The new budget agreement crafted by Congress is projected to raise budget deficits by $150 billion annually over the next two years, an increase of a bit more than 0.7 percent of GDP. This follows the passage of the tax cuts, which are projected to increase the deficit by an average of more than 1 percent of GDP over the next five years.
This should settle one point beyond any dispute. Republicans do not give a damn about budget deficits. All the sanctimonious whining we heard when President Obama was trying to push his stimulus package as the economy was collapsing back in 2009, and when it was still languishing in 2011 as the Republicans regained control of Congress and demanded austerity, was crap.
The Republicans were trying to obstruct anything Obama proposed. There was no principle at play here, it was just a story where if Obama was for it, they were against it. The consequences for the economy — millions of people needlessly being unemployed, losing their homes, children going homeless — those didn’t matter. Paul Ryan and Mitch McConnell’s agenda is winning at politics, not being do-gooders for the country.
Most of us recognize politicians as being politically motivated, except of course for the people who get paid to tell us what they are doing. We heard and read endless pieces on National Public Radio, The New York Times and other mainstream news outlets telling us how Republicans believe in balanced budgets, that they were concerned about debts and deficits, etc.
Don’t tell us politicians’ beliefs and concerns; just tell us what they say and do, full stop.
OK, but beyond Republicans being incredible liars and hypocrites, the big jump in the deficit will allow for an important economic experiment. We will get to test how far we can push the economy and how low we can get the unemployment rate before seeing serious problems with inflation.
The reality is that economists haven’t a clue as to how far we can push the economy. Just four years ago the Congressional Budget Office put the floor of the unemployment rate at 5.5 percent. This estimate implied that if the unemployment rate fell below this level that the inflation rate would begin to spiral upwards.
The unemployment rate has now been well below this level for more than two-and-a-half years, and there is still no evidence of an inflationary spiral. In fact, the inflation rate remains well below the Federal Reserve’s 2 percent target.
If the Fed and Congress had tried to craft monetary and fiscal policy around this 5.5 percent figure, as many economists advocated, millions of workers would have been needlessly denied the opportunity to get jobs. Tens of millions would be looking at lower wages, as the tighter labor market has finally allowing workers at the middle- and bottom-end of the labor market to finally share in the gains of economic growth.
We should be grateful that the Fed, under previous head Janet Yellen, held off on excessive rate hikes that would have substantially slowed growth, but the new tax cuts and spending pushed through by the Republican Congress take stimulus to another level. The additional demand resulting from the larger deficits should provide a considerable near-term boost to growth.
We are likely to see the unemployment rate fall well below 4 percent, reaching levels not seen since the height of the Vietnam War half a century ago. This will give many of the least advantaged in society — less-educated workers, formerly incarcerated individuals and the disabled — opportunities for work that they would never otherwise realize. It should also give tens of millions of workers additional bargaining power to secure larger wage gains.
Will the boost to the economy lead to serious problems with inflation? I’ll give the honest economist’s answer: I don’t know. But this is an experiment worth performing. We should look to push the economy to its limits. We have repeatedly erred with excessive fiscal and monetary restraint, needlessly keeping millions unemployed. It’s worth putting the foot on the accelerator and seeing how far we can go.
It is incredibly ironic that we need a Republican in the White House and a Republican Congress to perform this test. The Republicans did everything they could to make sure that we never tested the economy’s limits under President Obama. The fact that many of his top advisers also had no interest in such a test also didn’t help.
But the constraints are off now. Let’s see how low the unemployment rate can go.