I wrote two days ago about how the White House is contemplating ideas to boost the economy.
This is somewhat worrisome since “stimulus” plans oftentimes are based on Keynesian economics, which has a terrible track record. But there are policies that could help growth and I comment on some of them in this interview.
The discussion jumped from one idea to the next, so let’s makes sense of the various proposals by ranking them from best to worst.
And I’m including a few ideas that are part of the discussion in Washington, but weren’t mentioned in the interview.
- Eliminate Trade Taxes – Trump’s various trade taxes have made America’s economy less efficient and less productive. And, as I explained in the interview, the president has unilateral power to undo his destructive protectionist policies.
- Index Capital Gains – The moral argument for using regulatory authority to index capital gains for inflation is just as strong as the economic argument, as far as I’m concerned. Potential legal challenges could create uncertainly and thus mute the beneficial impact.
- Lower Payroll Tax Rates – While it’s always a good idea to lower the marginal tax rate on work, politicians are only considering a temporary reduction, which would greatly reduceany potential benefits.
- Do Nothing – As of today, based on Trump’s statements, this may be the most likely option. And since “doing something” in Washington often means more power for government, there’s a strong argument for “doing nothing.”
- Infrastructure – This wasn’t mentioned in the interview, but I worry that Trump will join with Democrats (and some pork-oriented Republicans) to enact a boondoggle package of transportation spending.
- Easy Money from the Fed – Trump is browbeating the Federal Reserve in hopes that the central bank will use its powers to artificially reduce interest rates. The president apparently thinks Keynesian monetary policy will goose the economy. In reality, intervention by the Fed usually is the cause of economic instability.
In my ideal world, I would have included spending cuts. But I limited myself to ideas that with a greater-than-zero chance of getting implemented.
I’ll close with some observations on the state of the economy.
Economists have a terrible track record of predicting twists and turns in the economy. This is why I don’t make predictions and instead focus on analyzing how various policies will affect potential long-run growth.
That being said, it’s generally safe to assume that downturns are caused by bad economic policy, especially the Federal Reserve’s boom-bust monetary policy.
Ironically, some people then blame capitalism for the damage caused by government intervention (the Great Depression, the Financial Crisis, etc).
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Image credit: Michael Vadon | CC BY-SA 2.0.
