There are one of two scenarios that will play out if Trump’s tax cuts pass through Congress. Secretary of the Treasury Mnuchin and Trump economic advisor laid out an aggressive tax plan in a joint press conference last week at the White House. I covered the details of the tax plan in this article.
The substantial tax cuts that Mnuchin and Cohn laid out will lead to either drastic cuts in government spending as I covered in this article. This is commonly referred to as starve the beast.
Most conservatives would prefer the starve the beast theory I laid out in that previous article. Unfortunately, it is far more likely that the Federal Reserve will come to the “rescue” and institute Quantitative Easing four. Quantitative Easing is simply the introduction of new money into the money supply by the Federal Reserve, the most common way to get the money into the system is to purchase US Treasury bonds. They may also lower the interest rate that they have raised a meager amount over the course of the last year.
President Trump repeatedly stated during his campaign that he would likely replace Obama appointed Janet Yellen as the Chairwoman of the Federal Reserve. But since taking office he has changed his rhetoric regarding Yellen. He has only gone as far as stating in a recent interview that Yellen is not “toast.” This seems to be a thinly veiled threat that as long as Yellen plays ball with Trump she will maintain her leadership position at the Federal Reserve.
If she would introduce Quantitative Easing round 4 and cut interest rates it would potentially defeat Trump’s goal of forcing government spending. QE 4 and a return to 0% interest rates would finance the government programs that would otherwise collapse due to a decrease in tax revenue.
It is true that the tax plan as it is currently presented would spur economic growth. But the cuts are so aggressive that they would grow the yearly deficit without substantial cuts to Federal government spending.