Fiscal policy for the long run: Is Trump up to the challenge?

As the new Congress settles down to business, one item on the agenda will be the fiscal stimulus package promised during the recent presidential campaign. In the years since the financial crisis, it has become increasingly clear that monetary policy alone would not be enough to restore us to a truly robust economic environment.

Consensus on a coordinated fiscal policy has been elusive, and the Federal Reserve has largely borne the burden of maintaining economic stability alone. But if the incoming administration follows through on its campaign promises, we should see a fiscal stimulus proposal sometime early this year.

Typically, when a new administration comes in with a strong popular mandate for change, the economy is in terrible shape and the areas for policy action are obvious. But this administration will take over the reins of power during a period when the economy is relatively strong, unemployment is low, consumer spending is improving and the stock market is posting all-time highs.

Unfortunately, restored prosperity does not seem to be lifting all boats at once and there, at least in part, is the rub. From the point of view of major sections of the voting public, the economy is anything but healthy and urgent action is required. Many promises have been made, both to restore jobs in localities that have experienced losses and to cut taxes across the board.

However, the national debt currently stands at close to 110 percent of gross domestic product (GDP), so anything in the nature of an aggressive fiscal policy will be difficult at best and will certainly involve some contentious trade-offs.

Traditionally, stimulus packages have focused on tax cuts, infrastructure and job creation—not necessarily in that order. They include tax cuts because the economy is still primarily consumer driven, and the assumption is that extra money in the hands of consumers will not only find its way into increased consumer spending, but will also have a salutary political effect for the party in power.

The second two areas, infrastructure and job creation, have been seen—at least since the time of Franklin D. Roosevelt—as two sides of the same coin. Building highways, bridges and hydroelectric dams not only provided employment for a lot of people, but had stimulatory effects on sectors key to the growth of an industrial economy. More importantly, however, these were the right infrastructure improvements for the time.

Building a superior transportation and power infrastructure set the U.S. up for the decades of industrial prosperity that resulted in our current standard of living and lifestyle expectations. But the world also changed over those decades. If we are to maintain our privileged place in it, we must ask ourselves what strategic infrastructure investments would position a knowledge economy for long-run success in the same way that depression era infrastructure investments positioned us for industrial success.

{mosads}Although it is not difficult to come up with some possibilities—wholesale reform of the K-12 school system might be an obvious place to start—few of the items on the knowledge economy short list have the potential to employ large numbers of displaced industrial workers or to produce an immediate impact on consumer spending.

That is not to suggest that the traditional areas of infrastructure spending are no longer valid. We need to evolve the highway system to support the age of electric self-driving vehicles. The power grid needs to continue moving toward greener sources of energy.

Although such initiatives have a legitimate place in any fiscal policy proposal that emerges, transportation and energy will not provide us with the competitive edge that they did in decades past. For that, we have to look in new directions that do not align quite as well with populist sentiment.

We revere President Roosevelt as the leader who guided the country out of the depression and through a world war, but the challenge faced by the incoming administration is more politically complex because long-run investments that are really needed don’t connect as cleanly with the areas of felt need among the electorate.

So what path will the incoming administration take? Will the fiscal stimulus proposal that is ultimately put forward truly be a strategic move aimed at setting us up for long-term competitive advantage in the global economy, or will it be a simple doling out of cash aimed mainly at fueling job growth in key industries and ticking off campaign promises? Put another way, will it be economically strategic or politically strategic?

Realistically, it will need to be both. The blend and how it is presented will tell us a lot about Donald Trump’s vision and willingness to lead. Explaining to people why the long-run view should take precedence over short-run concerns is one of the key functions of leadership. How the incoming administration chooses to position its fiscal proposal will provide an important early indication of its likely long-run impact on the economic health of the nation.

David Louton, Ph.D., is a professor of finance at Bryant University.

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