The Tax Bill and the New Fed Chairman

I realize that in this essay title I am mixing fiscal and monetary policy, which are two different policy areas, but should compliment each other, and often do not.  The real message that needs to be heard in both arenas is that we need a heightened focus on economic growth.

In fiscal policy, taxes and spending, we need a tax bill that emphasizes tax rate cuts, not managing incentives through deductions and credits, and we need to restore our confidence in the dynamics of supply-side fiscal policy that somehow we have allowed to be discredited, even though it has worked every time it has been properly applied, for Calvin Coolidge, John Kennedy, Ronald Reagan, and George W. Bush.  And we shouldn’t apologize for the fact that tax rate cuts at the margin are the necessary impetus for growth, beginning with the highest individual tax rate.  Nor should we buy into this notion of tax rate cuts that need to be “paid for” or that they should be “phased in”–the phasing has a tendency to be continually deferred.

Douglas Holtz-Eakin, former CBO head put it well several years ago: “High marginal tax rates have a damaging impact on investment, the competition for investment funds, saving, household portfolios, schooling decisions, the decision of one or both spouses to work, the hours of work, the intensity of work, that decision to pursue a promotion, and myriad other economic decisions.  In each case, progressively high tax rates have increasingly large damage”.  And our European competitors are ahead of the curve here, most of them having taken the lead on reductions in their top rates on both individuals and corporations.

Demand-side spending policy might be stimulating for a short spurt, but more often ends up with a lot of pork spread around to every congressional district and not very long-lived impetus to growth (remember the “shovel-ready” projects?).  So we shouldn’t buy into these infrastructure plans as growth and job engines, however much some of them might be overdue and in the country’s interest on their own merits.

As for monetary policy, President Trump’s appointee as the new Federal Reserve Chairman, Jay Powell, seems to be a safe choice, but he certainly needs a vigorous vetting and interview process.  Again, the name of the game is growth, and the Fed needs to understand that 2% as the new normal is not acceptable.  Powell has evidently disagreed with very little of Janet Yellen’s strategy, at least by his voting record on the Board.  I am particularly concerned about the size of the Federal Reserve Bank’s bloated balance sheet and the distortions in asset pricing that have been a result and hope that it can be reduced at an accelerated rate.  I am also interested, as the Senate should be, about his views on interest rate management versus money supply management and which one will take the lead in policy.  It does make a difference.

Again, fiscal and monetary policy must be complementary, but the organizing principles should be economic growth and the stability of the dollar.