Could the tax package passed Friday by the House unexpectedly unleash the pent-up power of the U.S. economy?
It sounds unlikely. The $858 billion deal has been picked over pretty thoroughly by now, with proponents saying it will boost spending and add as much as a percentage point to U.S. growth next year. The deal also has been savaged over the past week and a half as a giveaway to the rich, a drain on the poor and an inefficient means of stimulating demand.
Perhaps most damningly, it has been taken as the latest example of policymakers kicking down the road a budget-management can they are going to have to actually heft one of these days.
Yet Andrew Goldberg and David Kelly, strategists for J.P. Morgan funds, say many analyses of the tax deal overlook what might well be its chief contribution: an improvement in investors’ outlook for both tax policy and the general drift of government.
It is this shift, rather than any improvement in the economic data, that will ultimately lift the United States economy out of its funk, they suggest.
Goldberg and Kelly say they expect interest rates and stock prices to continue to rise in coming months, as a gradual pickup in the economy lifts corporate profits and worries about trillion-dollar deficits weigh on bond prices.
But you won’t catch Goldberg and Kelly calling the tax deal a mistake, because they believe Washington must do whatever it can to get the economy rolling again. That is a lesson being learned the hard way now in places like Greece and Ireland, where austerity plans have been implemented to great applause but, months later, to no apparent avail.
And thus back to confidence. Admittedly, it’s a squishy concept and one that has been a bit discredited by having been one of Hank Paulson’s favorite watchwords during the early stages of the financial crisis in 2007-2008. Failing to grasp the scale of our losses, Paulson and others initially diagnosed an acute financial problem as a psychological one that could be cured, believe it or not, by talk of super-SIVs and bazookas and all the rest.
But the case for people being less overexended but still economically shell shocked is at least a little easier to carry off now, and so it’s worth considering whether a big shift in expectations could indeed contribute to a self-sustaining expansion. As Kelly told me last week, “The question is, to what extent do people finally throw off the gloom and start believing in themselves?”