The U.S. Republican majority is about to take the nation on a grand experiment in supply side economics.
The last time Washington embarked on a concerted program to deregulate business and cut taxes was during the Carter-Reagan years, and the Gipper’s economic expansion ultimately ran 33 quarters and accomplished 3.9 percent annual growth.
The loyal opposition in Congress and most economic forecasters are skeptical that the current round of tax cuts will create more than a temporary Keynesian jolt to growth.
For example, the Wall Street Journal survey of forecasters has growth for next year at about 2.6 percent and then falling back to approximately to 2 percent. That would be a bit slower than the 2.2 percent achieved during the Obama recovery. The Federal Reserve monetary policy making committee’s expectations are about the same.
These projections appear to reflect the view that productivity growth and the labor-force participation rate have been permanently reduced by powers beyond the grasp of public policy.
It’s as if eight years of more aggressive government regulations, higher taxes on businesses than abroad and new policies enabling able-bodied adults easier access to Social Security disability pensions, food stamps, Medicaid and the like had nothing to do with it.
The falling adult labor-force participation rate cannot be attributed only to baby boom retirements. In 2006, the Bureau of Labor Statistics projected an aging population would lower the participation rate from 66.2 percent to 65.5 percent by 2016.
After Obama used the financial crisis as cover to build out the above-mentioned entitlements, the participation rate fell to 62.7 percent.
The economics profession appears to have lined up behind Northwestern University Professor Robert Gordon’s view that the easy productivity-improving innovations have been found and advancing commercial knowhow is too expensive. For example, economists cite the rising cost of developing new drugs.
The latter would have been like studying the productivity of mule drivers on the Erie Canal in the 1850s. Thirty years of experience had taught barge owners most of what could be discovered about the optimal number and size of animals and equipment for moving cargo, but declaring freight transportation improvements at a dead end would have been absurd given the quickening potential of steam power and railroads. Similarly generalizing about potential for productivity growth from conventional drug research or the slowing pace of laptop sales ignores the blossoming fields of stem-cell therapies, electronic brain implants, artificial intelligence, robotics and other new fields.
Paradoxically, liberals want to give everyone a guaranteed annual income because computer programs and machines will eliminate the need for most workers.
Isn’t that infinite productivity growth – for example, autonomous drive vehicles will take us from one driver per passenger mile to zero drivers per passenger mile?
Sadly the regulatory state and high taxes have caused too many American firms to focus on lobbying instead of the next wave. General Electric is staggering from declining demand for coal and gas turbines while Chinese competitors are coining money selling the new stuff – solar panels and the inner workings of windmills.
Econometric studies indicate that cutting business taxes substantially should reorient corporate America’s creative energies from tax avoidance to investing in these new technologies, and restoring productivity growth to something closer to rates accomplished during the second half of the 20th century and give a permanent lift to economic growth.
From the founding of the Republic through the middle of the recent Bush presidency, the U.S. economy, across recessions and recoveries, averaged better than 3 percent growth.
Tax cuts alone will not get us to that level. Entitlements reform, which ranks high on the administration’s list of priorities, will be needed to raise labor-force participation and economic growth to that level.
For now, if tax cuts permanently raise the trajectory of economic growth to 2.5 percent from the 2.2 percent accomplished during the Obama recovery, supply siders will have something to brag about.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times.