Blog Post

AEIdeas

What does it mean to say the Trump tax cuts are “working?” What would be the evidence if that were true? Even before the tax cuts were passed, GOP politicians and pundits were pointing to the rising stock market as early proof investors were already factoring in a massive whoosh of new economic growth. Mr. Market is forward looking!

But the market has been flat since the president actually signed the bill last December. What’s more, economic growth in the first quarter was a tepid 2%. Nor has there been some rapid acceleration in wage growth.

Still, maybe all that is about to change. Plenty of economists are forecasting 4% growth or higher in the second quarter. Faster wage growth, too. And if that growth surge actually happens, GOP politicians and pundits will assuredly point to the upturn as evidence the Trump tax cuts are indeed working to make the economy great again. They will say all those gloomy Democrats and left-wing experts who were declaring the US economy couldn’t grow at 3% — much less 4% — have now been proven wrong. The libs have been owned yet again.

And when I hear those claims being made on July 27 — that’s when the BEA releases the advance estimate of Q2 GDP growth — these are the sort of thoughts that will likely flash across my mind

1. Faster GDP growth is most welcome. But let’s remember that there were hypergrowth quarters (which I define as quarters of 4% growth or faster) during the Obama years — even as fast as 5.2% in Q3 2014 — but never faster sustained growth. So we’ll see.

2. The anti-tax cut or pessimist argument was never that the US economy is incapable of growing faster than 2%. Indeed, it is the Wall Street-Washington consensus that fiscal stimulus from the Trump tax cuts and higher government spending will bounce growth higher for a couple of years. The actual pessimist argument is that because of demographics, sustained growth of 3% or higher won’t happen without historically high productivity growth. And productivity growth has been moribund since before the Financial Crisis.

3. So to judge the tax cuts as “working” — at least according to traditional GOP “supply side” economics — we would want to see higher business investment, higher productivity growth, and thus faster real GDP growth over a numbers of years. And maybe that will happen. The changes to the corporate tax code were significant. Of course, “time will tell” is an unsatisfying cable-news hot take. And even if productivity growth accelerates, it will be tricky to separate the impact of the tax cuts from other trends already in place, such as the advance and spread of artificial intelligence and other technologies. Plus, one might still expect to see a natural cyclical upturn in productivity growth as the Financial Crisis recedes further in time.

4. One more thing: All those forecasts showing a growth surge also show a worsening federal budget deficit. Trillion-dollar deficits as far as the eye can see. A sugary growth surge doesn’t solve that problem; even sustained faster growth doesn’t. Growth solves a lot of problems, but this unfortunately ain’t one of them. (Please check out some real talk on debt and deficits from my AEI colleague James Capretta.) This from the Committee for a Responsible Federal Budget:

Because faster growth results in both higher revenue and spending, a substantial acceleration in growth would be necessary to put the debt on a downward path. Assuming this growth came from higher productivity, it would need to be nearly twice the levels projected simply to stabilize the debt somewhat below current levels, based on rough CRFB calculations. To put the debt on a downward path to reach its historical average by 2040, productivity would need to be three times as high as projected. In other words, for growth alone to solve the debt, the country would need sustained annual productivity growth between 2.5 and 4 percent. By comparison, the historical record for any 25-year period since 1950 is 1.9 percent.

Indeed, the CBO is forecasting 3% growth this year and next. And here is its debt forecast: