanie Kelton (the most visible MMT advocate and adviser to Bernie Sanders) is correct to say that the future of economics will invariably entail central banks accommodating fiscal policy, then Trump is “right”, even if his approach is ham-handed in the extreme.
Cutting payroll taxes (which, unlike his handout to the wealthy and corporate America actually would benefit families), and implicit deficit financing by the Fed (assuming it took on a more MMT-esque character, as opposed to the way QE currently functions, which is simply as rocket fuel for financial assets) could help ensure that when this expansion finally ends, unemployment will not soar during a downturn. It could, in short, help the US avoid falling into the European trap, where fiscal austerity is trying (unsuccessfully) to coexist with extreme monetary largesse.
If Trump were less abrasive (and/or capable of reflection), he might actually be able to solve multiple problems at once. “Realistically, America has no ability to pressure Germany into changing its domestic policies”, Krugman goes on to say, but adds that “we might be able to provide a little moral suasion if our own leadership had any intellectual or policy credibility, but, of course, it doesn’t”.
Trump’s tariffs and his tax cuts for the wealthy and corporations have been a failure. But Trumponomics, to the extent it leans on fiscal stimulus aimed at real people and monetary policy designed to facilitate that, MMT-style, may yet succeed. In spite of its namesake.