On the theory that if you repeat a lie often enough, people will believe it, President Donald Trump is retweeting the persistent falsehood that the economy turned on a dime when he won the election and that all of the so-called experts who said it was impossible for the economy to grow this fast were wrong.
For the record, no one ever thought that a quarter or two of 4% growth is impossible. It happens all the time: four times while Barack Obama was president, four times under George W. Bush and one time under Donald Trump.
“We have the greatest economy ever in the history of our country. So we’re very happy with the way things are running, generally speaking. I don’t think we’ve ever had an economy like this.”
Furthermore, almost everyone who forecasts the economy saw that the tax cut and the spending bill would be a powerful, if temporary, stimulant to growth this year and next. They predicted the growth that Trump claims no one predicted.
The Congressional Budget Office, for instance, revised its forecast for 2018 gross domestic product from 2.2% before the tax cut to 3% afterward — a forecast that now looks fairly prescient. Policy makers at the Federal Reserve agreed. So did the International Monetary Fund. Private-sector economists surveyed by the Wall Street Journal and the venerable Society of Professional Forecasters were on the same page.
Instead of thinking that 3-ish growth was “impossible,” these experts thought it was likely — for a year or two. All of these forecasters anticipated that the economy would revert back to the 2-ish trend by 2020 when the temporary stimulus fades.
These facts don’t stop economic illiterates such as Peter Ferrara,Newt Gingrich,Stephen Moore,Larry Kudlow and Donald Trump from playing a con game on the American people. The crux of their lie is to switch the discussion from “what’s possible in the long run” to talking about “what’s do-able for a quarter or two.” And you can always juice the economy in the short run by pumping money into it — just ask John Maynard Keynes.
The main goal of the tax cut was always to lower the taxes of rich people and of the businesses they own and control — it’s redistribution, pure and simple.
The secondary goal was to shrink government revenue so much that some future Congress would be forced to cut spending, especially on Medicare, Medicaid and Social Security. We’re seeing this second point play out now as Republicans once again pretend to care about the debt just months after blowing a $2 trillion hole in it.
But to make it easier for Republican lawmakers to go back home and justify doing things that will make the lives of voters worse off, the architects of the tax cut resurrected the old con that the more you cut taxes, the faster the economy will grow in the long run.
They promised that, if we cut the corporate and individual income tax rates, the economy could grow at 3% or maybe 4% or even 6%, rather than at the 2% trend line.
A lot of responsible and respectable people objected to this Republican sales pitch. They pointed out that the economy’s long-run potential growth rate seemed to be stuck around 2%, even with favorable assumptions about productivity growth.
Also read: Sorry, Mr. Trump, but the only way to get to 3% growth is to hire more Mexicans
Let’s do the math. The growth rate of the economy, in the long run, is determined by the resources available (the labor force is the key variable) and the efficiency at which we can use those resources (technology is the key variable).
Limits to growth
Unfortunately, the labor force is barely growing now. In the 1980s, it was growing at more than 2% per year, fueled by the demographics of the baby-boom generation and by millions of women entering the work force for the first time. If the labor force is growing at 2% and productivity is growing at 1.5%, the economy can grow at 3.5% year after year (2% + 1.5% = 3.5%). And so it was.
But now, the labor force is projected to grow only about 0.5% per year (and it could be much less than that if the Republican Party gets its way and restricts legal immigration). If we wanted to get the economy to grow at 3% now, we’d need productivity to improve 2.5% every year (0.5% + 2.5% = 3%). But over the past four years, productivity has only been growing 0.8% per year.
The one thing that the tax cut could do to improve the economy in the long run would be to give companies greater incentives to invest in equipment, structures, technology and R&D. Over time, those investments might pay off in faster productivity growth, but we wouldn’t see it in the data for a long time. There’s a big debate over whether the tax cut has created those conditions, but everyone agrees that changing the potential growth rate of the economy takes years, not months.
But the Republicans can’t wait for the seeds they planted to sprout; they need a harvest now! They are trying to hold on to their majorities in the House and the Senate in the November midterm elections. They need a quick victory, so they are trying to persuade us that their policies — which can work only in the long run — have already produced stunning successes in only 10 months.
Just weeks after the tax cuts passed, the Republicans were desperate to show that the tax cut was already helping working people. A few companies announced that they were taking the money they saved on taxes and giving bonuses to the workers. It was all over the news.
However, recent data from the Bureau of Labor Statistics shows that, in the aggregate, bonuses did not accelerate after the tax cut was passed. In other words, it was not true that workers were directly getting any significant piece of the corporate tax cut.
That big lie may yet work for Trump. You can fool some of the people most of the time. Most people don’t follow the intricacies of tax law, or know how GDP is put together. They want to believe that the people they trusted will deliver.
But they also know what their own economic condition is. If the Republicans don’t deliver, they’ll be turned out. That’s just math.