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GOP betting tax bill will boost economy before 2018, 2020 elections

President Trump said on Dec. 4 that "the stock market has been reacting unbelievably well" to the GOP tax bill. "The only thing that hurts it is the fake news." (Video: The Washington Post, Photo: Jabin Botsford/The Washington Post)

By the time Republicans have to face voters in November, Senate Majority Leader Mitch McConnell (R-Ky.) predicts the economy will “be performing better.” There's a good chance he's right. The global economy has been on an upswing for the past year. Even before the tax bill, most experts had been predicting the momentum would continue into 2018 and 2019 with more jobs, more business investment and higher wages.

Now massive tax cuts are likely to come, too. Republicans in the House and Senate have both passed tax bills, and they are about to meet to iron out their differences and pass a final version that can go to President Trump's desk.

Typically, the U.S. government doesn't pump more stimulus into the economy when it's this healthy, but that's what the tax plan from Trump and congressional Republicans would do, at least for a year or two. The result could end up being an economy on steroids heading into the 2018 and 2020 elections. Unemployment, already at a 16-year low, could easily fall below 4 percent for the first time since the dot-com era. And growth, solidly above 3 percent in since April, could easily top 4 percent for a quarter or two next year.

The benefits of the Republican tax plan are front-loaded, most analysts say, which probably will help the GOP in the 2018 and 2020 elections. Many of the less palatable things — tax cuts that expire for the middle class after 2025, deficits expected to hit $1 trillion over a decade and probable spending cuts to the social safety net — won't kick in until later.

Democrats have tried to cast the bill as a “scam” that is heavily titled toward the wealthy and corporations. House Minority Leader Nancy Pelosi (D-Calif.) called it the "end of the world" on Monday because of what it does to health care and the debt. But that messaging will be a hard sell if the economy is humming.

“If the jobless rate is 3.7 percent on Election Day 2018 and wage growth is accelerating (both possible), [it's] tough to sell tax cut as killing America,” James Pethokoukis, a fellow at the right-leaning American Enterprise Institute, tweeted Monday.

The U.S. economy hasn't grown over 4 percent since the second quarter of 2014 (and it hasn't happened for an entire year since 2000). If the economy surpasses that mark under Trump, even for just a quarter, he probably would tout it on Twitter and beyond as a huge victory. On Monday, Trump spokeswoman Kellyanne Conway was dubbing the latest stock market highs as the “new normal.”

Many have pointed out that the tax bill is deeply unpopular in polls. Even among Republicans, 40 percent don't approve of the plan. But the reality is most people don't know what's in the tax bills. The details are hard to grasp, which is why it could be easy for Republicans to make the case that the tax cuts led to an economic boom, even if that boom was going to happen anyway.

“What we called an economic 'upturn' in 2016 morphed into a robust synchronized global expansion. World growth may still be accelerating, but even if not, the energy will carry well into 2018,” predicts Bob Baur, chief global economist at Principal Global Investors.

Baur, like many Wall Street economists, points to stabilizing oil prices and a falling dollar that made U.S. exports cheaper as key drivers of the economic rebound.

But voters aren't likely to care what's driving the upturn, as long as they feel that things around them are better. Warnings about the potential pitfalls of the tax bill down the road -- the growing debt and a recession if the economy overheats -- might be brushed aside if times are good.

“At the moment most Americans don't even know what Congress just voted for on their behalf,” says Chris Rupkey, chief financial economist at MUFG Union Bank. “Tax collections in the future will be less, and that can only mean one thing: that the mandatory entitlement spending of the federal government is going to have to be less as well.”

As Americans tried to digest over the weekend what is in the tax bill and what it means to them, investment bank Goldman Sachs sent out a note to clients that summed it up well. For 2018 and 2019, Goldman predicts stronger growth because of the tax plan — about 0.3 percent higher (so, close to 3 percent annually). But after that, it isn't nearly as pretty.

We “note that the effect in 2020 and beyond looks minimal and could actually be slightly negative,” Goldman's economists wrote. There has been a lot of attention lately on what Goldman is saying because the bank has so many of its former employees in prominent positions in the White House, including Treasury Secretary Steven Mnuchin and National Economic Council leader Gary Cohn, both of whom have played key roles in crafting Trump's tax plan.

Kent Smetters, the head economist behind the Penn Wharton Budget Model, agrees with Goldman. His model shows very modest growth impact from the tax cuts overall, which is why it projects about $1.5 trillion will be added to the national debt, but what growth there will be probably will show up early on. Smetters says it will come from the piles of cash companies such as Apple and Microsoft have been holding overseas that they are likely to bring back when the tax rate drops substantially — from 35 percent now to around 14 percent on overseas cash coming back to the United States.

The expectation is that most of that foreign cash will end up paying down debt or going to shareholders in the form of higher dividends or more share buybacks. But even if just a small amount goes toward new investment, it would cause a bounce in growth for a quarter or two. Business spending has already been picking up, helping to drive growth above 3 percent from April through September. The Morgan Stanley Capex Plans Index, a measure of business spending, is at its highest level since 2007.

“In the three quarters prior to last November’s election, investment growth was an abysmal 0.9 percent,” says Rajeev Dhawan, director of the Economics Forecasting Center at Georgia State University. “In the three quarters post-election, investment growth has been a healthy 5.9 percent.”

It's possible the Federal Reserve will step in if the economy gains too much steam and raise interest rates, a way to put the brakes on growth and inflation. But the Fed has been very cautious about raising rates in recent years. Most don't think that will change any time soon under new Fed chair Jerome Powell, a Trump nominee.

The bottom line is the U.S. economy is at its “full potential” for the first time since the Great Recession, according to the non-partisan Congressional Budget Office. Few economists think extra stimulus is needed, but it's probably coming anyway with the tax bill.

“The economy doesn't need a tax cut,” Rupkey said. “This is the first Congress in American history to cut taxes massively when the economy is already at full employment and everyone has a job.”

Republicans are calculating they can turn stronger economic growth into victories at the polls, even if it means more debt and greater inequality later on.

“We think this will produce results, results we will certainly be able to talk to the American people about in the fall of 2018 and 2020, as well,” McConnell said Sunday on ABC’s “This Week.”

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