We're here with Northern Trust Chief Economist Carl Tannenbaum. Carl, great to see you.
Good to be with you.
So as a new cast prepares to take over in Washington, the national budget is front and center. What is the current state of federal finances?
There's good news, and there's bad news. In recent years, we've done a very good job of bringing down the national budget deficit. We've been very contained on our spending. And we've had an economic expansion that not only has included a lot of corporate profits, but, also, many people have gotten back to work. So the revenue has been coming in.
The bad news though is, if you look over the horizon over the next few years, the increasing number of retired Americans is going to put strain on both Social Security and Medicare. And projections call for the deficit actually to start rising again in the next few years.
What changes in tax policy do you see coming from the new administration?
The incoming administration has proposed a couple of categories of tax changes, both of which are intended to boost economic growth. They've indicated that they'd like to reduce personal tax rates. One of the things that many don't realize is a lot of small businesses actually are taxed at the personal tax rate. So the idea would be that you would kindle more small business formation and improve their profitability.
On the corporate tax side, we've been at a disadvantage internationally. Our companies are moving their headquarters to other countries. And their profits are stranded overseas and unable to be used here for investment. So those are the two areas that are prime for modification.
What are the implications in terms of the federal budget deficit?
Well, that's going to be a very interesting balancing act. Economists will tell you that reducing income taxes should generate-- at least in the short term-- some additional economic growth. But most will also tell you that those tax cuts will not pay for themselves or be revenue neutral. So the cast in Washington is going to have to look for more economies in the federal budget in order to keep the deficit from getting too large because, if it does, then the pressure on interest rates might be very, very damaging.
Against a general trend of austerity, you've written recently that there might be an opportunity for more federal spending. Why?
I think we do have to be careful about what we spend at the federal level. But there is a category of spending that could be good for growth in both the short term and the long term. And that's infrastructure. The projects to improve roadways, the electric grid, the communications network, transportation-- anything that moves people, ideas, or products from place to place more efficiently would not only be creative because of the value of the projects in the short term, but they could make our economy more productive in the long term. And productivity is something that we really do need to reinforce in our society.
The key is doing that well, designing the projects well, and funding them efficiently. We'll see if the new cast can pull that off.
Carl, thanks for being here.