Tuesday, August 20, 2019

Trump says White House looking at payroll tax cut — Brett Samuels

Another reversal of position, but this time definitive, coming from the Oval Office.

Unfortunately, the Democratic Establishment will probably paint this as 1) an attack on Social Security, which is "funded" by the payroll tax, and 2) a further "blowing out" of the deficit, both of which are nonsense in terms of MMT.

Actually, a payroll tax cut would be redistributive, which would bolster the president's support among the middle class, and it would increase the purchasing power of all working people that pay the tax, likely leading to consumer spending that would be stimulative. 

The later is the expectation of the Trump administration to ward off the onset of a recession that isn't coming anyway. Trump is correct in claiming that the media is wrong in predicting an immanent recession. Data do not support this, government spending liberally, increasing the deficit year over year, and bank credit increasing, also adding to purchasing power. Inflation remains low, and the labor bill is not increasing markedly.

The threat of recession for the US comes mostly from coupling to the global economy, which the president's own policies are affecting negatively, and there is evidence that the global economy is sluggish, as the Chinese economy consolidates and Chinese resource appetite reduces. However, there is enough uncertainty about the global economy, e.g., owing to exogenous shock (war) and the emerging challenge of climate change, that markets are skittish and the media is doing well selling fear.

The president is also encouraging the Fed to cut the interest rate by 100 bp and restart QE, which he believes would be stimulative, failing to grasp that cutting interest rates lowers government spending on interest payments. The reason he want a resumption of QE is to stimulate asset prices in the face of a stock market sell-off.

MMT economists have been recommending reduction or abolition of the payroll tax as a matter of principle, since it doesn't actually fund Social Security, only appearing that way for those who don't understand the actual operations and accounting. But the Trump administration is not proceeding on that basis.

The GOP has pretty consistently acted in terms of MMT principles when it suits their agenda, while espousing fiscal responsibility and discipline when it comes to funding social welfare.

The Hill
Trump says White House looking at payroll tax cut
Brett Samuels

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