President Trump is reportedly planning another tax cut. If so, he should figure out why the first one was a dud.
As a card-carrying supply-sider, I was certain tax reform would at last lift the U.S. economy out of its rut of 2% growth. On Dec. 16, 2017, a few days before he signed the Tax Cuts and Jobs Act, Mr. Trump told reporters: “The economy now has hit 3%. Nobody thought we’d be anywhere close. I think we can go to 4%, 5% and maybe even 6% ultimately.”
But the increase in gross domestic product hasn’t hit 3%. It was only 2.3% in 2017 and 2.9% in 2018, when the cuts kicked in. The U.S. Bureau of Economic Analysis estimates only 2.3% for 2019. Overall, annual GDP growth under Mr. Trump has averaged only a few tenths of a point better than that of President Obama’s second term.The Obama-Trump EconomyAnnualized GDP growth by quarter, 2013-19Source: Bureau of Economic Analysis%2013’14’15’16’17’18’19-2-10123456
I supported the 2017 corporate and personal tax cuts, expecting them to add incentives to work and invest. Businesses were supposed to plow tons of money into new factories and machines. Instead, in 2019, real private nonresidential fixed investment fell.
Economic growth lifts all boats, and it is disappointing—but probably inevitable—that the Democratic presidential candidates have focused on redistribution rather than increasing GDP.
Still, why didn’t the tax cuts have the desired effect? Perhaps they did but were overwhelmed by losses from other policies.
- Tariffs on foreign goods harmed growth by raising prices for consumers and producers and disrupting supply chains.
- Restrictive immigration policies helped cut U.S. population growth to less than 0.5% last year, the smallest increase since the 1918 Spanish flu epidemic. A growing population, especially of working-age immigrants, is crucial to economic growth.
There’s another likely deterrent as well. Mr. Trump’s erratic behavior and penchant for economic and diplomatic isolation have almost certainly dampened the enthusiasm of both foreigners and Americans to devote capital here. Foreign direct investment has dropped for five straight quarters.
The Obama years were hardly brilliant for the economy. After a bad recession, we didn’t get our usual roaring recovery. Instead, we puttered along at little better than 2%. Unfortunately, we’re still puttering along.