The dishonesty ab out the Trump tax cut for the rich from certain Republican leading conservatives are been extensively noted so let’s not go there. But why is Dean Baker writing this?
There are two ways in which we can say that a deficit/debt is will hurt our children. The first is by slowing economic growth and therefore making the economy and our kids less wealthy in the future than they otherwise would be. The route through which this is supposed to happen is that deficit pushes up interest rates and crowds out investment, thereby slowing productivity growth. (We can also see a rise in the value of the dollar, which means larger trade deficits and more foreign debt.) There are no projections that show any substantial negative effect in this way. In fact, most projections show at least a modest positive boost to growth. So this one doesn’t make any sense.
There are no projections that the Trump tax cuts for the rich will lower national savings? If not, there should be. We tried this back in 1981 and what was the result? A massive increase in real interest rates and a massive appreciation of the dollar. The former did crowd out investment and the latter did lead to large trade deficits. I’m sure Dean remembers this. I would assert that the proposed tax cut today is a lot like the 1981 tax cut. If Dean disagrees – might he tell us why.
What Reagan managed to accomplish was to turn the US from the worlds largest creditor nation into the worlds largest debtor nation.
Why don’t people see that the expanded deficit will reduce savings and expand the savings-investment gap which is equal to the current account deficit. So crowding-out works much more through the dollar than through interest rates. The single item most responsible for the decline in manufacturing has been the Republican tax cuts.
It’s not a bug it’s a feature.
First the analogy with 1981 is not exactly exact.
Over 8 years, Reagan signed bills which cut taxes only for the rich, because there was a payroll tax increase which offset the Kemp-Roth cuts. However, the initial cuts weren’t as skewed towards the rich as the current tax bills.
This matters, because the effect of the current cuts on aggregate demand will be small (ultra rich people’s spending is limited by how much time they have not how much money). So far, there would be a smaller effect on the trade deficit.
It’s also true that Kemp-Roth-Reagan-Volcker were also disinflating. The absurd over valuation of the dollar & crushing blow to US manufacturing was partly due to tight monetary policy. That won’t happen this time.
However, the stated *purpose* of the proposed tax cuts is to cause a huge current account deficit. Technically they promise to encourage foreign investment and a huge capital account surplus, but accounting says that means they aim for a huge current account deficit.
This will hurt US manufacturing. The accumulated debt will have to be serviced and the US ability to borrow is not (quite) unlimited. The next vulgar populist might play with the idea of default (as Trump did). This could destroy the world financial system. We can hope it will just make us poorer on average.