Tax Cuts and Growth

March 16, 2018

 

Back in the 1970s, supporters of the status quo said there was nothing to be done about stagflation (high inflation and slow growth). It was a "fact of life" that Americans had to accept after experiencing faster growth and lower inflation during the decades immediately following World War II.

Then along came supply-side economics, which was quickly dismissed by the stagflation status quo as "voodoo economics."  But in the 1980’s, when supply-side policies were tried, they worked.  Growth picked up, inflation fell.  In the past decade, however, the old arguments have come back into vogue, with apologists for slow growth arguing the US simply can't grow as fast as it used to. "Secular stagnation" means growth will be permanently slow. Rapid growth, they argued, is a thing of the past.  Then 2017 saw the tides start to shift. Regulation was cut dramatically and the U.S. saw the most sweeping corporate tax reform in history.  Guess what?  Growth picked up to almost 3% annualized in the last three quarters of 2017 and real GDP may be set for about 4% growth in the first quarter of 2018.  In a nutshell, we've gone from a political philosophy that said "you didn't build that" to one that says "please build that."  The U.S. economy is being lifted by an incredible wave of new technology.  Fracking, 3-D printing, smartphones, apps, and the cloud have boosted productivity and profits.  

Yet taxes, regulation and spending all have increased markedly in the past decade, which raised the burden of government and dragged down the real GDP growth rate to a modest 2.2% from mid-2009 to early 2017.  However, getting back to long-term 4% growth may be difficult because of the recent bipartisan orgy of government spending.  Congress lifted the budget caps on "discretionary" (non-entitlement) spending by about $300 billion over the next two years, and spending is now set to rise by 10% this year.  While this may not kill the economy tomorrow (or this year), unless the Congress gets control of federal spending, the benefits from the tax cuts and deregulation could very well be short-lived.
 

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