The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the Economy.

With the recent tax cuts and the infrastructure initiative proposed by the Trump administration, many economists worry about the economic effects heading into the future. In the immediate short run, these initiatives are bound to increase economic activity and raise growth by an additional 0.7%. This comes at the cost of adding $500 billion dollars to the budget deficit bringing it from about $700 billion to $1.2 Trillion. As the article states somewhat facetiously, "it would be very hard for the government to pump an extra half-trillion dollars into the economy in a single year without getting some extra economic activity out of it." 

The questions come into the picture when trying to forecast into the future. In the short run, it is hard to estimate this impact because of the uncertainty of the current job market in the US. We still do not know what the impacts of the tax cuts will be. If the effect is that employers will begin to invest more heavily into their capital structures that will increase productivity per worker and draw some eligible workers back into the job market, these initiatives will have a substantial positive effect on the economy. However, if the fed increases interest rates more than it currently plans to the affect of the tax cuts will be short lived and the job market may stay at a relatively low level of unemployment as we have now. This would result not in economic growth but rather in a spike in inflation.

When investigating the long term impacts of these spending plans and tax cuts, the main issue for US taxpayers will be the astronomical debt-service cost the US government will have incurred. The CBO estimates that our proportion of debt to GDP will increase by 14% over the next ten years, leaving us with a ratio of 91% in 2027. Even before the tax cuts announced this year, US taxpayers are forecasted to pay roughly $800 Billion in debt service costs in 2027. With this increased need for debt by the US government, there will also be a crowding out of the private market for debt increasing the price of money for consumers in the economy. 

The picture is certainly hazy moving into the future. What do you think will happen?

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