Archive for the Category Supply-side economics


Growth in 2017

The 4th quarter GDP numbers were just released.  Here is how I’d summarize the data:

Growth from 2016:Q4 to 2017:Q4 = 4.4% nominal and 2.5% real

Growth from 2015:Q4 to 2016:Q4 = 3.4% nominal and 1.8% real

So what do we know about this data?

1.  Monetary policy was more expansionary during 2017.  That might explain both the increase in inflation and the increase in real growth.

2.  My hunch is that monetary policy alone does not fully explain the increase in real growth, just most of it.

3.  The rest of the increase in real growth is due to some combination of faster global growth and policy changes in the US.

Here’s my guesstimate.  Of the 0.7% rise in RGDP growth, I’d guess 0.4% was monetary stimulus (i.e faster NGDP growth), and 0.2% was global growth, 0.1% was deregulation, and o.1% was expectations of corporate tax cuts.  Yes, that adds up to 0.8%, but I think there was also a 0.1% drag on growth caused by the US approaching full employment.

I think corporate tax cuts will add about 0.2% to 0.3% to RGDP this year.

I don’t have high confidence that any of these numbers are precisely right (and the data itself may be revised), but I do think they are in the ballpark.

PS. I have a new post at Econlog pointing out that monetary policy in 2017 was nearly perfect.

PPS.  Hypermind currently forecasts 4.3% NGDP growth from 2018:Q1 to 2019:Q1.  My hunch is that it will come in just below 4%.  I’m sticking with my frequently made prediction that this will end up being  the longest expansion in US history.


Will the tax cut boost growth?

I am enough of a supply-sider to think the answer is “yes”, and enough of a realist to think the growth effects will be quite modest, maybe a couple tenths of percent per year over the next decade (mostly front-loaded).  Michael Darda recently provided a much better explanation than I can:

Our friend Scott Sumner often says “real economists don’t forecast, they infer market forecasts”. On this score, those who believe that the Tax Cut and Jobs Act will drastically ramp up growth typically point to the stock market gains YTD and then argue that a gush of capital will come flowing in as corporate tax rates fall. There are a few major problems here, in our view. First, we have had a global equity market boom in 2017, with markets in Europe and Japan up by similar magnitudes and emerging market equities up 30% YTD, outperforming the S&P 500 by 1000 bps. Surely, the TCJA cannot explain why emerging market equities are outperforming domestic equities as the latter are the ones supposedly being lifted by fiscal policy expectations. Moreover, if markets expected a “rush of capital” to come pouring into the U.S., why has the dollar basically done nothing as the tax bill’s chances of passage have become almost certain? Some argue that this is because the Fed is going to “accommodate” the tax cut, meaning that despite projections for higher deficits, they will not tighten more as a result. Well, this is very hard to square with the bond market, which shows no significant pop in real rates (which is consistent with the dollar story); hence, there is no big expected jolt to supply-side growth expectations and also very little movement in inflation breakeven spreads, which means no big expected pop to the demand side. If the tax cut were expected to be expansionary, and the Fed were expected to accommodate said tax cut, why is the yield curve continuing to flatten instead of steepening?  . . .

With all this in mind, why, you may ask, are we advancing a debt-funded tax cut at a time of near full employment, which will likely add at least an additional trillion to a net $10 trillion in cumulative deficits over the next decade (HT, Caroline Baum<>)? We do not know and no one in Congress has given a good explanation as to why.

I would add that the market forecast of the impact of new policies is the optimal forecast (pity we don’t have a RGDP futures market) and anything we observe subsequently will be less informative than the market prediction.  Recall my posts on how there is no “wait and see” with monetary policy initiatives.  You discover within 5 minutes almost everything you will ever know about the effectiveness of moves like QE.

I see the market response to the tax cut as being consistent with my view of “some effect, but modest”.  A lot like QE!

Is tax reform falling apart?

First we have the Senate reinstating the AMT.  And now this:

On Friday, Gary Cohn, the president’s senior economic adviser, suggested the White House might push for a cap on federal deductions for state income taxes, rather than an elimination.

Both the House and Senate have already passed bills that cap SALT deductions (for property taxes) at $10,000.  Why put this idea out there now?  This is just mind-bogglingly dumb.

And now we discover that the corporate income tax changes will encourage firms to move plants overseas.

PS.  I enjoyed reading this:

As written, the plan is “a disaster”, said the head of another powerful New York-based investment bank, who asked not to be named for fear of being attacked by Mr Trump on Twitter.

He added: “This won’t happen over the period of a quarter or a year, but in five to 10 years, when we’ll look back at the amount of intellectual capital lost by New York City and other blue [Democratic-led] states because of Trump’s tax reform, we’ll get the full extent of how damaging all this is.”

But wait, I thought it’s been “proved” that supply-side economics is wrong; marginal tax rates don’t affect behavior.

This is what I feared

The proposed GOP tax bill is not what it seems.  First of all, pay no attention to the media discussion of who gains and who loses—as they use naive models where stockholders are assumed to bear the burden of a corporate income tax, and the person who writes the check to the IRS is assumed to bear the burden of the personal income tax.  In the long run, markets adjust to tax changes and largely offset any distributional impacts.

Also pay no attention to the fact that taxes are supposedly being “cut”.  The GOP has no intention of cutting spending, and one way or another society must pay for all of that spending.  Money doesn’t simply grow on trees.  Yes, the “starve the beast” theory might have some validity, but most likely the Dems will largely offset any tax cuts with higher future taxes.  And meanwhile the larger budget deficits will be a drag on investment.

There is only one issue worth paying attention to—efficiency.  Do these changes make the tax system more efficient?  The initial proposal seemed positive on that score, but I’m seeing worrisome signs of backtracking:

Late Thursday, the chatter in the Capitol was that Republicans may adjust the repeal of the alternative minimum tax, which ensures that certain individuals pay a baseline tax if they have high deductions, to pay for Corker’s demands. That would cause problems in the House, where Republicans have touted the repeal of the AMT as a significant feature of their tax plan.

It’s not just a significant feature, I’d say the repeal of the AMT and the dramatic reduction in itemized deductions are pretty much all that is worth fighting for, at least on the personal income tax side.  Backtracking on this would be a huge defeat, leaving our horrendously complex tax system largely unreformed.  This is a real test for the GOP.  Our health system is called “Obamacare”; after this bill passes our income tax system should be called the “Republitax”.

Congress has no idea how much damage it does by adding tax complexity.  That’s why I still believe the best solution would be the complete abolition of the personal income tax.

PS.  Yes, I’m aware that most people are not affected by the AMT, although any statistics you see in the media will be complete lies.  The number is far higher than the media reports.  (Just as the 39.6% top rate is a complete lie.)  But the income tax system imposes complexity in a wide variety of ways, such as its interaction with the health care system.  We are all much worse off because of this monstrosity.

PPS.  There is also talk of sunsetting the tax cuts after 6 years.  That’s like “reverse Keynesianism”.  Implementing lower taxes during boom years and higher taxes during recessions.

A supply-sider is a progressive who’s been elected governor

People used to say that a conservative is a liberal who’s been mugged.  I wonder if the same sort of principle applies to progressives who have been elected governor, and assume responsibility for the health of their state’s economy:

Here’s New York Governor Andrew Cuomo:

New York will be destroyed if the deductibility of state and local taxes is included in any final plan that passes the House.

His next door neighbor Connecticut is a perfect example of a state economy wrecked by “progressive” high tax policies.

PS.  In a previous post I wrongly claimed that 53 Alabama pastors had signed a letter in support of Roy Moore after the recent scandal.  That was not accurate; the letter was written several months ago.  But this Boston Globe story suggests that not much has changed:

Over the last week, the Globe called dozens of evangelical pastors in Alabama and elsewhere who had supported Moore before the allegations emerged, gleaning from a list of names posted to the Facebook account of the candidate’s wife.

None of the nearly 10 pastors reached by phone said the allegations of sexual misconduct changed their views about Moore. Several said the allegations made them more proud to vote for the former judge.

Repeatedly, the pastors attempted to discredit Moore’s accusers in personal terms, with some dismissing their emotional stories as “crocodile tears” and “fake news.”

“I don’t know how much these women are getting paid, but I can only believe they’re getting a healthy sum,” said pastor Earl Wise, a Moore supporter from Millbrook, Ala.

Wise said he would support Moore even if the allegations were true and the candidate was proved to have sexually molested teenage girls and women.

“There ought to be a statute of limitations on this stuff,” Wise said. “How these gals came up with this, I don’t know. They must have had some sweet dreams somewhere down the line.

“Plus,” he added, “there are some 14-year-olds, who, the way they look, could pass for 20.” . . . “You’re asking me to believe them,’’ Raddish said, “when their own mother didn’t have enough red blood in her to . . . go and report this? Come on.”

And here’s how Jim Geraghty of the National Review responded to the pastors:

Yeah, why didn’t those mothers go down to the local district attorney and report that their daughters were being inappropriately sexually pursued by . . . the local assistant district attorney?

Meanwhile . . .

Donald Trump’s national security adviser reportedly mocked the US president and called him a “kindergartner” during a private dinner. . . .

During the meeting General McMaster mocked Mr Trump calling him an “idiot” and a dope, adding he had the intelligence of a “kindergartner”, five sources told BuzzFeed News. . . .

Last month it was claimed secretary of state Rex Tillerson referred to Mr Trump as a “moron” during a meeting at the Pentagon.

When the reports emerged, Mr Tillerson repeatedly refused to answer when asked whether he had made the comments.

Meanwhile Republican senator Bob Corker has previously likened the White House to “adult daycare”.

I’ve decided to stop insulting Trump.  From now on I’ll just report the views of his staff.