Category: Ch26: Fiscal Policy

Glenn Signs Letter to Congress Backing Legislation on Permitting Reform

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As we discuss, in Macroeconomics, Chapter 16 (Economics, Chapter 26), fiscal policy actions that increase aggregate supply will both expand output and reduce upward pressure on the price level. A key problem that faces attempts to expand infrastructure, particularly by increasing energy production and transmission, is the difficulty of obtaining government permits and meeting government regulations. These regulatory hurdles can delay projects for years, greatly raising the cost of constructing them.

Glenn joined officials from both Democratic and Republican administrations to urge Congress to pass the Bipartisan American Affordability and Jobs Act, which is intended to lower the regulatory barriers to constructing new energy infrastructure projects.

Below are some extracts from the letter. The full text of the letter can be found here. An article in the Wall Street Journal discusses the letter and the issues involved in permitting reform.

“Critical industries across our economy—from semiconductors to critical minerals to artificial intelligence—are built in the physical world and powered by energy infrastructure that must be built as well. Unfortunately, we are not building this infrastructure fast enough to remain globally competitive.”

“While American infrastructure development—and the economic growth it enables—flounders, our competitors invest and build. China, our principal strategic competitor, has made energy infrastructure central to its industrial strategy. China has built more high-voltage transmission in the last fifteen years than the U.S. has built in all of its history. China’s abundant, affordable energy has enabled its strategic industries from critical minerals processing to automobile manufacturing.”

“Consider the Cardinal-Hickory Creek transmission line: the 102-mile project was approved by the regional grid operator as part of a larger transmission buildout in 2011 but did not become fully operational until September 2024.
Along the way, it faced years of federal review and litigation, including two federal court injunctions, even as 160 generation projects representing over 24 gigawatts were waiting for its completion.”

“These delays are especially concerning given the growth of artificial intelligence. Artificial intelligence is a transformational technology, but it must be developed in a manner beneficial for all Americans. Our current permitting structure makes that impossible. To avoid long lead times in connecting to the grid, U.S. hyperscalers [firms such as Amazon, Google, and Microsoft that are building large data centers and related infrastructure] have turned to on-site power generation solutions. By generating power ‘behind the meter,’ they can bypass strained grid infrastructure and the years-long interconnection queue.”

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“With a more rational permitting process, hyperscalers would invest in new energy infrastructure that could connect speedily to the grid, which, together with sound regulatory policies, would increase electricity supply for all
consumers and ultimately reduce residential bills. Alleviating our permitting
bottlenecks can help ensure that America retains its competitive edge in a critical technology while delivering benefits to the American people.”

“The Bipartisan American Affordability and Jobs Act is the most significant
bipartisan legislative effort that Congress has undertaken in decades to tackle
these challenges. It addresses key constraints stifling American industry by
requiring interregional transmission planning, strengthening the federal backstop for nationally significant transmission lines, and creating a faster, more predictable process for connecting new generation to the grid. It also makes permits more durable by imposing tighter timelines for litigation and limiting frivolous lawsuits that can halt projects indefinitely, while preserving community input and judicial review of substantive agency decisions. Among many other important reforms, the Act also requires data centers to pay for the new transmission built to serve them, as well as their fair share of existing system costs, which would reduce costs for other customers.”

The Federal Government Runs Another Large Budget Deficit in Fiscal Year 2026

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The federal government’s fiscal year runs from October 1 to September 30. The Congressional Budget Office (CBO) has released its estimate of the deficit for the 2026 fiscal year, which ended September 30, 2026. The deficit increased to $1,993 billion in 2026 from $1,775 billion in 2025. As the following figure shows, in the context of the period since 1960, the budget deficit in 2026 remains very large, particularly at a time when the U.S. economy is at or very close to full employment. The budget deficit in 2026 is well below the record deficit of $3,096 billion in 2020.

Economists typically focus more on the size of the budget deficit relative to the size of the economy, as measured by GDP. The following figure shows the federal budget deficit as a percentage of GDP was largest during and after the Great Recession of 2007–2009, and in 2020–2021, during and immediately after the Covid recession. In both those periods, federal tax revenues declined as production and employment fell. In addition, Congress passed legislation increasing government purchases and transfer payments. Although during the past few years the budget deficit as a percentage of GDP has declined from a high of 14.5 percent in 2020 (which was the largest deficit since World War II ended in 1945), it still remains very high for a period of close to full employment.

The following table from the CBO report shows that in 2026 federal receipts increased less than federal outlays, leading to a larger budget deficit.

The next table shows the changes in the major categories of federal receipts. Individual income and payroll taxes—which fund the Social Security and Medicare programs, as well as the federal government’s contributions to state unemployment insurance plans—both increased, while corporate income tax receipts fell. Customs duties declined as the federal government refunded tariffs collected under higher tariff rates imposed by the Trump administration beginning in April 2025. The Supreme Court ruled in February 2026 that some of the tariff increases were not authorized by federal law.

The next table shows the changes in the major categories of federal outlays. Spending on the Social Security, Medicare (health insurance for older people), and Medicaid (health insurance for lower-income people) programs continue to steadily increase. Spending on Medicare is now more than $150 billion greater than spending on defense. Interest on the public debt continues to increase as the debt grows and interest rates remain well above their pre-2021 levels.

Hall and Woodford Win 2026 Nobel Prize in Economics

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Photo of Michael Woodford from politicaleconomy.columbia.edu

Robert Hall of Stanford and Michael Woodford of Columbia have been awarded the 2026 Nobel Prize in Economics. Their careers have helped define the evolution of macroeconomics during the past 50 years.

Principles of economics is often taught as one semester of microeconomics and one semester of macroeconomics. In microeconomics we focus on analyzing the households’ decisions about which products to buy and on firms’ decisions about which products to sell and what prices to charge. In macroeconomics we switch the focus to the economy as a whole, analyzing what determines total production in the economy, as measured by GDP, and what determines the price level, as measured by the consumer price index (CPI) or the personal consumption expenditures (PCE) price index. An important part of macroeconomics is analyzing the effects of the federal government’s monetary and fiscal policies on production, employment, and prices.

Microeconomics and macroeconomics are connected because macroeconomic aggregates (like GDP, the unemployment rate, and the price level) ultimately depend on the decisions of households and firms. Similarly, the effects of fiscal and monetary policies on the economy depend on how households and firms react to the policies.

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The focus on economic aggregates in macroeconomics dates back to the publication of John Maynard Keynes’s General Theory of Employment, Interest, and Money in 1936. Keynes’s book was long and complicated, which led shorter, more straightforward, interpretations of his ideas by Nobel laureate John Hicks of Oxford and Alvin Hansen of Harvard to become widely accepted. The Hicks-Hansen interpretation was embodied in the IS-LM model, which focused on the relationships among a few macroeconomic variables. (We discuss the IS-LM model in the appendix to Chapter 18 of Money, Banking, and the Financial System.)

During the Great Inflation of the 1970s of the 1970s and early 1980s, many economists concluded that the basic IS-LM model was no longer a good guide to understanding events in the U.S. economy. That conclusion increased the interest in grounding macroeconomics in the basic decision making of households and firms. This approach became known as the microfoundations of macroeconomics.

This new focus on microeconomics led some economists to reject the idea that discretionary monetary and fiscal policy was able to stabilize the economy by reducing fluctuations in aggregate output and employment. This approach is called the New Classical Macroeconomics. (We discuss the New Classical Macroeconomics in the appendix to Macroeconomics, Chapter 13.) Other economists argue that discretionary policy can play a role in stabilizing the economy, which is a key argument advanced by Keynesians since the 1930s, but believe that policymakers need to take into account how households and firms react to policy. This approach is called the New Keynesian economics. The work of Hall and Woodford contributed to the development of New Keynesian economics.

Early in his career, Hall published an academic article making a major contribution to understanding the microfoundations of consumption spending. Hall’s work elaborated Milton Friedman’s permanent income hypothesis. As we discuss in Macroeconomics, Chapter 12, Section 12.2 and Chapter 16, Section 16.5, consumers are forward looking, which means their consumption decisions take into account not just their current income but also their expected future income—which Friedman called permanent income. For example, a real estate agent might have a high income in a year when she earns a commission on the sale of 15 houses and a much lower income in a year when the local housing market is weak and she earns a commission on only 2 houses. Most people like to smooth out their consumption over time, so the agent is likely to spend less of her current income in good sales years and more of her current income in the bad sales years.

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Hall formalized Friedman’s insight using the tools of dynamic optimization and also showed that the model fit the macroeconomic data well. One important implication of Hall’s work is that households are unlikely to significantly adjust their spending in response to temporary policy changes, such as a temporary cut in personal income taxes. Hall made a number of additional contributions to macroeconomics, including by analyzing why prices and wages don’t always respond quickly to changes in total spending. As we discuss in Macroeconomics, Chapter 10, Section 10.3, the federal government produces many statistics that make it possible to monitor the state of the economy, but the federal government does not officially decide when a recession begins or when it ends. Instead, most economists and policymakers accept the decisions of the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a private research group located in Cambridge, Massachusetts. Hall served as chair of the committee for 46 years, from 1978 to 2024.

Image of the NBER building from the Wikipedia Commons

Woodford has made wide-ranging contributions to the development of New Keynesian economics. In particular, he developed a model that synthesized the contributions of a number of other economists to provide a general framework for understanding macroeconomics and for evaluating the effects of monetary policy. His 2003 book, Interest and Prices: Foundations of a Theory of Monetary Policy, has been particularly influential.

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The Nobel Committee’s announcement of the prize can be found here. A longer discussion of the Hall and Woodford’s work can be found here. The scope of their research can be seen by reviewing their curricula vitae, which can be found here and here. The amount of the prize this year is 12 million Swedish kronor (about $1.2 million).

Glenn on a Novel Approach to Reforming Social Security

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In Macroeconomics, Chapter 16 (Economics, Chapter 26), we discuss the problems facing the Social Security system. In this opinion column, which first appeared on the website of the Economist, Glenn discusses a new approach to discovering the views of the public on possible reforms to the system.

America Needs a Citizens’ Assembly to Reform Social Security

Of the various fiscal challenges faced by America, the one the public feels most keenly is the looming crisis in Social Security. It also presents an opportunity for a bold reform process outside the polarised and dysfunctional electoral process, built around consulting a sample of voters directly in a citizens’ assembly. This would have the twin benefits of bypassing both voters’ mistrust of politicians and politicians’ incomplete understanding of voters’ attitudes towards reform.

Voters are clearly ready for reform. Recent polling of swing-state voters by the Peterson Foundation, an organisation launched to promote fiscal responsibility, revealed broad opposition to inaction and support for reforms including raising the earnings cap subject to the payroll tax and capping Social Security benefits for better-off households. Only 17% of voters said they were likely to support a candidate in the upcoming midterms who promised not to touch the current system.

Social Security pays retirement benefits to 62m Americans and disability benefits to another 8m. But the 2026 Social Security Trustees Report (sstr) predicts that the system’s trust funds will be exhausted in 2032, and if no action is taken by Congress, benefits will need to be cut across the board by 22% at that time.

Elected officials have responded in a now-familiar way, with a proposal for a 13-member commission of members of Congress and experts. Historically, a commission held promise: one assembled in 1981 and commonly known as the Greenspan Commission after its chairman, Alan Greenspan, offered a sensible roadmap for gradual reforms in 1983. Today, such an approach, however well intentioned, is likely to fail, given how out-of-balance the system is. According to the sstr, it faces an actuarial deficit of 4.4% of payroll annually for the next 75 years. Tackling that via a commission would have been extremely difficult in the 1980s. Doing so today, with public trust in government and experts a lot lower, looks impossible. According to the Pew Research Centre, just 17% of Americans trust the federal government to do “what is right” always or most of the time, down from around 40% in the early 1980s.

America needs to experiment more boldly this time by entrusting the big decisions to voters, via a citizens’ assembly tasked with presenting clear options to elected officials. Social Security reform offers a logical use case for such an approach because the areas where change is needed are clearly delineated: retirement age, benefit formulas and the level and structure of taxation. And it can give insight to politicians about voters’ real views about the thorny economic and political trade-offs that will need to be made.

Citizens’ assemblies date back to ancient Athens as a way to inform democracy. In the modern era they have been used in several countries, including Belgium, France and Ireland, to develop policy. In Ireland, for example, recent citizens’ assemblies illustrated to politicians that attitudes towards abortion and same-sex marriage had changed more than legislators had realised.

A citizens’ assembly can help to break through policy gridlock by allowing ideas to be developed and debated in a higher-trust environment than a commission drawn from politicians and experts in whom the public has declining faith. Moreover, the ideas emerging from an assembly can sometimes reveal the “Overton window”—the range of reforms that the public can live with at that particular time—better than elected leaders can alone, as seen in the Irish case.

Three steps are critical to the success of any citizens’ assembly. The first concerns its composition. Its members, typically 50-100, should be chosen by lot, as with candidates for a jury. It should be an electorate in miniature, representative of the nation’s social strata and demography. Towards this end, sampling should be random to avoid simply selecting volunteers with particular upfront points of view. Those selected should be compensated for their time and expenses. Structured in this way, the citizens’ assembly can channel mistrust of politicians towards a reclaimed populism of actual voters’ input, not slogans.

Second, per the advice of William McChesney Martin, a former chair of the Federal Reserve, experts should be on tap, not on top. In contrast to the typical commission, experts’ role would be to provide information, not to suggest prescriptions. That would allow an assembly to develop reform options that reveal genuine voter sentiment, while neutralising populist mistrust of experts.

Third, politicians and their existing institutions need to support the work of the assembly. Congress should signal strongly that it will give serious consideration to proposals coming out of an assembly—and commit to an up-or-down vote on them, as with the process for military-base closures in 1988. Elected officials should not need reminding about the large benefit reductions that will kick in as a result of a failure to act by 2032.

Selection, expert input and politicians’ commitment map well into Social Security reform. Over multiple sessions (the Irish deliberation on abortion unfolded over several weekends in a six-month period) the assembly would agree upon objectives and principles, a menu of reform options and a recommendation for formal consideration by Congress. Outside experts would provide background information on design choices (say, refining the current system or moving, for example, to a system with a flat benefit for all) and the budget and individual tax-and-benefit consequences of options (say, changes in the retirement age, payroll tax, and benefit level and structure). With this input, the assembly would evaluate options with both principles and political feasibility in mind.

Such an assembly offers an opportunity for meaningful action before the 2032 deadline. Were it successful, that would also provide momentum in related areas, such as the need for budget consolidation and policies towards artificial intelligence.

Social Security reform is stuck in deep political mud. A citizens’ assembly might just be the way to free it. It’s surely worth a tr

The Federal Government Runs Another Large Budget Deficit in Fiscal Year 2025

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The federal government’s fiscal year runs from October 1 to September 30. Today (October 8), the Congressional Budget Office (CBO) released its estimate of the deficit for the fiscal year ending September 30, 2025. The deficit fell slightly from $1,817 billion in 2024 to $1,809 in 2025. As the following figure shows, the budget deficit in 2025 remains very large, particularly at a time when the U.S. economy is at or very close to full employment, although well below the record deficit of $3,133 billion in 2020.

The following table from the CBO report shows that in 2025 federal receipts increased slightly more than federal outlays, leading to a slightly smaller deficit.

The next table shows the changes in the major categories of federal receipts. Individual income and payroll taxes—which fund the Social Security and Medicare programs, as well as the federal government’s contributions to state unemployment insurance plans—both increased, while corporate income tax receipts fell. The biggest change was in custom duties, which more than doubled following the Trump administration’s sharp increase in tariff rates beginning on April 2.

The next table shows the changes in the major categories of federal outlays. Spending on the Social Security, Medicare (health insurance for older people), and Medicaid (health insurance for lower-income people) programs continue to rapidly increase. Spending on Medicare is now more than $100 billion greater than spending on defense. Interest on the public debt continues to increase as the debt increases and interest rates remain well above their pre-2021 levels.

The Macroeconomic Effects of a Federal Government Shutdown

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This morning (September 30), the federal government appears headed for a shutdown at midnight. As this handy explainer by David Wessel on the Brookings Institution website notes:

“… federal agencies cannot spend or obligate any money without an appropriation (or other approval) from Congress. When Congress fails to enact the 12 annual appropriation bills, federal agencies must cease all non-essential functions until Congress acts.

Government employees who provide what are deemed essential services, such as air traffic control and law enforcement, continue to work, but don’t get paid until Congress takes action to end the shutdown. All this applies only to the roughly 25% of federal spending subject to annual appropriation by Congress.”

A federal government shutdown can cause significant inconvenience to people who rely on nonessential government services. Federal government employees won’t receive paychecks nor will contractors supplying nonessential services, such as cleaning federal office buildings. Many federal government facilities, such as museums and national parks will be closed or will operate on reduced hours. It seems likely that the Bureau of Labor Statistics will not release on time its “Employment Situation Report” for September, which was due on Friday.

Apart from the effects just listed, how might a shutdown affect the broader economy? The most recent federal government shutdown occurred during the first Trump administration and lasted from December 22, 2018 to January 25, 2019. At the end of that shutdown, the Congressional Budget Office (CBO) prepared a report on its economic effects. The main conclusion of the report was that:

“In CBO’s estimation, the shutdown dampened economic activity mainly because of the loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which thereby dampened private-sector activity).”

Table 1 from the CBO report shows the effect of the shutdown on federal government expenditures. (Note that the CBO refers to the shutdown as being “partial” because, as in all federal government shutdowns, essential government services continued to be provided.)

Table 2 from the report shows the effects of the shutdown on real GDP.

Most of the macroeconomic effects of a government shutdown aren’t long lasting because most federal government spending that doesn’t occur during the shutdown is postponed rather than eliminated. When federal government employees return to work after the shutdown, they typically receive backpay for the time they were furloughed. The CBO estimates that the lasting effect of the shutdown on GDP was small “about $3 billion in forgone economic activity will not be recovered. That amount equals 0.02 percent of projected annual GDP in 2019.”

Will a federal government shutdown that begins at midnight tonight and lasts for a few weeks also have only a short-lived effect on the economy? That seems likely, although the Trump administration has indicated that if a shutdown occurs, some federal government employees will be fired rather than just furloughed. A significant reduction in federal employment could lead to a larger decrease in GDP that might persist for longer. The effect on the areas of Virginia and Maryland where most federal government workers live could be significant in the short run.

New Census Data Highlights the Aging of the U.S. Population

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In June, the U.S. Census Bureau released its population estimates for 2024. Included was the following graphic showing the change in the U.S. population pyramid from 2004 to 2024. As the graphic shows, people 65 years and older have increased as a fraction of the total population, while children have decreased as a fraction of the total population. (The Census considers everyone 17 and younger to be a child.) Between 2004 and 2024, people 65 and older increased from 12.4 percent of the population to 18.0 percent. People younger than 18 fell from 25.0 percent of the population in 2004 to 21.5 percent in 2024.

The aging of the U.S. population reflects falling birth rates. Demographers and economists typically measure birth rates as the total fertility rate (TFR), which is defined by the World Bank as: “The number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with age-specific fertility rates currently observed.” The TFR has the advantage over the simple birth rate—which is the number of live births per thousand people—because the TFR corrects for the age structure of a country’s female population. Leaving aside the effects of immigration and emigration, a TFR of 2.1 is necessary to keep a country’s population stable. Stated another way, a country needs a TFR of 2.1 to achieve replacement level fertility. A country with a TFR above 2.1 experiences long-run population growth, while a country with a TFR of less than 2.1 experiences long-run population decline.

The following figure shows the TFR for the United States for each year between 1960 and 2023. Since 1971, the TFR has been below 2.1 in every year except for 2006 and 2007. Immigration has helped to offset the effects on population growth of a TFR below 2.1.

The United States is not alone in experiencing a sharp decline in its TFR since the 1960s. The following figure shows some other countries that currently have below replacement level fertility, including some countries—such as China, Japan, Korea, and Mexico—in  which TFRs were well above 5 in the 1960s. In fact, only a relatively few countries, such as Israel and some countries in sub-Saharan Africa are still experiencing above replacement level fertility.

An aging population raises the number of retired people relative to the number of workers, making it difficult for governments to finance pensions and health care for older people. We discuss this problem with respect to the U.S. Social Security and Medicare programs in an Apply the Concept in Macroeconomics, Chapter 16 (Economics, Chapter 26 and Essentials of Economics, Chapter 18). Countries experiencing a declining population typically also experience lower rates of economic growth than do countries with growing populations. Finally, as we discuss in an Apply the Concept in Microeconomics, Chapter 3, different generations often differ in the mix of products they buy. For instance, a declining number of children results in declining demand for diapers, strollers, and toys.

Glenn on Policies to Increase Economic Growth and Reduce the Federal Budget Deficit

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Glenn, along with co-authors Douglas Elmendorf of Harvard’s Kennedy School and Zachary Liscow of the Yale Law School, has written a new National Bureau of Economic Research working paper: “Policies to Reduce Federal Budget Deficits by Increasing Economic Growth”

Here’s the abstract:

Could policy changes boost economic growth enough and at a low enough cost to meaningfully reduce federal budget deficits? We assess seven areas of economic policy: immigration of high-skilled workers, housing regulation, safety net programs, regulation of electricity transmission, government support for research and development, tax policy related to business investment, and permitting of infrastructure construction. We find that growth-enhancing policies almost certainly cannot stabilize federal debt on their own, but that such policies can reduce the explicit tax hikes, spending cuts, or both that are needed to stabilize debt. We also find a dearth of research on the likely impacts of potential growth-enhancing policies and on ways to design such policies to restrain federal debt, and we offer suggestions for ways to build a larger base of evidence.

The full working paper can be found at this link.

Glenn on How the Trump Administration Can Hit Its Growth Target

Treasury Secretary nominee Scott Bessent. (Photo from Progect Syndicate.)

By setting an ambitious 3% growth target, U.S. Treasury Secretary nominee Scott Bessent has provided the Trump administration a North Star to follow in devising its economic policies. The task now is to focus on productivity growth and avoiding any unforced errors that would threaten output.

U.S. Treasury Secretary nominee Scott Bessent is right to emphasize faster economic growth as a touchstone of Donald Trump’s second presidency. More robust growth not only implies higher incomes and living standards—surely the basic objective of economic policy—but  also can reduce America’s yawning federal budget deficit and debt-to-GDP ratio, and ease the sometimes difficult trade-offs across defense, social, and education and research spending.

But faster growth must be more than just a wish. Achieving it calls for a carefully constructed agenda, based on a recognition of the channels through which economic policies can raise or reduce output. While a pro-investment tax policy might boost capital accumulation, productivity, and GDP, higher interest rates from deficit-financed tax or spending changes might have the opposite effect. Similarly, since growth in hours worked is a component of growth in output or GDP, the new administration should avoid anti-work policies that hinder full labor-force participation, as well as sudden adverse changes to legal immigration.

While recognizing that some policy shifts that increase output might adversely affect other areas of social interest (such as the distribution of income) or even national security, policymakers should focus squarely on increasing productivity. The three pillars of any productivity policy are support for research, investment-friendly tax provisions, and more efficient regulation.

Ideas drive prospects in modern economies. Basic research in the sciences, engineering, and medicine power the innovation that advances technology, improvements in business organization, and gains in health and well-being. It makes perfect sense for the federal government to support such research. Since private firms cannot appropriate all the gains from their own outlays for basic research, they have less of an incentive to invest in it. Moreover, government support in this area produces valuable spillovers, as demonstrated by the earlier Defense Department research expenditures that became catalysts for today’s digital revolution.

This being the case, cuts in federal support for basic research are inconsistent with a growth agenda. Still, policymakers should review how research funds are distributed to ensure scientific merit, and they should encourage a healthy dose of risk-taking on newer ideas and researchers.

In addition to encouraging commercialization of spillovers from basic research and defense programs, federal support for applied research centers around the country would accelerate the dissemination of new productivity-enhancing technologies and ideas. Such centers also tend to distribute the economy’s prosperity more widely, by making new ideas broadly accessible—as agricultural- and manufacturing-extension services have done historically.

To address the second pillar of productivity growth, the administration should seek to extend the pro-investment provisions of the Tax Cuts and Jobs Act that Trump signed into law in 2017. While the TCJA’s lower tax rates on corporate profits remain in place, the expensing of business investment – a potent tool for boosting capital accumulation, productivity, and incomes – was set to be phased out over the 2023-26 period. This provision could be restored and made permanent by reducing spending on credits under the Inflation Reduction Act, or by rolling back the spending – such as $175 billion  to forgive student loans – associated with outgoing President Joe Biden’s executive orders.

If the new administration wanted to go further with tax policy, it could build on the 2016 House Republican blueprint for tax reform that shifted the business tax regime from an income tax to a cashflow tax. By permitting immediate expensing of investment, but not interest deductions for nonfinancial firms, this reform would stimulate investment and growth, remove tax incentives that favor debt over equity, and simplify the tax system.

That brings us to the third pillar of a successful growth strategy: efficient regulation. The issue is not “more” versus “less.” What really matters for growth is how changes in regulation can improve the prospects for growth through innovation, investment, and capital allocation, while focusing on trade-offs in risks. Those shaping the agenda should start with basic questions like: Why can’t we build better infrastructure faster? Why can’t capital markets and bank lending be nimbler? Not only do such questions identify a specific goal; they also require one to identify trade-offs.

Fortunately, financial regulation under the new administration is likely to improve capital allocation and the prospects for growth, given the leadership appointments already announced at the Securities and Exchange Commission and the Federal Reserve. But policymakers also will need to improve the climate for building infrastructure and enhancing the country’s electricity grids to support the data centers needed for generative artificial intelligence. This will require a sharper focus on cost-benefit analysis at the federal level, as well as better coordination with state and local authorities on permitting. Using federal financial support programs as carrots or sticks can be part of such a strategy.

Bessent’s emphasis on economic growth is spot on. By setting an ambitious 3% target for annual growth, he has provided the new administration a North Star to follow in devising its economic policies.

This commentary first appeared on Project Syndicate.