12 March 2016

The Three Pronged Republican Economic Platform

The Republican economic platform can basically by summed up by three defining characteristics: 1) increase military spending, 2) cut taxes, primarily for high-income individuals, and 3) balance the budget. If you look at each of the Republican candidates' websites, you'll see pretty much all of the same policies (with the exception of Trump, who, instead of a balanced budget amendment, proposes what he calls 'revenue neutral' and everyone else calls 'budget busting' policies), with everything else pretty much secondary.

Perhaps the most interesting part of this nearly ubiquitous threefold policy is that each of these objectives are pretty much mutually inconsistent. Each candidate is effectively proposing massive spending increases (military buildup) as well as massive tax cuts (ranging in severity from 'insane' -- Cruz -- to 'I can't judge because there are no specifics' -- Kasich). Unless you buy into the idea that cutting income taxes incentivizes people to work so much more that the net effect on revenue is positive (relative to the higher-tax counterfactual, shut up Reaganites), you should realize that the three effects of each Republican's plan will be 1) massive deficits, 2) whatever supply-side effects (if any) the tax cuts have. and 3) no effect on the output gap, because the Fed, which reasonably thinks that the economy is already near potential, will offset the effects of any expansionary fiscal policy (the same can't be said for contractionary fiscal policy, shut up Market Monetarists).

So, when Rubio accuses Trump of having numbers that don't add up, he should really include himself in the same boat; balanced budgets do not go together with tax cuts and military buildups. Even George W. Bush knew this, at least he admitted that his plan would erase the surplus, even if Mr. NCLB accused Gore of "fuzzy math." Of course, everyone is now going to argue that the spending cuts that each administration will undertake will outweigh the military spending increases. My response: maybe, but have any recent Republican administrations done that? No? I thought so. Keep in mind that government spending has been more restrained as a percentage of GDP under Obama (and under Clinton) that it was under either Reagan or W.
What about the supply-side effects of tax cuts? Well, we do have one pretty good experiment of this from 2003, when Bush passed his tax cuts and, well, I'll let the subsequent lack of employment growth speak for itself:
Now, before everyone freaks out, I know I didn't adjust for demographics here, but I think it's fair to say (based on my own analysis linked above) that the demographic adjustment for Obama would be larger than for Bush, so I'm really being kinder to the Bush tax cuts that I should be. With that aside, it seems pretty clear that the 2003 tax cut did pretty much nothing in the way of speeding up the recovery, so what should make anyone think that more of the same thing will be all that different?

When it comes to monetary offset, as I wrote here, fiscal policy only has demand-side effects to the extend that the central bank doesn't act in the face of fiscal shocks. So, in the event of a massive fiscal expansion (assuming the candidates can't achieve the desired balanced budgets by gutting the government), we should simply expect the Fed to raise interest rates faster, which will mean that the only effect that fiscal policy will have is the supply-side one, which is probably minimal.

TL;DR: Republican fiscal plans = deficits + not much else

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