JP Morgan’s Joseph Lupton forecasts that the US economy will expand by 1.25% over the next two years thanks to President Donald Trump’s company tax cut package, but that the tax cuts could potentially lead to 1970s-style stagflation, noting that fiscal conditions in the US at present are similar to those of the 1960s. From The Australian:
“We’ve never seen this type of stimulus so late in the economic cycle. With the unemployment rate very low there’s no reason this economy needs fiscal stimulus,” he said.
The US unemployment rate has fallen steadily to 4.1 per cent and the budget deficit is expected to rise to the equivalent of 5 per cent of GDP, double Australia’s, for instance.
Mr Lupton likened the current fiscal US conditions to the 1960s during the Vietnam War, when large budget deficits accompanied strong jobs growth.
“That was potentially setting the foundation for the stagflation of the 1970s, where you had rising wages, productivity growth slowing and price pressures were building,” he said.
“One of the disappointing features of the tax reform package was that it wasn’t reform, just a tax cut. Typically you want these to be revenue-neutral and bipartisan and this was neither of those.”
The stagflation of the 1970s was considered one of the darker periods of global macroeconomics, and involved a simultaneous lift in inflation, rising unemployment, and falling economic growth.
By lifting the US Budget deficit, the Trump Administration’s tax cuts will effectively trade some short-term growth stimulus for longer-term pain.
Moreover, most of the proceeds from the tax cuts have flowed to company owners via share buybacks and dividends, with little actually flowing to the real economy via increased investment or wages growth. This is great for asset markets and the wealthy, but not so good for America’s working and middle classes.
The above should serve as a stark warning to Australia’s senate, which is currently weighing up passing the Turnbull Government’s company tax cut package. Passing this package would similarly worsen Australia’s structural Budget deficit for little material economic gain.
