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Revised third-quarter GDP came in a bit hotter than expected at 3.2%, beating expectations. Now that’s hardly hypergrowth, but it’s also only the eighth time the US economy has hit 3% or higher since the Great Recession as I eyeball it. So it’s a notable achievement.
So given that pace of growth plus the jobless rate, does the US economy really need a big dose of fiscal stimulus right now? It’s not an unreasonable pro-case given continued low inflation and subdued labor force participation rates. Plus we probably shouldn’t get used to the 3-handle. As JPMorgan notes, “despite the upside surprises in the 3Q data, we are keeping our 4Q GDP forecast at 2.0% for the time being—the 3Q numbers were not very far from expectations and the limited inventory data we have so far for the fourth quarter looks very weak.”
Not that one should expect any stimulus to produce stunning results. Recall yesterday’s mid-range OECD forecast that the “likely size of the stimulus would boost US economic growth to 2.3% from 1.9% in 2017, and to 3% from 2.2% in 2018.” Of course there are certainly Wall Street firms expecting less, others more.
But here is something to consider: What if all this tax cutting and infrastructure spending gets pretty much paid for? Martin Feldstein outlines that case:
Anyone who listened to his speeches or read his campaign material should have noted that he was not proposing that the federal government should carry out the infrastructure investment. He was not calling for a Keynesian fiscal stimulus based on deficit spending. Instead, Trump’s campaign called for a “deficit-neutral system of infrastructure tax credits” to provide incentives for private businesses to undertake projects to build roads, bridges, tunnels, airports, and so forth. Of course, it is not clear that Congress will agree to such large new tax credits. And even if it does go along, there is no guarantee that businesses will respond as intended. … It is also easy to fall into the trap of thinking of the tax cuts as a way to boost aggregate demand. But congressional Republicans may insist on paying for the cuts in personal income tax by limiting the deductions that individuals now use to lower their tax bills. The tax plan put forward on behalf of the Republicans by Paul Ryan, the speaker of the House of Representatives, calls for eliminating all deductions other than those for charitable contributions and mortgage interest. That change would raise revenue equal to about 1% of GDP, enough to pay for very substantial reductions in individual tax rates. …There is of course no reason to seek an increase in aggregate demand at this time. The economy has essentially reached full employment, with the unemployment rate at 4.9% in October. The tight labor market caused the core consumer price index (which excludes food and energy) to rise 2.2% over the past year, up from 1.9% a year earlier. And production workers’ wages rose 2.4%, faster than prices. The Federal Reserve can begin the process of raising interest rates in December without any need for an offsetting fiscal boost to demand.
In any event, I would hope Washington policymakers focus on deep, supply-side reform rather when designing these policies, rather than providing a fillip.