Politics has become very binary (all 1s and 0s). A person is expected to be for something or against. A policy issue is expected to either help the country or cause harm. In reality, many issues are complex and the answer is somewhere in the middle. This is true with the President’s economic plans.
The discussion of tax cuts and other reforms has resulted in great optimism on Wall Street. But, not all facts are known yet. It isn’t the subject that is good or bad, it’s the extent something is implemented. Tax cuts matter most when the current rates are oppressive or are not competitive. Setting competitive rates can encourage more economic activity and even more tax collections. However, the exercise isn’t just about tax cuts, it’s about finding the right balance between taxing and spending, and being competitive. Some tax cuts will matter more than others. If done properly, we could see an improvement in the long term trend line for GDP and employment. If we push too far, we will simply be shifting future economic activity into the next couple of years at the expense of a more volatile business cycle and more debt for our kids to inherit.
The same issues arise related to regulatory reform. Government will sometimes push the edge of the envelope when it comes to babysitting the public and businesses. This results in weaker economic growth. The elimination of inefficient regulations will indeed result in higher rates of economic activity. But, removing reasonable regulations will result in temporary surges in business profits at the expense of other things that matter to the public and cause long term harm. These points hold true for banking and finance reform and national security issues. It also holds true for infrastructure investment. The investment is much needed, but we have to eventually pay for all this great stuff.
It seems easier to push things too far or not far enough compared to agreeing on a middle ground. The middle is very unpopular among policymakers despite it being the home to most of America. As you watch D.C. politics unfold over the next month, ask yourself if the economic reform of the day: 1) is intelligently designed and corrects an underlying problem, 2) is extreme and shifts economic activity from a couple years down the road to today, or 3) is not balanced and is just handing future tax bills to our kids. From what I have seen so far, there are components of all three. That is why I remain optimistic and irritated at the same time.
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