Washington Insider: New Economic Realities

Well, it was sure to happen. One of the most often repeated campaign promises was to create some new economic programs, including a substantial one to invest in infrastructure. However, The Hill is questioning now whether last month's strong U.S. job numbers raise serious questions about proposed economic strategies.Specifically, The Hill asks, does the economy really need a stimulus now at a time that it is at or very close to full employment? The group points out that with U.S. unemployment down as low as 4.6%, such a stimulus “has to raise real concerns about inflation, particularly at a time when wage increases are gaining pace and international oil prices are being boosted by OPEC's decision to cut production.”In these circumstances, “one would think that the last thing needed is a monetary or fiscal policy boost that could fuel inflationary pressures,” The Hill says.Not only do the plans being discussed by the incoming administration include a Reagan-style tax reduction that would more than halve the corporate tax rate to 15% and cut household income tax rates as well—at the same time implementing both the ambitious infrastructure program and a large increase in defense spending.In total, The Hill thinks this could provide the U.S. economy with “a fiscal boost of as much as 0.8 percent of GDP next year and an even greater boost in later years.”The Hill argues that such a policy mix could threaten an unwelcome return of inflation along with negative implications for interest rates and for the dollar. It also could leave the Federal Reserve “little choice but to raise interest rates at a significantly faster pace than previously planned in order to curb inflation.” This would widen the gulf between U.S. monetary policy and that of the rest of the world, which would all too likely keep the recent dollar rally going and keep long-term interest rates rising, The Hill says.It also argues that any “further strengthening of the dollar” is the last thing that the incoming administration should want as it works to restore the country's international competitive positon and reduce its trade deficit.The Hill also asserts that “if anything were designed to undermine the country's competitive position across the board, it would be a strong dollar that would make U.S. exports more expensive abroad and that would make U.S. imports cheaper.”The group also thinks that such a strong dollar might lead the incoming administration to raise import tariffs on countries like China and Mexico and provide additional incentives to tear up trade agreements like NAFTA. This, in turn, could raise the specter of bitter trade fights and “a generalized return to beggar-my-neighbor policies that have in the past proved to be so destructive to US and international economic prosperity.”Well, nobody ever thought that macroeconomic and trade policy was simple, and there may have been already been only tepid support for the massive infrastructure spending in the Congress—although, there is a vast need. Still, the stronger-than-expected economy may well be causing some second or third thoughts about campaign promises. But, trade is especially important for agriculture at a time when surpluses are large, and, in some cases, building so policies that affect global competitiveness are enormously important. Thus, the coming debate about the economy should be watched closely as it develops, Washington Insider believes.