Yes, deficits matter. They mattered under Bush, they matter under Obama, and they will matter under Trump

From CNNMoney:

IMF: Trump stimulus set to boost U.S. growth

by Jethro Mullen | January 16, 2017: 9:08 AM ET

U.S. economic growth should get a lift from stimulus measures under Donald Trump’s presidency, but it won’t hit the speed he promised anytime soon.

That’s according to the International Monetary Fund, which has pushed up its forecasts for the world’s largest economy.

Companies, workers, investors and governments around the globe are hoping to get a clearer picture of Trump’s economic policies after his inauguration Friday.

For the time being, the IMF has nudged up its U.S. growth forecast for 2017 to 2.3%, from the prediction of 2.2% it made in October. The increase to next year’s forecast is bigger: from 2.1% to 2.5%.

That’s a good deal faster than the 1.6% growth the IMF estimates the U.S. economy grew in 2016. But it’s still slower than the 2.6% it reached in 2015 — and way off the 4% pace Trump previously claimed his economic proposals would achieve.

There’s more at the original.

FOMC projectionsIt seems that the learned economists at the International Monetary Fund are more optimistic about growth in the American economy than the just-as-learned economists in the Federal Reserve, whose estimates for economic performance are shown in the chart to the left.1

The Fed based their estimates on economic and fiscal policies remaining unchanged, even though the December meeting was held after Donald Trump won the election.  The obvious question becomes: will Mr Trump’s policy proposals, which include significant stimulus and deficit spending, really spur the economy to greater production?

I’ve said it before: I do not believe that ‘stimulus’ has any positive reward anymore, because we have not been following the economic models for stimulus. The Keynesian argument that governments need to run deficits during poor economic times has seemed particularly blunted to me, because the second part of John Maynard Keynes’ point, that governments need to balance their budgets and pay down their debts during good times, simply hasn’t been part of the plan. Our continual deficit spending, during good times as well as bad, has taken us completely away from Keynesian ideas and has, in effect, inoculated our economy to any projected benefits from stimulus. Constant stimulus has already been figured in to our economy.

What would it take? Under President Bush, we were stimulating the economy with well over $100 billion every year, $161 billion in FY2007 and that was before the recession began. FY2008 saw a $458 billion deficit, and FY2009 ramped the deficit up to $1.413 trillion. We had four straight years of trillion dollar deficits, which means four straight years of trillion dollar stimulus, and still our economy did nothing more than settle into a slower-than-normal growth pattern.  Even the incoming President doesn’t plan on trillion dollar deficits, so if there is to be any benefit at all from them, those benefits should be less than what was achieved under President Obama, which is to say: not much at all.

Naturally, we’ll see continued hypocrisy from the liberal economists. Paul Krugman wrote that President Obama’s huge 2009 stimulus plan was way too small, and just before the election, when he assumed that former Secretary of State Hillary Clinton would win, he tweeted:

But, once Mrs Clinton didn’t win, once it became Donald Trump who would be the next President, to the esteemed Dr Krugman Deficits Matter(ed) Again.

At The First Street Journal, we are many things, but hypocrite is not one of them. I was opposed to the huge deficits run up under President Obama, and the $9,314,930,334,915.97 added (so far) under his term to the national debt, and I am not suddenly in favor of more deficit spending just because it will be a Republican proposing it. If the incoming President finds ways to pay for the increased infrastructure spending he proposed during the campaign, I will support that; he simply needs to cut spending elsewhere. It makes a lot more sense to pay more people to do productive work than it does to pay welfare to allow them to live indolently, but welfare has to be cut so that we are not supporting both the workers and the non-workers. As I’ve said previously, yes, I want to see my taxes cut, but I want spending brought under control first.

  1. The chart is a simplified version, produced by me, of this .pdf file of the Federal Open Market Committee’s projections. The FOMC’s estimates are discussed here.