The Trump Campaign just issued a tax plan designed to lower taxes and simplify the tax code. Leaving politics aside, the plan is very good, but not great. It does represent a step in the right direction by providing a real boost in disposable dollars to the lower-middle-upper middle class. The one point Trump is right on is the official unemployment rate of 5.1% is very misleading. The real number is much higher. This article is not about politics, it is about economics.
Recently the Federal Reserve decided not to raise interest rates despite numerous calls to do so. The reason they didn't is simple, the economy remains too weak. The article The Federal Reserve Will Not Raise Interest Rates In 2015 points out that "the industrial capacity utilization rate is only 77.8%, which is below the 80% threshold considered normal for an expanding economy." It further points out the labor force participation rate is at 62.6%, which is 4 percentage points lower than it was a decade ago. That means the unemployment report has removed over 10 million adults from the employment rolls versus a decade ago. These people are still unemployed, even if they are not considered so in the official statistics. The article also points out that the inflation rate remains below the Federal Reserve's target of 2%.
What this means is the economy has not fully recovered from what some labeled The Great Recession. Yes, the economy bottomed in 2009 and has been growing ever since and creating jobs. But the economy has not grown fast enough over the last 5 years to return the employment situation to normal. So one has to keep in mind when following a statistic like GDP that it measures a rate of growth and not full economic potential. The unemployment statistics are a much better measurement of full economic potential. While the Federal Reserve saved the banking system, the federal government did not supply enough stimulus and raised taxes too quickly. Congress and the President mistakenly focused on the deficit and the debt and not on economic growth.
Lots of people are comfortable with kitchen table economics. If a family has $100 to spend and routinely spends $150, then one day they are going to have to pay the piper when they can no longer borrow and have to pay their debts. But the finances of the federal government simply do not live under the same economic laws as a family, business, or even a state government. The federal government owes everyone dollars, which they can print. While everyone else can run out of dollars, the federal government can never run out of dollars. Therefore, they should cut taxes and spend money as much as is necessary to return the economy to full potential.
A policy like this would only become inflationary when the economy returned to full potential. At that point there would be too many dollars chasing too few goods. Right now there are too few dollars chasing too many goods. Modern Monetary Theory is a yin-and-yang economic theory. It would prescribe that spending be cut and taxes raised for an economy that was running at full potential and in danger of becoming inflationary. It is not a print money all the time theory. Right now it is still necessary for the federal government to support the economy.
This is where the Trump Tax Plan is very good, but not great. Much will be written about how much the rich will and will not pay under the plan. But that discussion is superfluous, because the rich are not going to spend any more money, just save it. The point of a tax cut to stimulate the economy is to put spendable dollars in the hands of people that are going to spend it. That basically means people living paycheck to paycheck. Consumer spending is the great engine of the U.S. and global economy. More spending needs to be encouraged, not discouraged. The Trump Plan calls for no taxes on a person making $25,000, or a couple earning $50,000. For the plan to be great rather than very good, it should double that amount to $50,000 for an individual and $100,000 for a couple. The idea is to eliminate taxes for everyone living paycheck to paycheck. The fact is $25,000 is barley a livable wage in most metropolitan areas.
A recent op-ed by Paul Krugman said Trump Is Right On Economics. Dr. Krugman actually had a misleading headline, because it was really a hit piece on Jeb Bush and his tax cut plan. Dr Krugman states "but his actual economic platform, which relies on the magic of tax cuts to deliver a doubling of America's growth rate, is pure supply-side voodoo." This represent the problem with economic discourse in America. Too many of our economists are on one side of the political aisle or the other, and therefore feel obliged to defend the orthodoxy of the political party they are aligned with. Dr Krugman is an expert on depression economics and has been calling on Japan for two decades to do much more to stimulate their deflationary depression. A federal government has three basic tools to stimulate the economy; it can spend money directly as it did on a military build-up in World War II, it can buy stuff like bonds as it did with quantitative easing after the great recession, or it can put money back into the people's pockets via the tax code and let them spend it.
The reality is the U.S. is short almost 20 million good paying full-time jobs. Until this problem is solved economic problems will persist. The quickest way to solve the problem is to have the federal government stimulate the economy. Interest rates are already near zero and the banks are solvent. So having the Federal Reserve buy more bonds won't provide much more in the way of stimulus. It is time for the federal government to spend more money in the economy by launching a massive infrastructure program on roads, bridges, airports, ports, and parks. And it is time for a massive federal tax cut for the lower and middle class. Mr. Trump just jump started the debate, and that is the right direction for the U.S. and global economy.
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