12-23-2016, 12:17 PM
Wall Street has been rallying in anticipation of full-bore fiscal stimulus likely emanating form the in-coming Trump Administration. The stock market is banking on massive tax cuts, de-regulation, infrastructure building and increased defense spending, all of which could, or should, give a sharp boost to an already accelerating economy. That appears to be the message the market is sending as it jumps to record levels and as Dow 20,000 is fast becoming a reality.
Dow 20K - risks for bull market—commentary
However, as always the devil is in the details. And there are those, like Krugman, who argue policy might actually not be so expansionary after all, because of the distributional consequences (a shift in income from those who save little to those that save a lot):
But will this actually amount to fiscal stimulus? Right now it looks as if Republicans are going to ram through their whole agenda, including an end to Obamacare, privatizing Medicare and block-granting Medicaid, sharp cuts to food stamps, and so on. These are spending cuts, which will reduce the disposable income of lower- and middle-class Americans even as tax cuts raise the income of the wealthy. Given the sharp distributional changes, looking just at the budget deficit may be a poor guide to the macroeconomic impact. Given the extent to which things are in flux, I can’t put numbers on what’s likely to happen. But I was able to find matching analyses by the good folks at CBPP of tax and spending cuts in Paul Ryan’s 2014 budget, which may be a useful model of things to come. If you leave out the magic asterisks — closing of unspecified tax loopholes — that budget was a deficit-hiker: $5.7 trillion in tax cuts over 10 years, versus $5 trillion in spending cuts. The spending cuts involved cuts in discretionary spending plus huge cuts in programs that serve the poor and middle class; the tax cuts were, of course, very targeted on high incomes. The pluses and minuses here would have quite different effects on demand. Cutting taxes on high incomes probably has a low multiplier: the wealthy are unlikely to be cash-constrained, and will save a large part of their windfall. Cutting discretionary spending has a large multiplier, because it directly cuts government purchases of goods and services; cutting programs for the poor probably has a pretty high multiplier too, because it reduces the income of many people who are living more or less hand to mouth. Taking all this into account, that old Ryan plan would almost surely have been contractionary, not expansionary.
Will Fiscal Policy Really Be Expansionary by Paul Krugman The New York Times