April 2018

While monetary policy is controlled by central banks, fiscal policy is controlled by governments. Two fiscal policy methods to increase economic growth are lowering taxes and increasing spending. Recently passed federal legislation does both.

The record corporate tax cut, lowered US corporate tax rates from 35% to 21%, a 69-year low. Income taxes should be about $1,000 lower for the median family (with $59,000 of income). Neither corporations, nor households, are expected to sit on their savings.

Corporations are under increasing investor pressure to grow while the average household tends to immediately spend what it has. As such, most tax savings are expected to be used. Once used, the money goes into someone else’s hands who might then utilize it. The movement of these funds through the economy should increase the velocity of money and economic growth.

Similar trends can occur as the government spends more money. Just as with monetary policy, aggressive fiscal policy has the potential to create long-term problems, like higher inflation and increased debt burdens.

The Federal Register, where all US federal regulations must be published, had its largest one-year drop in number of pages. Regulation roll-backs might be nearing 1,000 per year. This should raise economic productivity as businesses reallocate time and money from compliance to core business activity. Less bank regulation could result in additional loan activity, further boosting the economy.

Efforts to reign in government spending were thwarted by this year’s omnibus spending act. While the President (with and without Congress) has ways to reduce the dollars spent, overall federal spending should rise. Through increased spending and tax cuts, the federal government is providing fiscal stimulus to an economy that already has accelerating growth.