Paul Krugman asks How Big a Bang for Trump’s Buck? (Wonkish)
Here is Krugman's conclusion:
So now we have a stimulus from tax cuts and spending increases in an economy already down to 4 percent unemployment, where the Fed is already raising rates to head off potential inflation. That is, we’re looking at normal monetary conditions, where we’d expect a smallish multiplier.
I’m having a hard time figuring out exactly how big a stimulus we’re looking at, but it seems to be around 2 percent of GDP for fiscal 2019. With a multiplier of 0.5, that would add 1 percent to growth.
That said, I’d suggest that this is a bit high. For one thing, it’s not clear how much impact corporate tax cuts, which are the biggest item, will really have on spending. ....
So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal.
How People Spend Their Tax Cuts
13% Will Spend
According to LendEdu, the average monthly paycheck will rise by $130.76. Only thirteen percent say they will spend their tax windfall.
I have huge problems with studies like these, even if the respondents do what they say.
The essential problem is "average" is misleading. So much of the tax benefit is skewed to the top 10% that average calculations are worse than useless.
The above chart is from United States Income Brackets and Percentiles in 2017.
The Median income bracket is $37,610. That income bracket will net $360 dollars or so, per year. That's a far cry from the LendEdu average estimate of $130.76 * 12 estimate of $1569.12 per year.
Household Income Brackets
- Make less than $10K: Benefit under $1 per month
- Make the median wage of $37,610: Benefit is $30 per month.
- Make the 75% percentile wage of $65,250: Benefit is $72 per month
- One has to make somewhere between $100,000 and $200,000 to see the "average" benefit of $130.76 per month.
I fail to see how this stimulates anything. And it adds at least $1.5 trillion to the deficit.
To pay for this, Trump is now considering a very regressive 25-cent gasoline tax hike.
Tax and Spend Republicans
Republicans have now gone full circle. For details, please see Tax and Spend: Trump Proposes 25-Cent Gas Tax, My Alternative Plan.
Questions of the Day
At the median level, is an extra $30 a month really going to help anybody pay down bills, save for education, or save for retirement?
One has to get above the 90% level before there is any reasonable impact on anything, and even that assumes any "savings" will not blow up in smoke over increased inflation or negative stock market impacts.
Word About Savings
I fully support saving. People claim they will "save" most of the tax cuts. It's savings that provide funds for future growth.
The problem is the rise in deficit is in effect negative savings overall.
Why can't Libertarians see this?
Libertarian Friends Dead Wrong
Krugman stated "So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal."
I suggest Krugman is a blazing optimist. The long-term effect of adding $1.5 trillion to the deficit cannot possibly stimulate anything. Moreover, when the next recession hits, I believe the deficit will be double what most expect.
Libertarians hold these positions: Tax cuts are good. Deficit spending is bad.
Unfortunately, my Libertarian friends are so enamored with tax cuts they have zero regard for the net impact of increased deficit spending.
One-sided ideology has gotten in the way.
Tax cuts cannot be good if growth will not pay for the cuts. I am 100% certain that long-term growth will not pay for the tax cuts as structured.
I rarely side with Krugman, and I don't here, but he is more correct than those who believe these tax cuts will provide a big economic stimulus.
I am a Libertarian. My Libertarian friends who support these tax cuts are dead wrong. And they should know it.
Mike "Mish" Shedlock