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by Steven Pressman

Apr 8, 2019 | Politics


President Trump regularly brags about the phenomenal economic growth achieved during his presidency. Many economic commentators and political pundits have fallen for his assertion and have repeated it. In fact, economic growth in 2018 was 2.9 percent, only a little more than the 2.2 percent average over the previous decade. And much of the additional growth last year was stolen from 2019 by a myopic administration seeking short-term gains at the expense of future economic growth.

Economic growth measures how much more the economy produces now compared to the previous year. It is important for both economic and political reasons. Without adequate growth, living standards stagnate, and it becomes hard for people to find work and keep their existing jobs.

Lackluster economic growth also spells disaster for politicians seeking reelection, especially those who promised a booming economy. When running for president, Donald Trump said he would ramp up U.S. economic growth, from 2.2 percent to something like 4 or 5 percent. He made similar claims when pushing his tax plan through Congress in 2017. Now the president needs to produce—economic growth must improve substantially.

Don’t expect this to happen.

One reason growth won’t surge is that the president’s policies have damaged growth prospects for the U.S. economy; another is that the president can’t control many of the factors impacting U.S. economic growth. In brief, there is little that the president could have done to double U.S. economic growth rates, and what he has done has hindered economic growth rather than advance it.

To help understand this, we start with some recent front-page news. In February, when Americans began doing their 2018 taxes, people noticed that their refund was much lower than usual. Many, expecting a large refund, got next to nothing or even owed the government money. On average, tax refunds were down 15–20 percent compared to the previous year at the same time; and fewer people were receiving refunds. Taxpayers were furious. #GOPTAXSCAM began trending on Twitter.

The Trump administration correctly pointed out that February was too soon to make judgments about the impact of its 2017 tax bill on tax refunds; most people file their taxes in March or early April. Still, it was not a good sign that people filing early, in anticipation of a big refund, were not getting the refund they expected and had received in the past.

The administration also pointed out that smaller tax refunds don’t mean that people didn’t get a tax cut. This, too, is right—but only partially so. For most families, their tax cut came in small increments during 2018 rather than as a lump-sum payment when they filed their tax returns. The big change concerning taxes in 2018 involved withholding. By administrative fiat, people had less money taken out of their regular paychecks. This was done in part to disguise the meager middle-class tax cut and in part to stimulate economic growth in 2018.

With more money in their paychecks, people spent more money. Consumer spending accounts for 70 percent of the spending in the U.S. economy. As the consumer goes, so goes the economy. The extra money spent in 2018 accounts for most of the faster economic growth experienced by the U.S. economy during that year.

Clearly, these temporary results cannot be sustained. To paraphrase a favorite expression of the president, it’s fake growth. It came from less tax withholding. To rephrase the slogan of angry taxpayers, it’s a #GOPGROWTHSCAM.

The economic boost from lower withholding in 2018 will be reversed this year. People who were expecting a large tax refund and were planning to use it for spending or to pay bills won’t be able to do so. Many will reduce their spending because they owe the government money (unexpectedly) and don’t have sufficient savings to pay their tax bill. Furthermore, as people learn that a large tax refund requires that they increase their tax withholding, they will make the changes necessary and receive less in their paycheck. Consumer spending and economic growth will then slow.

There’s even more bad news for economic growth. Many Trump policies (the trade war, the government shutdown, immigration restrictions) actually hurt economic growth in 2018 and will continue to do so this year.

In addition, in order to get people to like the tax cut immediately, Republicans front-loaded their tax cut. Average families got a small tax cut in 2018; this will slowly get taken away from them over the next nine years. In effect, there will be tax hikes.

One change introduced in the 2017 tax bill concerns how the standard deduction and income tax brackets get increased or indexed every year to account for higher costs of living. The switch to a measure that gives a lower inflation estimate means that people will be paying relatively more in taxes than they were under the old inflation measure. Some provisions of the new tax law were not indexed at all—for example, the state and local taxes, or SALT, limit. The SALT cap of $10,000 is always $10,000—regardless of inflation and regardless of how much state and local taxes increase. As inflation pushes up incomes as well as state and regional taxes, the SALT deduction becomes a smaller fraction of income. And with lower deductions, people will be paying a larger fraction of their income in taxes to the federal government.

While the president has failed to increase growth, daunting economic facts of life make it implausible the U.S. economy can achieve sustained economic growth considerably above 2 percent. Doubling what we have recently experienced, to something between 4 and 5 percent, is impossible.

Economists agree that three main factors contribute to economic growth—the growth of the labor force (people who want to work), the increase in number of people with jobs (or falling unemployment rate), and how productive (on average) workers are. With more people working or with U.S. workers being more productive, economic growth will be robust. Little increase in the number of workers and in worker productivity means that economic growth will stagnate. We face a future of slower growth.

Demographic changes are one key factor determining labor-force growth. In the decades following World War II, the baby boom generation entered the labor force in large numbers. In addition, more and more women were working. These two trends increased the U.S. labor force by 1.6 percent annually from 1950 to the late 1990s.

Between 1997 and 2007, U.S. birth rates remained constant. Since the Great Recession began in 2008, U.S. birth rates have plummeted. Those facing higher debt and greater economic insecurity seem unwilling to form families and have children. Women’s labor-force participation rates are also approaching the rates for men. So we can’t expect that more people entering the labor force will boost economic growth. Demographic forces are powerfully working against it.

Nothing that President Trump does today can increase birth rates from two decades ago. These negative domestic demographics would be countered by increased immigration, but this is unlikely to happen at a time when President Trump’s policies of discouraging immigration and showing disdain for immigrants are actually slowing down U.S. labor-force growth from foreign sources.

As a result, the Bureau of Labor Statistics forecasts that the U.S. labor force will increase by around 0.6 percent annually over the next decade—a 1 percentage point drop from the latter half of the 20th century.

Entering the labor force or looking for a job is not enough. You need to actually get a job. If you don’t succeed, if you are unemployed, you don’t produce and don’t contribute to economic growth. Reducing unemployment is a second way to increase growth.

However, because unemployment is already near its lower bound, reducing it further can’t be used to generate additional economic growth. The U.S. economy began last year at close to full employment (the unemployment rate was 4.1 percent in December 2017). In December 2018, the unemployment rate was close to where it was a year earlier (4 percent), and it had averaged 3.9 percent for the entire year.

Most economists think that this is about the best we can do, since firms go out of business (or consolidate) with some degree of regularity, creating temporary unemployment, and those looking for jobs don’t immediately find new ones. Nor can we expect people to take the first job they are offered, especially in an economy with low unemployment rates and many job opportunities. Often it pays to remain unemployed, look longer, and find something better.

Since the end of World War II, the U.S. unemployment rate has fallen significantly below 4 percent in only two years: 1951 (3.1 percent) and 1952 (2.7 percent), both during the peak of the Korean War. History tells us that we might be able to get unemployment down a few additional tenths of a percentage point; it is hard to believe we can do much better than this. Creating jobs for a few tenths of a percentage point of the labor force will increase economic growth by only a few tenths of a percentage point. It doesn’t come close to giving us the economic growth rate promised by the president.

This brings us to the final factor determining economic growth: how productive each worker is. Even with no increase in the number of people working, if everyone is 3 percent more productive this year (compared to last year), we produce 3 percent more as a nation, our economy grows by 3 percent, and everyone’s standard of living (on average) will rise by 3 percent.

This is what happened from the end of World War II until 1973. U.S. productivity growth increased nearly 3 percent annually. Then it began a slow decline. Over the past decade, productivity has grown only 1.3 percent a year, on average. Things are not expected to improve much over the next decade. The Bureau of Labor Statistics forecasts productivity growth to come in at around 1.6 percent annually.

A good part of slower productivity growth in the United States stems from a shift from manufacturing jobs to service jobs, where productivity is hard to increase. Economists call this “Baumol’s Disease,” after economist William Baumol, who argued that productivity, by its very nature, grows more slowly in services than in manufacturing. His favorite example involved musicians playing the Mozart horn trio. Unlike manufacturing workers, musicians are not more productive when they play the music a lot faster, and they can’t fire one of the performers so that the remaining workers are more productive. In each case, the piece would no longer be the Mozart horn trio.

President Trump has sought to bring manufacturing jobs back to the United States. Most of these jobs will not return. Some are being replaced by machines, and some are being outsourced. More important, this promise runs counter to a great deal of historical evidence about consumption. People first buy goods (necessities like food, shelter, and clothing); then, as they add services (food preparation, vacations, education, health care, financial services, child care, etc.), relatively less of their income goes to buying goods, and the service sector grows faster than manufacturing. The 2017 tax act can’t change this fact, and it won’t double U.S. productivity growth by causing American consumers to buy more goods and use fewer services.

Promises about how the 2017 tax cut would lead to greater productivity and higher incomes have also failed to materialize. The large tax cuts for businesses and the wealthy did not increase investment in new machinery or production processes (that were then supposed to make workers more productive). There was an increase in investment in early 2018, but this increase was mainly in gas and oil drilling—a response to higher energy prices. As oil and natural gas prices retreated, so too has energy investment. Nothing else has taken up the slack. Business investment continues to stagnate. The large corporate tax cut has mainly been used for company share buybacks. This pushes up stock prices and makes the senior executives who own lots of stock considerably richer; it does nothing to boost worker productivity.

There are a few policies that would increase economic growth a little bit. Paid parental leave, inexpensive government childcare and pre-K programs would enable parents to work more and devote less time to childcare. This is one reason France has such high labor-force participation rates and also a large middle class relative to the United States (see my article in the August 2018 issue of The Washington Spectator). Job training and education programs would increase the proportion of Americans with jobs and make workers somewhat more productive.

Making the U.S. tax system more progressive would help, as would increases in the minimum wage and unemployment benefits. There is growing empirical evidence that greater income inequality hurts productivity growth. It does so, in part, because people resent working harder when the primary beneficiaries are their bosses, the owners of the firm they work for, while they get little or nothing. This provides little incentive to work hard. And having all the gains from economic growth going to the top 1 percent is a good description of what has happened in the U.S. economy since the 1980s.

Enacting these policies will require taxing the wealthy in order to pay for programs that benefit all Americans—something unlikely to happen during the Trump administration. Policies that help all Americans and generate a little more economic growth will, unfortunately, have to await a new president.

Steven Pressman is professor of economics at Colorado State University, author of Fifty Major Economists, 3rd edition (Routledge, 2013), and president-elect of the Association for Social Economics.

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1 Comment

  1. I must admit that I stopped reading the article after the complete misepresentation of the tax cuts and their effects on the economy so I will limit my response to that issue. First, thebauthor correctly states that refunds were lower because the US taxpayer got immediate reductions in the form of smaller withholding. Since the withholding amounts were estimated, some folks ended up getting more money right away and in some cases had too little withheld. Overall, this benefited the individuals immediately and was far more efficient than the Bush Obama schemes of just printing money and sending $400 checks out. Secondly, it is not temporary. Workers can now adjust their W4/withholding amounts however they please. Thirdly, the SALT deduction didnt not impact the majority of taxpayers. It affected those making $200k plus most. Lastly, the doubling of the standard deduction lowered AGI considerably for the majority of tax payers, again negatively affecting those making the most money, much to Democrats chagrin. Dems most assuredly are aware of the middle and lower class benefits, but “tax cuts for the rich” is an ingrained mantra. This doesnt even take into account the ENORMOUS benefit of the corporate tax cuts. Mostly impacting small business and its ability to hire Nd expand productivity. These are not temporary measures. Further more the jump from 2.2 to 2.9 in GDP has exponential economic benefits. It isn’t a little thing.

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