The “boom” of 2018 tells us that fiscal stimulus works, but that the GOP has only used it when it helps their reelection, not when it helps typical families

The Commerce Department released data today on the growth in gross domestic product (GDP—the widest measure of economic activity) in the 3rd quarter of 2018. It showed growth at a 3.5 percent rate in this quarter, down slightly from 4.2 percent growth in the second quarter of 2018. For comparison, in the run-up to the 2016 presidential elections, economic growth had barely averaged 2 percent since recovery from the Great Recession began in mid-2009.

White House economic adviser Larry Kudlow refers to this recent pick-up in growth as the “boom” of 2018. While Kudlow is always hyperbolic and almost always wrong, especially about “booms” (he pronounced in December 2007—the last month before the Great Recession—that “there’s no recession coming. The pessimistas were wrong. It’s not going to happen…. The Bush boom is alive and well.”), it remains worth asking: what is the basis of the faster growth so far in in 2018?

The answer is simple: a pronounced swing from fiscal austerity to fiscal stimulus, enacted by a Republican Congress that decided to help, rather than hurt, the economic recovery once it was being helmed by a Republican president. Yes, that sounds like a harsh and partisan judgement, but it’s the only rational reading of recent years’ evidence.

In the run-up to the 2016 elections, we documented clearly that that recovery from the Great Recession had been intentionally throttled by a historically large dose of austerity; specifically, historically slow growth in public spending. The main actors in imposing that austerity were Republicans in Congress, with some assists from Republican governors and state legislatures (think Sam Brownback from Kansas and Scott Walker from Wisconsin). The quick federal pivot to stimulus once the White House changed hands in 2017 makes the political roots of all this pretty clear.

One aspect of the last year’s swing from austerity to stimulus is well-known: in late 2017 the Republican Congress passed a large tax cut and President Trump signed it into law. As far as economic stimulus goes, the tax cut was extraordinarily wasteful. If you want to boost the economy in the short-term by cutting taxes, you should make sure the benefits of these cuts go to low-and moderate- income households, whose spending is actually constrained by their take-home incomes, making them more likely to spend any extra money in their pockets. Instead, the 2017 law gave the lion’s share of benefits to already-rich households, whose spending is not constrained by their take-home income, and hence responds a lot less to tax cuts. If Congress had been interested in efficient stimulus, they could have given the economy the same boost with other measures that increased the deficit by about a fifth as much as the tax cuts did by either directing tax cuts towards low and middle-income households, or by increasing spending. But as inefficient as it was, the tax cut did throw money into an economy still starved of spending; even very leaky buckets can still carry some water.

A less well-known aspect of the swing from austerity to stimulus is the sharp, across-the-board increase in federal spending passed by Congress earlier this year, boosting spending by almost $300 billion over the next two years. This boost led to federal spending’s contribution to economic growth in the first three quarters of 2018 being larger than in any year since 2010—when spending from the original Recovery Act was still coming online. Given that spending provides far more effective a boost to economic growth than tax cuts aimed at rich households, this bit of the swing from austerity is probably more important for explaining the growth pick-up, even as it’s far less-recognized.

Some have decried the timing of this shift towards stimulus. With unemployment already low by the mid-2017 (after following the same downward trend inherited by the Trump administration at the beginning of that year), many argued that further stimulus, particularly when financed by deficits, would not boost the economy much in the short-run and would lead to large problems stemming from too-high federal debt. These worries are overblown.

Granted, the swing towards stimulus would have been far more welcome earlier in this business cycle. And a combination of tax increases on rich households (instead of cutting them) and larger spending boosts could have provided more stimulus while yet increasing deficits less. But even the extremely sub-optimal fiscal boost we’ve gotten has been useful to demonstrate that there was still room for unemployment to fall and growth to pick-up without setting off any rapid inflationary spiral.

So, if the actions of President Trump and Republicans in Congress—cutting taxes and boosting spending—helped boost growth in 2018, does this mean we need to give them credit as economic stewards?

No. Not. Even. A. Little. Bit.

Congressional Republicans spent a decade strangling economic recovery for political gain. Millions of American families suffered unnecessarily because of this. They don’t deserve credit for releasing the chokehold now that it’s politically expedient. And the tax cut they constructed with President Trump has been staggeringly titled towards the rich and as inefficient and wasteful as fiscal stimulus could possibly be.

No, what this past year’s growth acceleration has made clear is that Congress and the president really can use fiscal policy to provide a very quick and sharp boost to the economy—even when they’re being mostly incompetent about it. While it would have would have been nice to heed that lesson a lot earlier, we should still remember when the next downturn comes or when there are premature declarations that full employment has been reached. And we should insist in the future that this power be used when it’s good for typical families, not just when it’s useful for beating your political opponents.

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