My Best Growth Forecast Ever
The Trump administration’s tax reform of 2017, which took effect in 2018, was viewed prospectively, and now retrospectively, as a contributor to US economic growth. But there was – and remains – a great deal of controversy over the size of the macroeconomic effects of the tax changes.
All businesses benefited from a move to full expensing for equipment, though this change did not apply to structures. Our research predicted a substantial long-term increase in capital accumulation, which would generate sizable gains in labor productivity and real wages. Real GDP growth was predicted to be higher over ten years by an average of about 0.2% per year. Thus, the predicted growth effect was moderate but long-lasting.
As an aside, I have a bet with a famous Harvard colleague who has promised to eat his proverbial hat if 3% GDP growth persists over a longer period. I recall that the bet specified the period as the full two years – 2018 and 2019 – but he now remembers it as the three years from 2018 to 2020. I think I must be right, because I never forecasted high economic growth for 2020.
I take it as self-evident that faster economic growth is better than slower economic growth. Underlying this sentiment is that millions of people benefit from higher growth rates, which are typically accompanied by higher wages and lower unemployment, which especially help the worse-off. Yet today, the antipathy toward the Trump administration is so intense that many people, including some of my economist colleagues, are rooting for lower economic growth just to deny Trump a political win.
I understand this viewpoint, but I still think that the direct benefits from a better economy outweigh this kind of political calculus. More to the point, the beneficiaries – which include most people and most voters – must favor faster over slower growth.