At the Democratic convention we got some insights into the Clinton campaign’s line of attack on Donald Trump. While they rightfully intend to confront his racism, sexism and xenophobia, the Clinton campaign also seems prepared to attack Trump’s “budget-busting” tax cuts. This is an area where caution would be advised.
The basic story is that, in the usual Republican tradition, Trump wants to give huge tax cuts targeted primarily to the wealthy. According to calculations from the Tax Policy Center of the Urban Institute and the Brookings Institution, these tax cuts will cost $9.5 trillion in lost revenue over the next decade before accounting for interest.
Of course $9.5 trillion is a REALLY BIG NUMBER, and you can often scare people with really big numbers. But if we want to be serious about matters, we need to put this number in some context. The Congressional Budget Office projects that over the next decade, Gross Domestic Product (GDP) will be roughly $240 trillion. That means that the amount of revenue lost due to Donald Trump’s tax cuts plan will be just under 4 percent of GDP. Given that we now spend 3.5 percent of GDP on the military, this is real money.
But before we join the “budget-buster” chorus, it is worth remembering that the economy is suffering from a serious shortfall of demand. This is the concept of “secular stagnation” that is now being embraced by many of the world’s most prominent economists. Before the 2008 recession, most economists did not take seriously the idea that the economy could suffer from a sustained shortfall in demand.
But in the years since the downturn, economists such as Paul Krugman, Larry Summers and Olivier Blanchard, the former chief economist at the International Monetary Fund, have all raised concerns about secular stagnation. This means that they believe the economy needs additional spending in order to boost demand and employment and bring the economy’s level of output back towards its…