Call Trump's tax cut what it was: Keynesian

Call Trump's tax cut what it was: Keynesian
© Getty Images

That President TrumpDonald John TrumpDem senator says Zelensky was 'feeling the pressure' to probe Bidens 2020 Dems slam Trump decision on West Bank settlements Trump calls latest impeachment hearings 'a great day for Republicans' MORE’s economic policies are spurring economic growth would come as no surprise to any follower of the great economist John Maynard Keynes.

Keynes famously argued that governments could increase employment by simply burying money in old coal mines, covering the mines up with trash and then allowing people to bid for the right to dig for the money.

Keynes wrote that even burying money in the ground would grow the economy by, among other things, leading to the hiring of workers to dig for dollars, as well as increasing capital investment in such things as shovels and other tools necessary to look for the buried treasure.  

ADVERTISEMENT

Of course, Keynes recognized that there were many more productive ways to grow the economy, but any government spending that puts money into the economy will result in economic growth. 

Trump’s tax cut was the modern day equivalent of Keynes’ buried treasure plan. The tax cut added money into the economy, and some of this money has been put to productive use (for example, the hiring of people) and some of it has been spent less productively (certain stock buybacks, additional savings for those already among the wealthiest in our society). 

However, whether one agrees or disagrees with the tax cut, no one should be surprised that additional fiscal stimulus helps grow the economy; this concept remains a central concept of Keynesian economic policy to this day. 

There are at least two reasons why Republicans can't admit that Keynesian economic policy works, and in particular any fiscal stimulus will grow the economy. 

First, Republicans are ideologically opposed to Keynesian economics and have been for decades. Indeed, Republicans repeatedly attacked President Obama’s use of fiscal stimulus, even during the recession. 

For example, Trump’s current secretary of Energy, Rick PerryRick PerryOvernight Energy: Mark Ruffalo pushes Congress on 'forever chemicals' | Lawmakers spar over actor's testimony | House Dems unveil renewable energy tax plan | Funding for conservation program passes Senate hurdle Volker: I 'cringe' when I hear 'three amigos' Live coverage: House holds third day of public impeachment hearings MORE, said that the U.S. had repeatedly tried Keynesian economic policy, and it always failed.

Similarly, Sen. Richard BurrRichard Mauze BurrMcConnell hopes Senate impeachment trial 'not too lengthy a process' Bipartisan senators urge national security adviser to appoint 5G coordinator GOP divided over impeachment trial strategy MORE (R-N.C.), like many Republicans at the time, argued that government spending under Obama was just a “waste of money” that would not grow the economy.

Yet, as Trump’s tax cut shows, government spending leads to economic growth. This holds true whether that spending occurs directly, through additional spending, or “indirectly” by using deficit spending to fund tax cuts.

The second reason why Republicans won't admit that Trump’s economic policies are a Keynesian stimulus package is because they would have to recognize that spending by the federal government can increase growth, even when that spending increases the federal debt. 

Simply put, the federal deficit can grow by increased spending or decreased revenues (or both). Trump’s policies have included both, with the result that the government is expected to run enormous deficits for years to come (no one seriously expects the tax cuts to pay for themselves, despite what Trump promised).

What is lost as a result of Trump’s Keynesian fiscal stimulus through tax cuts is the opportunity to spend the same money in a more positive manner. For example, instead of spending $1.5 trillion on tax cuts that largely went to the wealthy, Trump could have used this same $1.5 trillion to fund the infrastructure project that he is now discussing with House Speaker Nancy PelosiNancy PelosiOvernight Health Care: GOP senator says drug price action unlikely this year | House panel weighs ban on flavored e-cigs | New York sues Juul Five things to know about Tuesday's impeachment hearings McConnell hopes Senate impeachment trial 'not too lengthy a process' MORE (D-Calif.) and Senate Minority Leader Chuck SchumerCharles (Chuck) Ellis Schumer2020 Republicans accuse Schumer of snubbing legislation Schumer: Leadership trying to work out competing surprise medical bill measures Top GOP senator: Drug pricing action unlikely before end of year MORE (D-N.Y.).

Of course, nothing prevents Trump from doing both projects. While the federal deficit will continue to grow, this is not necessarily a bad thing so long as the deficit leads to economic growth, including additional hiring.  

However, we should recognize Trump’s economic policy for what it is: a classic use of Keynesian economics to stimulate economic growth. 

Of course, Trump and the Republicans should have no problem coming to terms with their prior rejection of Keynesian theory. As Keynes himself said, “There is no harm in sometimes being wrong — especially if one is promptly found out.”

David Berger is a litigation partner at Wilson Sonsini Goodrich & Rosati and a leader in the firm's corporate governance and shareholder activism practices. He represents directors, enterprises and stockholders on fiduciary duty and corporate control issues.