Risks In Trumpian Economic Policy: Government Spending
/There are many reasons at this point to be encouraged about the prospects for the national economy under President Trump. As examples, EPA fossil fuel restrictions and Obamacare mandates are serious drags on economic performance, and Trump is promising to roll both back. Stock market gains since the election reflect widespread optimism. On the other hand, from what our President-elect has said both before and since the election, there are important areas where his proposed policy changes pose major risks. Topping the list is the question of whether major new restrictions will be imposed on international trade. I have previously covered that subject here and here, and will not discuss it further today. Another area of significant risk is government spending. Will there be massive increases in spending on wasteful and unproductive projects?
As discussed here last week, in the late stages of the campaign and the period since the election, Trump has gone in big for the idea of a major increase in federal "infrastructure" initiatives. He has talked of a $1 trillion plan, covering ten years, which would be $100 billion per year. His website on the subject, as usual, has many generalities and few specifics. In particular, it is unclear how much of the trillion would be direct federal spending, since there is talk about things like "[l]everag[ing] new revenues and work[ing] with financing authorities, public-private partnerships, and other prudent funding opportunities." Still, there is every reason to be concerned that Trump may be buying into the fallacy that blowout government spending, particularly (for some reason) on big construction projects, is the way to speed up economic growth.
It's not just Paul Krugman and the Keynesians who keep up the incessant drumbeat that further increases in government spending are the cure-all for every economic ill. Recent weeks and months have seen remarkable repetition in Democrat-side sources of the theme that the economy performs better under Democrat presidents than Republican. (It's almost as if they speak from a set of common approved talking points!) Of course the idea is to promote increased government spending, since everybody knows that Democrats are for more spending, and that's the explanation for the difference. Hillary Clinton used this theme throughout her campaign. For example, here is a statement from Hillary at an early stage of the campaign (October 2015):
There’s a lot of evidence that when we have a Democrat in the White House, unemployment is lower, income is higher, and even the stock market is higher. But when you have a Republican in the White House you are four times more likely to have a recession.
Asked by factcheck.org to support the statement, Clinton cited to a study by Blinder and Watson, "Presidents and the Economy: An Economic Exploration." You will recognize Blinder and Watson as partisan Democrats (Blinder was on the CEA during the presidency of Bill Clinton). You won't be surprised to learn that there is a gigantic starting-point fallacy in their study:
The analysis consider[s] a 64-year period beginning with President Harry Truman and ending with President Barack Obama.
In other words, Blinder and Watson:
- Leave out the FDR presidency, when an intentional war against capital prolonged the depression for eight years from 1933 to 1940.
- Then start with Truman, whose first important act as president was to cut federal spending by well more than half in the World War II demobilization, in the face of dire warnings from the Keynesians that this would lead to an immediate and prolonged depression. Of course, the economy then boomed.
For some more recent repetitions of the talking points, see Paul Waldman in the Washington Post on November 4 ("The economy is better under Democratic presidents"), or David Leonhart in the New York Times on November 29 ("'Big Marco' Or His Own Presidency"). From Leonhart:
All told, economic growth under Democratic presidents over the last half-century has been 25 percent faster than under Republicans. Private-sector job growth has been more than twice as fast. Republicans even have a worse record running up the deficit. (These comparisons hold no matter when precisely you start the clock on a president’s legacy.)
Well, OK. But can we recognize that the best economic times in this period were (1) the six latter years of the Reagan administration, a time of both tax cuts and serious spending restraint, and (2) the six latter years of the Clinton administration, when serious spending restraint was imposed on the president by a Republican Congress? In other words, the talking points are used as an argument for big spending increases, but on even a moderate inspection, that argument doesn't hold up.
If you still think that blowout spending, particularly on infrastructure, is the route to faster economic growth, I would highly urge you to look at the case of Japan. Their economy has been in a funk since about 1989 -- going on 28 years now. In that time they have somehow gone for one after another massive infrastructure "stimulus" spending program. They have the fanciest and fastest trains anywhere, and top-notch roads and highways. They also have national debt now at about 240% of GDP. And the economy somehow never gets out of the funk. See my detailed 2014 post here. Only the private sector can create real economic growth, and that requires restrained government spending and taxes.
In the U.S., the gradually improving economy and spending restraint (under a Republican Congress) of the past few years have led to declining deficits -- but at $500 billion per year, we are still talking numbers that are way too big. Going forward, even with spending restraint, automatic increases in entitlements promise to take the annual deficits to $1 trillion and above by the 2020s. Adding massive new "infrastructure" spending to the mix is far likelier to be a negative -- and a major negative -- than anything positive.
I've been feeling like a lonely voice on this issue so far. But Michael Tanner of the Cato Institute chimes in today at the National Review:
Stephen Moore, a Trump economic advisor and a man I know and respect, recently told congressional Republicans that, since Donald Trump won the election, it is their duty to deliver on his agenda — even if his policies are bad ideas. Umm, no. Bad ideas are bad ideas, even when voters choose them. . . . Infrastructure spending is not likely to deliver the bang for the buck that Trump supporters expect in terms of either job creation or economic growth. . . . [S]tudies show that, while infrastructure spending may provide a short-term boost to GDP, it can actually reduce economic growth over the long-term by diverting resources and creativity to less innovative and productive uses.
I would only add that the supposed "short-term boost to GDP" from government infrastructure spending is likely to be completely fake -- an artifact of the unjustifiable convention of counting all government spending on goods and services as a 100 cents on the dollar addition to GDP, no matter how wasteful and unproductive the spending may be. If counted in GDP at a more realistic rate like 50%, wasteful government infrastructure spending would be recorded as a reduction in GDP, which it is, rather than an increase.