Could Donald Trump be the one to end secular stagnation?

It's an intriguing prospect to consider given the response of markets to Tuesday's election results. Attention is now focused on the potential of a large fiscal stimulus under Trump, who has proposed trillions in tax relief and major expenditures on infrastructure.

AD

It has been liberals, after all, who have argued that a big fiscal shot — which would invariably raise the deficit — is the best prescription for low growth.

AD

“We need larger deficits in the context of a weak economy,” said Dean Baker, an economist and a founder of the liberal Center for Economic and Policy Research. “I hate to say that Trump might be the guy that gets us there, but you know, that’s the world.”

“A smart infrastructure plan that invests in productive public goods that have been long ignored would be helpful in offsetting secular stagnation,” added Jared Bernstein, Vice President Biden's former chief economist. “It doesn’t matter which party signs the checks.”

AD

That said, there are many caveats. Bernstein and others are critical of the details of Trump's plans. His proposal for tax reform alone would increase the national debt by more than $7 trillion, and the majority of the relief would go to the richest 1 percent of taxpayers, according to an analysis by the nonpartisan Tax Policy Center. Many economists argue the rich would keep most of the additional money in the bank, rather than circulating it throughout the economy.

AD

Trump's plan for spending on public works is a complicated proposal that combines tax credits with tolls and other fees for users that would go to private companies. Bernstein says he would be “less confident” in the benefits of the plan if Trump “ends up bending to whichever lobbyists has his ear.”

And, over the medium and long term, massive federal borrowing to pay for this stimulus could lead to runaway inflation, a recession and fiscal instability.

AD

Adam Posen, the president of the Peterson Institute for International Economics, has argued that Trump's ambitious plans for the government would result in exorbitant borrowing, eventually forcing the Federal Reserve to increase interest rates sharply.

“Mr. Trump's plan is a huge budget blowout. I mean, there's just no other way to put it,” Posen said at a conference last month. “It’s potentially a very bad outcome.”