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How Will We Know If the GOP’s Supply-Side Experiment Works?
It looks almost certain the GOP tax bill will pass Congress, to be then signed by President Trump. So here’s a question or two or three: How will we judge whether it worked? What are the expectations? What will be the standards?
Now, generally, Republican politicians and pundits have been more optimistic than most mainstream economists about the growth impact. For instance, the IGM Forum Economic Experts Panel found that only one out of 42 economists surveyed agreed with this statement: “If the US enacts a tax bill similar to those currently moving through the House and Senate — and assuming no other changes in tax or spending policy — US GDP will be substantially higher a decade from now than under the status quo.”
Indeed, most private sector models don’t show a whole lot of growth, certainly not the 0.4% increase in annual growth rates that many Republicans are touting. From the Committee for a Responsible Federal Budget:
And here is what Goldman Sachs is looking for:
We expect the legislation to boost growth by around 0.3pp in 2018 and 2019. This is based mainly on the Senate version of the bill, which delays the corporate income tax cut to 2019 but includes a tax cut for individuals (including pass-through income) of around 0.6% of GDP in 2018, slightly greater than what we had previously penciled in. . . . We note that the effect in 2020 and beyond looks minimal and could actually be slightly negative, as the JCT estimates suggest that the tax cut that year would actually be slightly smaller than in 2019.
If you think the economy’s baseline growth is around 2%, then these gains really don’t get you anywhere close to 3% or higher sustained growth. (Goldman, by the way, is looking for GDP growth of 2.5%, 1.8%, 1.5%, and 1.3% over the next four years.) But sustained 3% growth is what many GOP supply-siders are expecting.
Every Saturday, I am on Larry Kudlow’s radio show. Here is what Kudlow said when I asked him how he would judge the tax plan’s impact:
First of all, 2.3 percent growth I would regard as a great disappointment. Secondly, if we don’t pick up business investment spending and capital formation, business investment spending and real wages and productivity: If all that stuff remains flat more or less like it has for the past 17 years, I will regard that as a great disappointment. . . . [But] give us our chance . . . and let’s see if this supply-side tax plan — on the business side particularly, mostly — let’s see if it works. Give us a chance, give us a couple years, and if it doesn’t work, and I am being very honest here, then we are all going to have to go back to the drawing board and maybe in a bipartisan way take another look at that. . . .
I believe firmly that we are going to have an investment boom with tremendous knock-on, spillover effects. I really do. . . . But if we’re down around the low twos in GDP, it won’t work, it’s not going to work. . . . I will say how disappointed I am, absolutely. . . . I am out there and Steve Moore is out there, we’re looking at three to four percent growth along with the productivity and wage gains and so forth.
So 3% or bust! Now would sure be a great time for a long-awaited productivity boom to kick in.
Published in Domestic Policy, Economics
But how will we know it is the tax cut that gets us the boom, if a boom could already be baked into the cake thanks to technology that was already in the pipeline? Honestly even looking at the Reagan cuts, how much of the 80’s boom was his first tax cut and how much of it was inflation fighting and how much was it women entering the workplace en mass?
All the macro economic predictions seem on shaky scientific ground. Certainly compared to something like gravity or relativity where we can more or less tell you what mass x traveling at speed y will do when it comes near mass z. In economics aside from some basic rules that seem right the predictive modeling seems guess work at best. I find it an interesting topic, because while our knowledge of physics is important it hardly is ever used to make public policy while our scant knowledge of economics is always appealed to for massive swings in public policy.
But, Larry is always a fair guy. The problem of course will be that people like Larry aren’t the ones in charge or running the show. Whatever the numbers say their interpretation will be partisan. But I agree they should have their shot.
I used to listen to Larry’s show religiously. My schedule seems to have shifted now on Saturdays.
How will we know? Economists will make it up. They will justify anything either in the positive direction or the negative, to support their positions. You can’t pull out the effects of one element in a complex ten trillion dollar economy and judge it. I don’t think it’s possible.
But I’m with Larry. I think we’re looking at a close to 4% growth in the next couple of years, mostly from held back growth. But the Trump plan won’t hurt.
I’m with Larry Kudlow. Combined with the approach the Trump administration is taking on regulations, we could be in for boom not seen since the 90’s. Also, I don’t think the boom will be mostly reflected in the stock market, I bet we see large business investment and rising wages. We already have low unemployment and low participation rates, it will take better wages to slow retirements for Baby Boomers and to entice Millenials away from going to graduate school.
You know you can listen to his show as a podcast at your leisure. That is how I listen to it. Larry’s podcast that is. Though James’ podcast is good too.
Well so here is the catch, if we will get the +3% growth anyway aren’t we then just creating deficits by cutting the taxes now? Or at least diminishing our ability to pay them down? Growing the government debt will have consequences further down the line if not in the present.
Scientific economics (theory based on facts and logic, as opposed to politically motivated economics) provides no means of quantitatively predicting the economic future. Anyone who claims otherwise isn’t a real economist.
Government spending in a given year takes resources from the private sector that would otherwise have been saved or used by the private sector as consumption or production goods. The size of this burden is determined by the amount of spending, not by how much is financed by tax and how much by government debt.
Tax policy determines the distribution of the loss of wealth of the private sector, not the amount.
How will we know if a tax policy achieved its stated ends? If it is an intervention in markets, and its stated ends are to improve material conditions for the citizens, then we know from application of the laws of economics that it will fail to achieve those ends. But we have no precise, confident way of quantifying the destruction, or how it is distributed on its victims over time. We know that in the short run it will benefit some, harm some, and the amount of harm will exceed that of the benefit. We know that in the longer term, essentially everyone will be harmed, but this loss of economic well-being will be unevenly distributed.
That’s why there is no such a thing as “scientific economics.” Given an initial state and a set of actions on that state, science predicts what comes next, with great precision. As you stated, economics — even “scientific” economics — cannot do that. Nor can any of the other pseudo sciences, e.g. social “science,” political “science,” etc. Economics is often called the dismal science. It may be dismal, but it isn’t science.
Well we are about to see what American business is capable of. Here’s hoping for the best.
Economies are too complex to use correlation to prove much, especially when we’re just fiddling around the edges. However, cutting the corporate rate by almost half is big enough and direct enough to tease out some meaningful conclusions. That’s all in this thing that matters. Our corporate rate is insane. It ought to be zero, but that’s a different argument. It’s time Republicans moved away from the supply side narrative. The Federal government doesn’t spend it’s money well, often regulates and taxes in a competition destroying crony enriching manner and the deficit matters mostly because we save so little and that clearly is related to bad tax policy. The focus should be on spending and tax and regulatory simplification. Any simplification and reduction has to be a good thing.
One can make a semantic argument that economics ought or ought not to be a called a science. The answer is arbitrary, and has no practical consequence because it depends on whether one includes or excludes some qualifications in the definition of “science”.
That is fine, but there is a huge problem if one uses a meaningless semantic definition to arrive at the conclusion that the provable theorems of economics, like the law of comparative advantage, can be disregarded. That would be pure sophistry. None of the theorems of mathematics, physics, or logical economics can be waved away, without disproving them logically or rejecting their axioms.
Aren’t we always seeing what it is capable of?
So what is the best method of economists figuring out what policy had what effect?
I mean capable of in the near future.
What we have here is a failure of epistemology. How do we know? Since we can’t really do a controlled experiment in economics we won’t know if it worked. We can’t know because we’ll never know what would have happened otherwise. All we can do is do what seems logical and right –
1) let people keep more of their own money
2) recognize that only people can pay taxes. Corporations are thick sheafs of legal documents. Those documents can’t pay taxes. Only people can pay taxes. All corporate taxes do is camouflage which people are actually paying the corporate tax… Shareholders? Employees? Customers?
Thanks. And yes we are creating deficits. In my humble opinion, creating deficits to reduce taxes and hem in government spending is well worth it.
Ya, if it hemmed anything in I might be more sanguine about it. But like a delinquent child with a credit card our government seems to never grasp the implication of the low minimum monthly payments. Government spending won’t be hemmed in.
Not true. They go through cycles and there was a freeze on spending several times in my lifetime.
Science allows us to have some knowledge about the results of actions. Of “what would have happened otherwise”.
For example, there is an assumption in physics that momentum must be conserved. Application of this law permits us to know that, if one attempts to create momentum by an action involving a series of collision between objects, one will fail. To say otherwise, one must either reject the assumption of the science, or show a logical error in the application.
For another example, there is an assumption in economics that people act to satisfy their subjective preferences for scarce goods, which leads by pure logic to the law of supply and demand. Application of this law permits us to know that, if one attempts to improve the income of those who sell work by arranging for a minimum price for work, one will fail. To say otherwise, one must either reject the assumption of the science, or show a logical error in the application.