Economy is doing well, and tax cuts won’t help

Growth in the four quarters of 2017 now looks likely to come in at 2.3 percent, marginally faster than the consensus just before the president’s election. Consensus expectations for 2018 are only marginally greater today than they were before the election. So, there has been no substantial updraft in the economy. In fact, the United States has trailed the global economy in the sense that other countries, notably in Europe, have seen greater upward forecast revisions.

The U.S. stock market has been very strong, rising by close to 25 percent since the election, which is far more than most observers expected a year ago. This appears to be heavily driven by increases in corporate profits. But performance is running behind that of Japan and Germany, belying the idea that the market is being driven by U.S.-specific policy factors.

The idea that U.S. fundamentals have importantly improved since the election is further called into question by the observation that the dollar has declined by 8 percent against the yen and 7 percent against the euro. If something fundamental had happened to improve the U.S. business environment, we would have seen capital inflows and an appreciating currency.

The growth that the United States has seen in 2017 is sustainable over the medium term. This seems unlikely, from both supply- and demand-side perspectives. From the supply side, it is hard to imagine that, with 4.1 percent unemployment, the economy can continue creating anything like 200,000 jobs a month, given that normal growth in the labor force is about 60,000 people. From the demand side, this year’s growth was driven in significant part by a more than $6 trillion increase in household wealth from the stock market rally. Even if the market holds its level, similar wealth increments cannot be expected on a regular basis in the future.

Even if growth can somehow be maintained or accelerated, it is foundational for a healthy economy that its benefits be widely shared. Unfortunately, the tendency has been very different in the United States. Inequality has steadily increased, and much of the growth that has taken place has been captured by a small share of the population. This reflects both increased dispersions in pre-tax income and the inadequate progressivity of the tax and transfer system. The tax-cut legislation now in conference committee on Capitol Hill exacerbates every important problem it claims to address, most importantly by leaving the federal government with an entirely inadequate revenue base. The tax-cut legislation now under consideration would leave the federal government with a revenue basis of 17 percent of GDP, a difference that works out to $1 trillion a year within the budget window. This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will likely mean further cuts in safety-net programs and cause more people to fall behind. And because it will also mean higher deficits and capital costs, it will likely crowd out as much private investment as it stimulates.