It is possible that the boost to the nation’s productive capacity from higher capital spending and greater labor supply will be higher than anticipated, leading to faster growth and greater revenue. But, on the other side, the revenue projections might also turn out to be overly optimistic as households and businesses react to changes in the tax code by adjusting how they conduct their activities in a way to minimize their tax liabilities. This might especially be true as people look to take advantage of the lower top marginal pass-through rate that is available on sole proprietorships, partnerships, LLCs and S corporations compared to wage income. Debt service costs will undoubtedly be boosted by higher levels of federal debt and higher interest rates. In fiscal year 2007, federal debt service costs totaled $ billion on $ trillion of federal debt held by the public. By fiscal year 2017, although federal debt held by the public had nearly tripled to almost $ trillion, debt service costs were $ billion, only modestly above where they were 10 years earlier. Over the past decade, the sharp decline in short- and longterm interest rates has kept a lid on debt service costs—that lid is now being lifted. Although the future path of interest rates is highly uncertain, the most recent 10-year projections of the Congressional Budget Office (CBO) illustrate where debt service costs are heading.
In strict inflation targeting, all policy actions are aimed at hitting an inflation target. In flexible targeting, policymakers balance deviations from both the unemployment and inflation targets. Usually, the policy prescriptions from the two targets are not in conflict. Above target unemployment is typically associated with muted inflationary pressures, and accommodative policies are appropriate to reduce both gaps from their respective targets. At times, however, conflicts can occur. When they do, a flexible targeter does not accept a large miss in one target in order to hit the other perfectly, but instead accepts moderate misses in both in order to minimize the total loss. A corollary is that any flexible inflation targeter has to accept the idea that optimal policy may involve inflation running for a time above the long-run target if that is a consequence of policies designed to bring unemployment more in line with its target rate. 3  For example, the economy may have experienced some permanent loss of potential output during the recession partly because of reduced capital deepening with lower rates of investment and partly because of other factors. In addition, extended unemployment insurance benefits and difficulties in matching workers with jobs may be temporarily pushing up the natural rate of unemployment. 4  See Board of Governors of the Federal Reserve System (2011). 5  See Evans (2011).