Should-Read: Paul Krugman: How Big a Bang for Trump’s Buck?

Should-Read: We are giving away a huge amount of fiscal space that we will in all likelihood very much want in the future, we are giving our income distribution another whack in a destructive direction, and we are getting very, very little in the way of effective economic stimulus for it. Neil Irwin of the Upshot may say that “this is the fiscal stimulus the left has been asking for”. That is false. He is totally wrong here: Paul Krugman: How Big a Bang for Trump’s Buck?: “I’m having a hard time figuring out exactly how big a stimulus we’re looking at…

…but it seems to be around 2 percent of GDP for fiscal 2019. With a multiplier of 0.5, that would add 1 percent to growth. That said, I’d suggest that this is a bit high. For one thing, it’s not clear how much impact corporate tax cuts, which are the biggest item, will really have on spending. Meanwhile, unemployment is only 4 percent; given Okun’s Law, the usual relationship between growth and changes in unemployment, an extra 1 percent growth would bring unemployment down to 3.5%, which is really low by historical standards, so that the Fed would probably lean especially hard against this stimulus. So we’re probably looking at adding less than 1 percent, maybe much less than 1 percent, to growth. This isn’t trivial, but it’s not that big a deal…

AUTHORS:

Brad DeLong
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