Is cutting taxes without cutting spending—as happened with the passage of the 2018 federal tax bill—a viable long-term economic strategy?

Owatonna, MN Correspondent-The feds passed another massive tax cut bill in 2018 that will push the annual deficits up toward the $1 trillion per year level yet again. We are the largest debtor nation in the history of the world and will probably never be challenged for that honor by any other country.

The puzzling question is that our deficit spending has managed to work for about 100 years. True, we’ve suffered a massive depression, multiple wars, a “Great Recession,” (code for “another depression”) and expanded the size and scope of all government to the point where it impacts virtually every aspect of our daily lives.

Sooner or later, all debt must be paid. Just as no citizen can make unlimited credit card purchases without the income to back it up, the government can’t borrow money and pay increasing amounts of interest forever. Yet if creditors are willing to lend money, borrowers like the US can keep on running deficits. Most nations have sizeable debt but keep it within in manageable limits. Countries that get out of whack because of overly generous domestic programs and weak economies—such as Greece in the last decade—end up defaulting and plunging into economic chaos.

Our largest foreign creditors—China and Japan—plus the largest domestic creditors—the Social Security Administration and the Federal Reserve—are more than willing to finance the deficits for two reasons. Foreign creditors prefer our currency to be stronger than theirs because a strong dollar gives them a trade advantage. Government creditors willingly hold our debt because the country would go default on the debt if they suddenly demanded repayment of trillions of dollars of principal. So, the merry-go-round keeps whirling.

As reluctant as I am to say it, deficit spending by our government is viable economic policy—as long as nothing changes. But as history teaches us—with events like the 9/11 terrorist attacks, Pearl Harbor, and the Great Depression—Black Swans (unforeseen, unanticipated events that shock the world) are always lurking in the shadows.

 

Gastonia, NC Correspondent-I understand the theory behind cutting taxes without cutting spending, but it makes me very nervous. The idea is that the economic growth caused by the tax cuts will lead to more taxes being collected, which will offset the tax cuts and end up in fact with a net benefit to the national coffers.

For this to work, business and industry have to play along. They have to turn their increased income around and reinvest it in the businesses via hiring and expansion. In the last few years, that hasn’t been the case, with corporations hoarding their cash reserves and paying fat dividends rather than trickling down some of their excess funding.  If that behavior continues, our economy will be thrown into a cocked hat as the deficit spirals past its already stratospheric levels.

We are also now highly vulnerable to another global recession. If something causes the world economy to tank, we’ll be left holding an ever-expanding bag of promissory notes without the wherewithal to pay them.  We could end up with a bond rating somewhere south of Venezuela’s.

That said, if this strategy DOES work, we’ll be in the catbird seat globally when it comes to trade, and our economy at home will be set for years to come. I’m in the “let’s give this a try” camp.

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