If I could get the econ-punditry genie to grant me one wish, it would be to kill the myth of large growth effects from high-end tax cuts. The fact that we’re still arguing about that, against reams of evidence, suggests we’re in the realm of religion, not analysis. But if I could squeeze a second wish out of her, it would be that we develop a more realistic view of the effect of presidents on the economy. The fact that this impact is hugely exaggerated is the source of all kinds of groundless claims and policy shenanigans.
All presidents do some of this, but Trump and his coterie take it to new heights (i.e., if the numbers are favorable; otherwise, they don’t believe them). Last Friday, when the gross domestic product report for the second quarter came out with a growth rate of 2.6 percent, the President crowed: “Two-point-six is a number that nobody thought they’d see for a long period of time. Remember, I was saying we will hit three at some point in the not-too-distant future, and everybody smiled and they laughed and they thought we’d be at one. And 2.6 is an unbelievable number.”
Um … no. It’s totally believable and nothing special. These quarterly numbers are jumpy, and annualizing the quarterly number amps up the jumpiness. The more accurate way to gauge the pace of GDP growth is to look at the change from the same quarter a year ago, which in this case comes to 2.1 percent, just about the same 2 percent trend that has prevailed for years.
In the first quarter of the year, the annualized quarterly rate was a lousy 1.2 percent. You didn’t hear much from the White House on that. But again, the year-over-year growth rate that quarter was … you guessed it, 2 percent — right on trend. Or, if you like, just average the first two quarters (1.2 and 2.6) to get a less noisy estimate of first-half growth and you end up with … wait for it … 1.9 percent.
More important, Trump’s claims about his impact on the economy make little substantive sense. He hasn’t legislated anything! True, expectations play a role in growth outcomes, and based on his plans to cut taxes and roll back market regulations, the equity markets and the dollar got a post-election Trump bump. As reality set in the dollar faded, although the stock market is still climbing. But the fact is that the U.S. economy was doing pretty well before Trump came on the scene and continues to do so.
Which underscores the larger point: Outside of recessions, presidents have somewhere between none and very little impact on “high-frequency” growth rates, meaning weekly, monthly or quarterly changes. Beyond that, it’s trickier to assess their effect, but it still amounts to less than you might think.
For example, Trump and his supporters constantly claim that tax cuts can raise the trend growth rate of 2 percent to 3 percent (ergo, my first wish to the punditry genie). But there’s no evidence that such changes get you anywhere close to growth effects of that magnitude. As I recently wrote on this page:
“There’s no such simple, empirical relationship between “high marginal [tax] rates” and investment, productivity, or GDP growth, either over time in the United States or across countries (see scatterplots here and on page 256 here). President Bill Clinton raised high-end tax rates in the 1990s and productivity boomed later in the decade (2.5 percent per year, 1995 to 2000); President George W. Bush lowered top rates and, a few years later, productivity growth started to slow. To be clear, I’m not saying that higher taxes boost growth. Instead, I’m strongly warning you to reject simplistic claims either way.”
Both sides do this with taxes. In a letter this week to Republicans asking for a bipartisan approach to tax reform, 45 Senate Democrats wrote (my bold):
“We are confident that, by working together, we could modernize our tax system to increase working families’ wages, improve middle-class job growth, promote domestic investment, modernize our outdated business and international tax systems and put in place sound fiscal policy that raises the revenue needed to meet the needs of our country.”
I’m all for a much cleaner, simpler, more progressive tax code. I’d close tons of loopholes that favor one kind of income on Tuesday and another kind on Wednesday. And the bold part of the Democrats’ statement is especially true and important (and not at all where the Republicans are headed, I fear).
But I’d never kid myself that my great tax plan would return higher wages, investment and growth beyond maybe a few basis points (hundredths of a percent), if that. When the Congressional Budget Office scored Trump’s budget, it estimated that it would boost growth by about 0.1 percentage point over the next decade, and it only got that little bump by accepting team Trump’s phony promise that they would offset their tax cuts with increases to be named later (deficits lead to slower growth in the CBO’s model, so unpaid-for tax cuts will ultimately lower the growth estimates).
Over the longer run, presidents can influence growth through immigration policy, investments in physical and human capital, or the appointment of the right person to chair the Fed (or reappointment … hint, hint!). And they can certainly screw up the economy. As we speak, Trump and the Republicans are creating needless uncertainty in insurance markets. Playing games with the debt ceiling doesn’t help. Neither would dialing back financial market oversight.
But although presidents have less effect on growth than is recognized, they can dramatically influence who ends up with whatever growth there is. Their influence on fiscal policy — taxes and spending — can have powerful distributional consequences, exacerbating or offsetting the inequalities increasingly generated by market outcomes. Same with trade deals, patent laws, and corporate and banking rules. So ignore the tweets about this or that monthly release and pay close attention to who’s getting rich and who’s getting whacked by the tax, spending, and other redistributive plans.