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No doubt many of you read the above headline and immediately started to tweet that the GOP tax bill can't be the end of economic sanity in Washington because there never was any to begin with.
I have two responses.
First...please do tweet that, and link to this post when you do.
Second...you're wrong. If it's enacted, the GOP tax cut now working its way through Congress will be the start of a decades-long economic policy disaster unlike any other that has occurred in American history.
There's no economic justification whatsoever for a tax cut at this time. U.S. GDP is growing, unemployment is close to 4 percent (below what is commonly considered "full employment"), corporate profits are at record levels and stock markets are soaring. It makes no sense to add any federal government-induced stimulus to all this private sector-caused economic activity, let alone a tax cut as big as this one.
This is actually the ideal time for Washington to be doing the opposite. But by damning the economic torpedoes and moving full-speed ahead, House and Senate Republicans and the Trump White House are setting up the U.S. for the modern-day analog of the inflation-producing guns-and-butter economic policy of the Vietnam era. The GOP tax bill will increase the federal deficit by $2 trillion or more over the next decade (the official estimates of $1.5 trillion hide the real amount with a witches brew of gimmicks and outright lies) that, unless all the rules have changed, is virtually certain to result in inflation and much higher interest rates than would otherwise occur.
The GOP's insanity is compounded by its moving ahead without having any idea of what this policy will actually do to the economy. The debates in the Ways and Means and Senate Finance Committees and on the House floor all took place before the Congressional Budget Office's analysis and, if it really exists, the constantly-promised-but-never-seen report from the Treasury on the economics of this tax bill.
Meanwhile, Congress has ignored other estimates like this one from the University of Pennsylvania's Wharton School showing that the tax bill won't do what the GOP is promising.
In other words, the GOP tax bill may be enacted without anyone who votes for it having any understanding of the damage it could do to the economy. They have wishes, hopes and prayers but in reality nothing beyond the economic equivalent of pagan superstition.
On top of everything else, there is no reason to rush this debate as the GOP is doing. Given that it's not really needed, a bill that is enacted next January or February will make as much economic sense as one signed into law by the end of this December. The must-do-it-by-Christmas deadline Trump has imposed is completely artificial and nonsensical.
The real economic insanity of the GOP's tax bill will be felt in future years. Consider the following.
- The $1 trillion a year budget deficit will not be the result of cyclical changes that will be reversed when the economy improves. These will be permanent structural deficit increases.
- The tax hikes that will be needed to resolve the structural imbalance between federal spending and revenues will be impossible for political reasons.
- Whenever the U.S. economy grows more slowly than expected or there's a downturn, an annual deficit of $2 trillion could easily become the norm.
- The federal government will have far less ability to respond to economic downturns unless previously unimaginable and politically intolerable deficits, tax increases or spending cuts suddenly become acceptable.
- Reduce the national debt? As they say in New York, fuhgeddaboudit at least in the next decade.
- Much more national debt plus rising interest rates means interest on the national debt will be the fastest growing part of the federal budget.
- Without massive cuts in Social Security, Medicare and the Pentagon, it won't be possible to reduce federal spending enough to do more than tweak the deficit.
- Washington's ability to invest in anything new that will improve the economy (think infrastructure, education and medical research) will be far less given the already-high deficits.
- Even though the limits to monetary policy became obvious the past few years, the Federal Reserve will be the major economic policy maker in Washington over the next decade.
In other words, if the GOP tax bill is enacted, Congress and the president this year will give up almost all ability to deal with the U.S. economy for at least a decade even when, as almost certainly will happen, there's a downturn. No one else will be able to fulfill this role.
That's almost a textbook definition of economic insanity.
