Last December, Republicans relied on the support of conservative economists who predicted that the party’s corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along.
BERKELEY – It has now been one year since US President Donald Trump and his fellow Republicans rammed their massive corporate tax cut through Congress. At the time, critics of the “Tax Cuts and Jobs Act” described it as a cynical handout for wealthy shareholders. But a substantial number of economists came out in support of it.For example, one prominent group, most of whom served in previous Republican administrations, predicted in The Wall Street Journal that the tax cuts would boost long-run GDP by 3-4%, with an “associated increase” of about 0.4% “in the annual rate of GDP growth” over the next decade. And in an open letter to Congress, a coterie of over 100 economists asserted that “the macroeconomic feedback generated by the [tax cuts]” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time.
Likewise, in a commentary for Project Syndicate, Robert J. Barro of Harvard University argued that the tax cuts would increase long-run real (inflation-adjusted) per capita GDP by an improbable 7%. And Michael J. Boskin of the Hoover Institution endorsed his analysis in a follow-up commentary.
Finally, Kevin Hassett, Chairman of the White House Council of Economic Advisers, and Greg Mankiw of Harvard University claimed that the productivity gains stemming from the tax package would primarily boost wages, rather than profits, because foreign savers would pour investment into the US.
.. To be sure, these were primarily long-run predictions. But proponents of the bill nonetheless claimed that we would see enough additional investment to boost growth by 0.4% per year. That implies an annual GDP increase of roughly $800 billion, which would require annual investment to rise from 17.5% to about 21.5% of GDP. We cannot know how much the US economy would grow in the absence of the tax cuts. But, as the chart below shows, investment has not jumped to that level, nor does it show signs of doing so anytime soon.
.. Back when all the aforementioned economists were issuing their sanguine predictions about the tax package’s likely effects, neutral scorekeepers such as the Tax Policy Center were painting a more realistic picture. And unlike most proponents of the cuts, the Tax Policy Center’s raison d’être is not to please donors or support a particular political party, but rather to make the best forecasts that it can.
The deep disagreement last year over the tax bill’s potential effects anguished Binyamin Applebaum of The New York Times. “What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement?” Applebaum asked on Twitter at the time. “How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?”
.. We can now answer that last question. Scholarship is about the pursuit of truth. When scholars find that they have gotten something wrong, they ask themselves why, in order to improve their methodology and possibly get it less wrong in the future. The economists who predicted that tax cuts would spur a rapid increase in investment and sustained growth have now been proven wrong. If they were serious academics committed to their discipline, they would take this as a sign that they have something to learn. Sadly, they have not. They have remained silent, which suggests that they are not surprised to see investment fall far short of what they promised.
But why should they be surprised? After all, it would be specious to assume, as their models do, that investment can rapidly rise (or fall) as foreign investors flood into (or flee) the US. Individuals and firms do not suddenly ratchet up their savings just because the after-tax profit rate has increased. While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
While a higher profit rate does make saving more profitable, it also increases the income from one’s past savings, thus reducing the need to save. Generally speaking, the two balance out.
All of those who published op-eds and released studies supporting the corporate tax cuts last year knew (or should have known) this to begin with. That is why they have not bothered to investigate their flawed forecasts to determine what they may have missed. It is as if they knew all along that their predictions were wrong.1
For reporters still wondering which economists to listen to, the answer should now be clear. If there is one message to take from the past year, it is: “Fool me once, shame on you; fool me twice, shame on me.”
The Trump Boom Is No Mere ‘Sugar High’
The latest liberal spin is that the economy is on a “sugar high” from deficit-financed tax cuts and spending hikes. When the rush wears off, they warn, watch out for a crash landing. It’s true that in fiscal 2018 the budget deficit swelled to nearly $800 billion, or about 4.2% of gross domestic product. But the Bureau of Economic Analysis estimates that the economic “contribution” from extra government spending added only 0.23 percentage point to growth in 2018. So even without all the budget bloat, the economy would still be growing well above 3%.
.. The same BEA data confirm that this year’s growth comes predominantly from a boom in production and investing—particularly in construction, manufacturing, and oil and gas development. While the housing market is weak, consumers are spending more as their wages rise... The real contradiction in the “sugar high” argument is that it ignores the slow growth of the Obama years, which featured an avalanche of debt spending. Deficits as a share of GDP were 9.8% in 2009, 8.6% in 2010, 8.3% in 2011 and 6.7% in 2012. Where was the sugar high then? Instead of the expected burst in output coming out of the 2008-09 recession, borrowing more than $1 trillion a year for four years yielded the worst recovery since the Great Depression. Even excluding 2009, Mr. Obama’s deficits averaged more than 5% of GDP throughout the rest of his presidency but produced less growth than Mr. Trump has with lower deficits.This wasn’t what Keynesians expected. Mr. Obama’s economic team predicted 4% growth every year coming out of the recession. Instead the “sugar high” from record peacetime deficits produced measly 2% growth. By 2016 GDP was running about $2 trillion below the trend line of a normal recovery.
The fastest growth rate over the past three decades was recorded in Bill Clinton’s second term, when federal government spending fell from 21.5% to 18% of GDP and deficits disappeared into surpluses. So much for the idea that deficit spending is a stimulant.
Mr. Trump’s fiscal policies have produced more growth than Mr. Obama’s because they were designed to incentivize businesses to invest, hire and produce more here at home. The Obama “stimulus,” by contrast, went for food stamps, unemployment benefits, ObamaCare subsidies, “cash for clunkers” and failed green energy handouts.
.. Massive government spending blitzes don’t produce “sugar highs” or anything like them. Even some conservatives erroneously argue that military spending stimulates the economy. But as Milton Friedman said, the government can only put money into the economy that it first takes out.
.. Those pushing the “sugar high” fallacy also don’t realize that the Trump tax cuts aren’t going away soon. The 2017 business tax cuts can’t cause a recession in 2019 or 2020 because they don’t expire until 2025. They aren’t sugar pills.
The biggest threats to the economic boom and financial markets today are a deflationary Federal Reserve and the specter of a global trade war. Solve those problems and the American economy can keep flying high on its own power. And Mr. Trump’s critics will be proved wrong again.
Trump’s Diminishing Power and Rising Rage
None of Trump’s extremist policy ideas has received public support. The public opposed last year’s
- Republican-backed corporate tax cut, Trump’s
- effort to repeal the Affordable Care Act (Obamacare), his
- proposed border wall with Mexico, the decision to
- withdraw from the Iran nuclear agreement, and the
- imposition of tariff increases on China, Europe, and others.
- At the same time, contrary to Trump’s relentless promotion of fossil fuels (coal, oil, and gas), the public favors investments in renewable energy and remaining in the Paris climate agreement.
.. Trump has tried to implement his radical agenda using three approaches.
1) The first has been to rely on the Republican majorities in the two houses of Congress to pass legislation in the face of strong popular opposition. That approach succeeded once, with the 2017 corporate tax cut, because big Republican donors insisted on the measure, but it failed with Trump’s attempt to repeal Obamacare, as three Republican senators balked.
.. 2) The second approach has been to use executive orders to circumvent Congress. Here the courts have repeatedly intervened, most recently within days of the election, when a federal district court halted work on the Keystone XL Pipeline, a project strongly opposed by environmentalists, on the grounds that the Trump administration had failed to present a “reasoned explanation” for its actions. Trump repeatedly and dangerously oversteps his authority, and the courts keep pushing back.
.. 3) Trump’s third tactic has been to rally public opinion to his side. Yet, despite his frequent rallies, or perhaps because of them and their incendiary vulgarity, Trump’s disapproval rating has exceeded his approval rating since the earliest days of his administration. His current overall disapproval rating is 54%, versus 40% approval, with strong approval from around 25% of the public. There has been no sustained move in Trump’s direction.
.. In the midterm elections, which Trump himself described as a referendum on his presidency, the Democratic candidates for both the House and Senate vastly outpolled their Republican opponents. In the House races, Democrats received 53,314,159 votes nationally, compared with 48,439,810 for Republicans. In the Senate races, Democrats outpolled Republicans by 47,537,699 votes to 34,280,990.
.. Summing up votes by party for the three recent election cycles (2014, 2016, and 2018), Democratic Senate candidates outpolled Republican candidates by roughly 120 million to 100 million. Nonetheless, the Republicans hold a slight majority in the Senate, where each state is represented by two senators, regardless of the size of its population, because they tend to win their seats in less populous states, whereas Democrats prevail in the major coastal and Midwestern states.
Wyoming, for example, elects two Republican senators to represent its nearly 580,000 residents, while California’s more than 39 million residents elect two Democratic senators.
Without control of the House, however, Trump will no longer be able to enact any unpopular legislation. Only policies with bipartisan support will have a chance of passing both chambers.
.. On the economic front, Trump’s trade policies will become even less popular in the months ahead as the American economy cools from the “sugar high” of the corporate tax cut, as growing uncertainty about global trade policy hamstrings business investment, and as both the budget deficit and interest rates rise. Trump’s phony national-security justifications for raising tariffs will also be challenged politically and perhaps in the courts.
.. True, Trump will be able to continue appointing conservative federal judges and most likely win their confirmation in the Republican-majority Senate. And on issues of war and peace, Trump will operate with terrifyingly little oversight by Congress or the public, an affliction of the US political system since World War II. Trump, like his recent predecessors, will most likely keep America mired in wars in the Middle East and Africa, despite the lack of significant public understanding or support.
.. Nonetheless, there are three further reasons to believe that Trump’s hold on power will weaken significantly in the coming months. First, Special Counsel Robert Mueller may very well document serious malfeasance by Trump, his family members, and/or his close advisers.
.. Second, the House Democrats will begin to investigate Trump’s taxes and personal business dealings, including through congressional subpoenas. There are strong reasons to believe that Trump has committed serious tax evasion (as the New York Times recently outlined) and has illegally enriched his family as president (a lawsuit that the courts have allowed to proceed alleges violations of the emoluments clause of the Constitution). Trump is likely to ignore or fight the subpoenas, setting the stage for a major political crisis.
.. Third, and most important, Trump is not merely an extremist politician. He suffers from what author Ian Hughes has recently called “a disordered mind,” filled with
- hate,
- paranoia, and
- narcissism.
According to two close observers of Trump, the president’s grip on reality “will likely continue to diminish” in the face of growing political obstacles, investigations into his taxes and business dealings, Mueller’s findings, and an energized political opposition. We may already be seeing that in Trump’s erratic and aggressive behavior since the election.
.. The coming months may be especially dangerous for America and the world. As Trump’s political position weakens and the obstacles facing him grow, his mental instability will pose an ever-greater danger. He could explode in rage, fire Mueller, and perhaps try to launch a war or claim emergency powers in order to restore his authority. We have not yet seen Trump in full fury, but may do so soon, as his room for maneuver continues to narrow. In that case, much will depend on the performance of America’s constitutional order.
Trump Is in Triage Mode
The president’s offensive on immigration is linked to his party’s struggle to build support for key pieces of its economic agenda.
GOP candidates appear to have lost faith that they can win the argument with voters over the key policies in their economic agenda, especially the longtime effort to repeal the Affordable Care Act and the huge tax cut Trump signed late last year.
“They are ending up on the culture war because we have blunted them on taxes and they can’t talk about health care,” Democratic pollster Ben Tulchin said. “So they are left with one card to play.”
.. While Republicans first expected the tax cut to anchor their midterm campaign, the public reaction to it has soured over the election year. An early October CNBC survey found that while 54 percent of Americans believe that the law provided “a lot of” benefits to large corporations, and 52 percent think that it similarly benefited the wealthy, the share who believe that it helped other groups is much smaller: 15 percent saw such gains for small business, 11 percent for average taxpayers, and a measly 8 percent for themselves personally. In campaigns across the country, Democrats have directly attacked the tax cut as a giveaway to the wealthy that will eventually compel Republicans to cut Social Security and Medicare.