At the Upshot, Neil Irwin reports:
For years, many liberal economists have argued that a little more federal spending and a higher budget deficit would create a stronger economy.
Now, they’re getting their wish, or at least a fun-house mirror version of it. All it took was total Republican control of the government.
“It’s a very weird and conflicted feeling,” said Jared Bernstein of the Center on Budget and Policy Priorities, who worked in the Obama White House. “On some level I should be happy, and I am sort of happy right now, but with some nontrivial caveats.”
I am, as one might expect, more or less with Bernstein on this, and I am delighted that partisan fury has subsided to the point that even avowedly left-wing economists can appreciate what’s going on here. The economics are fairly straightforward, and were never really in question. Seeing through the fog of politics is more a matter of nerve than brilliance.
In that vein, it is important to reiterate what I see going forward. First, I expect interest rates to continue to rise. Any manner of crisis or even economic stumble could bring them down, but the baseline is for them to go up. This implies, second, that there will be some crowding out. That is, the stimulus will reduce some economic activity that would have otherwise occurred.
My baseline expectation is that this will largely be in single-family housing and that it’s not necessarily a bad thing. Housing shortages are an issue and we’ll have more to say about that as time goes on, but at this point in the expansion, I am more worried about an asset bubble in single-family housing than its undersupply.
Third, I expect significant tightness in the labor market. I expect job growth to slow and the business community to complain intensely about it. This is all according to plan. Indeed, it’s that very labor market pressure that I hope will both draw workers back into the labor and – and I am about to make news here – reverse the Republican party’s antipathy towards immigration.
If everything goes according to plan, the pressure will be so intense that business’s demands for more legal immigration will override all other policy concerns. Trump will then, if he hadn’t already, declare victory on illegal immigration. Conservative pundits will say something to the effect of “see, liberals just didn’t understand that we needed to stop illegal immigration before we could expand legal.” Say what they will, I get the policy I want and that is all that really matters.
There are fours, fives, and sixes, but those are topics for separate posts, so I’ll leave it here for now.