Republicans including President Trump and Treasury Secretary Steven Mnuchin hyped and over-hyped the potential impact of their tax bill. Four percent growth! No make it five! Deficits? Nah, it’ll pay for itself. None of that was remotely accurate. In the aftermath of the bill’s passage we are now learning just how puny the results may be.
We should recognize job growth in 2017 was lower than 2016. The Post reported last week:
The U.S. economy added 148,000 jobs in December after a year of steady hiring, missing expectations for a larger last-minute surge, the government reported Friday.
The unemployment rate stayed at 4.1 percent last month, the lowest point since 2001. Wages continued their slow climb, rising by 9 cents to $26.63. That’s a 2.5 percent increase since December 2016 (and still below pre-recession levels).
President Trump’s first year in the White House brought healthy growth and 2.1 million new jobs, a slight drop from 2.2 million positions created during Obama’s last year in office, government estimates showed Friday. The average number of jobs employers added each month in 2017 was 173,000, compared to the previous year’s 187,000.
It is not unusual that as we move along in a recovery cycle the job gains taper off. With an unemployment rate of only 4.1 percent (although millions dropped out of the job market), we’ll be hard pressed to get that number lower.
Republicans said the solution was a tax cut heavily tilted in favor of the wealthy and corporation. After it has passed, economists — some who cheered the bill — tell us it won’t have much of a long-term effect. The Wall Street Journal reports:
Taxes and the outlook were hot topics in icy Philadelphia this weekend during the AEA annual conference.
Kevin Hassett, chairman of the White House Council of Economic Advisers, noted during a Saturday presentation that professional forecasters have been revising up estimates for near-term U.S. growth, consistent with an improving outlook tied to lower taxes.
Other economists in Philadelphia were skeptical the tax cuts will produce a meaningful boost.
Historically, “tax cuts aimed at the top of the income distribution have had very little stimulus effect,” said University of Chicago economist Austan Goolsbee, who had Mr. Hassett’s job during the Obama administration.
Glenn Hubbard, dean of the Columbia Business School and former top White House economist under President George W. Bush, said the legislation isn’t as worrisome as critics suggest, nor as positive as advocates claim. “It’s not going to raise us off to 4% GDP growth,” Mr. Hubbard said. “But it’s not going to kill 10,000 people a year.”
In the long run, economists believe the economy’s maximum sustainable growth rate is determined by two forces: how many people are working, and how productive they are.
And that is precisely what critics, Right Turn included, argued in opposition to the bill. Tax cuts that run up huge deficits are not a long-term solution to sluggish growth. In fact, they are largely irrelevant beyond an initial stimulus (and when the economy is not in a recession even that is a question mark). Meanwhile, there are other factors at work having nothing to do with the tax code:
Demographics are set to hold down workforce participation as baby boomers retire. Meantime productivity growth in the U.S. has sagged since an information technology-fueled surge in the late 1990s and early 2000s. Tax cuts could spur productivity by incentivizing business investment in new equipment, but the effects are uncertain.
The CBO last summer estimated potential gross domestic product growth would average 1.8% over the ensuing decade. Estimates by Federal Reserve officials in December for longer-run GDP growth ranged from 1.7% to 2.2%, with a median projection of 1.8%. Private-sector economists surveyed by The Wall Street Journal last month had an average longer-run GDP forecast of 2.2% a year.
Even those who think productivity might pick up due to more capital investment are not predicting an economic miracle. (“Northwestern University economist Robert Gordon said the U.S. is due for a pickup of long-depressed productivity growth that will help the economy maintain growth around 3% a year—but only for a year and a half, perhaps two years. . . . ‘That potential growth ceiling on growth will eventually start to bite as we run out of workers,’ Mr. Gordon said.”) Ironically, this is an important reason we need more skilled immigrants, not less as the xenophobic Republicans want.
Unfortunately, having in effect blown their money at a casino for the rich, lawmakers have little ability — or so they will say — to make meaningful changes that might not only influence our long-term growth but also boost wages, which have been flat for many Americans. That won’t satisfy a lot of voters who will soon discover they were sold a bill of goods with a tax bill that didn’t address the central issues we now face.
If we want a sounder policy approach to growth, perhaps we should go back to how we got here. Former Federal Reserve Chair Ben Bernanke, in a thoughtful address last year, argued that despite huge economic expansion since World War II, “missing from the mix, however, was a comprehensive set of policies aimed at helping individuals and localities adjust to the difficult combination of slower growth and rapid economic change.” Bernanke suggested:
[A] great deal more could have been done, for example, to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction, and other means; and to address serious social ills through addiction programs, criminal justice reform, and the like. Greater efforts along these lines could not have reversed the adverse trends I described at the outset—notably, Europe, which was more active in these areas than the United States, has not avoided populist anger—but they would have helped. They might also have muted the disaffection and alienation which our political systems are currently grappling. . . .
Policies that would more directly address the needs of the people who elected Trump, such as community redevelopment, infrastructure spending, job training, and addiction programs have recently received a good bit of rhetorical attention from the White House, but it remains to be seen whether that attention will be translated into programs and budgets. Ironically, it may be that the most rhetorically populist president since Andrew Jackson will, in practice, not be populist enough.
In case you think this is a recipe for big-government liberalism, conservative economic think tankers have been advocating a similar approach. Michael R. Strain, a font of creative ideas ranging from worker relocation to earned-income tax credit expansion, has this to say:
That costs money, which Republicans who sucked out revenue in an ill-conceived tax bill say we don’t have. Balderdash. If Democrats run on a better tax bill and an agenda that embodies Strain’s and Bernanke’s vision (plus standard policy ideas you will find at center-left think tanks), they will not only clean Republicans’ clocks but maybe even launch us on a more constructive discussion about growth and social cohesion.