On the heels of the release of the House GOP tax bill, the Labor Department announced Friday that the unemployment rate fell to a 17-year low of 4.1 percent in October. The solid jobs report underscores a question that some critics of the Republican tax proposal have been asking: Does the U.S. economy really need a big dose of fiscal stimulus right now?
Goldman Sachs CEO Lloyd Blankfein expressed his doubts in an interview with Bloomberg on Thursday. “I can’t say this is the moment where you want the most fiscal stimulus in the market, when we’re mostly at full employment, when GDP last registered at 3 percent. I don’t know that this is the moment that you provide the biggest stimulus.” Blankfein did agree that the economy could conceivably grow at a faster rate, but said this could be achieved best by boosting confidence through reduced regulations — a move the government can make “for free.”
Similarly, in his analysis of the bill Friday, William Gale of the Tax Policy Center wrote: “we do not need economic stimulus right now. We are near full employment, so there is little current capacity for higher-than-normal expansion. From a fiscal perspective, we should be running surpluses when the economy is strong. Instead, we are already running substantial deficits and the tax cuts would add significantly to fiscal shortfalls over the next decade.” And deficit hawks argue that adding $1.5 trillion to our national debt, as the GOP tax bill would do, will hurt the economy in the long run.
One concern for many economists and investors is the threat of inflation. Morgan Stanley analysts said earlier this week that a big tax cut risks overheating the economy, and that the stock market could “boom and bust” as result. Another worry is what will happen when the economy does eventually hit a rough patch, since adding fiscal stimulus now will leave lawmakers with fewer options to combat a downturn.
Still, the jobs report out Friday showed little sign of increased wage pressure, even as the unemployment rate continues to drop. Prudential Financial’s chief market strategist, Quincy Krosby, said Friday that the economy is close to a “Goldilocks” scenario, in which there is solid growth but little inflationary pressure.
What does this imply for a big tax cut? Republicans will no doubt continue to argue that the economy would benefit from a fiscal shot in the arm, and that a little overheating could boost wages. And just as certainly, their opponents will continue to say that, whatever the merits of tax reform, the U.S economy has no need for a tax cut right now.