Clinton Can Afford Some Trump-Like Fiscal Craziness
Hillary Clinton often boasts, as she did in Wednesday night's debate, that her policies wouldn't add a penny to the national debt. She says that's because she offsets every new spending proposal and tax break with a budget cut or tax increase.
Her fiscal rectitude contrasts with Donald Trump's fiscal craziness. He ignores accounting niceties to slash taxes and protect entitlement programs. In doing so, he would add at least $4 trillion to the national debt over 10 years.
Here's a heretical thought: Clinton could be a little crazier. She could even steal a page from Trump and propose more deficit spending to rev up the economy in her first few years in office, if she wins.
This somewhat surprising recommendation draws from a new economic model that mimics the effects of tax cuts on behavior. The model, unveiled this week by the University of Pennsylvania's Wharton School with an assist from the Tax Policy Center, seeks to explain how much individuals and corporations work, save, invest and spend when taxes go up or down.
It shows that Trump's tax plan would produce faster economic growth in the short term while Clinton's would dampen growth. After 10 years, though, the reverse would be true: Gross domestic product would be slightly lower under Trump and slightly bigger under Clinton, compared with current law.
In today's environment of slow growth, minimal inflation and too many labor-force dropouts, Clinton could do more to jolt the economy with short-term tax cuts or more spending increases than she has proposed. And she shouldn't be looking for budget cuts, which would erase the stimulative effect.
More fiscal stimulus has been suggested before, including by economists Paul Krugman and Lawrence Summers. The Penn Wharton model helps that argument by illustrating three budgetary rules of thumb.
First, big tax cuts for companies and individuals will increase after-tax incomes and stimulate the economy, just as supply-siders predict, because people will work more hours knowing they can keep more of their income. Companies will have more cash to pay workers and invest in their operations.
This is the logic behind Trump's tax-cutting proposal, which would lower the top individual rate to 33 percent from 39.6 percent and increase standard deductions. He would also cut corporate taxes to 15 percent from 35 percent and allow immediate deductions, rather than gradual write-offs, for equipment purchases.
But as rule No. 2 dictates, tax cuts like Trump's are less effective when they disproportionately benefit the wealthy, whose minimal spending on day-to-day necessities doesn't lift demand much. Hefty, permanent tax cuts also can turn around and bite if they aren't paid for.
Trump so far promises vague spending cuts, but has yet to detail them except to say that the three biggest programs -- Social Security, Medicare and the military -- are untouchable. Because he would need to almost halve spending on the remaining federal programs to offset his tax cuts, heavy borrowing seems more likely. And because lots of borrowing raises interest rates and crowds out investment in the private sector, where jobs are created, the result in the long run will be slower growth.
The third budgetary rule is that tax increases are a drag on growth. They discourage work and investment. By raising taxes on high-income households and on investment returns, Clinton would mildly trim GDP in her first few years. But her tax increases would also constrain growth in the debt, reducing the crowding-out effect and producing slightly speedier growth over the long haul.
Why not go for the best of both worlds -- short-term stimulus a la Trump, combined with long-term fiscal probity, a la Clinton?
Clinton seemed to be on the verge of suggesting something like that when her campaign whispered over the summer that she would soon unveil a middle-class tax cut. It never appeared, possibly because she ran out of offsetting tax increases elsewhere.
Last week she proposed to double the child tax credit to $2,000 for each child up to the age of 4 and to direct the benefit toward low-income families. This is on top of other targeted tax cuts for health-care expenses, education and child care, yet they don't add up to broad-based middle-class tax relief.
An alternative stimulative policy would use borrowed money to sharply increase public investment in everything from energy to transportation and wastewater treatment, as Krugman has suggested. Kent Smetters, the Wharton professor of business economics who oversaw the model's creation, tells me an infrastructure-spending proposal financed by borrowing, but whose spigot turns off after about 10 years, probably would erase the short-term drag on growth in Clinton's plan without harming long-term growth.
Wouldn't more deficit spending lead to slower growth, not to mention burden future generations? Not if the borrowing is temporary and done at low interest rates. As Summers has argued, "future generations will be better off owing lots of money in long-term bonds at low rates in a currency they can print than they would be inheriting a vast deferred maintenance liability."
The U.S. is in the enviable position of being able to lock in ultra-low interest rates on its debt. The cost to borrow money for two years, for example, is a mere 0.8 percent. The benchmark 10-year Treasury bond was yielding 1.74 percent on Oct. 19, versus an average of 6.2 percent since 1980.
The U.S. Treasury recently announced that the budget deficit for the fiscal year that ended on Sept. 30 rose to $587 billion, from $438 billion. (The increase came largely because Congress extended business tax breaks without finding cuts elsewhere.)
That's a big number, to be sure, but the U.S. has a big economy, at $18 trillion in annual output. Spending more now to help everyone become more efficient -- better roads and airports, faster trains, smarter electric grids -- translates into a more robust economy in the future, one that will generate higher tax revenue to pay down debt. Hillary Clinton, if elected, can heed the numbers and go a little crazy.
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