Tax cuts could cure the US economy's subpar performance

Tax cuts could cure the US economy's subpar performance
© Greg Nash
Those who only see the short-term political potential of tax cuts overlook their long-term economic potential. The American economy's prolonged subpar performance gives tax cuts and Republicans an opportunity unseen since the Depression. A recovery to pre-crisis “ordinary” would look post-crisis extraordinary. What appears as simply a political win today could quickly become a far bigger economic one, and leave a greater political return in its wake.

As President Trump and the Republican Congress' first year together winds down, some have suggested they need a major “accomplishment." Enacting tax cuts could rally currently tenuous support. Following Republican losses in Virginia and New Jersey and negative national polling, it is understandable why rallying support is a focus.

Understandable as this may be, it is also short-sighted. For some time America's primary concern has been the economy. And just as the economy has greatly influenced America's politics — driving issues and propelling two administrations into office — the impact of tax cuts could be equally large.

America's extended period of slow growth is poised to make even a modest recovery look comparatively large. Even if tax cuts do not meet the most ardent supply-siders’ claims, they may appear as though they have to most Americans. As such, the recent economy offers Republicans the potential that the Depression offered Democrats over eight decades ago.

Because downturns reduce the economic baseline, they also boost a recovery’s growth relative to it. As the economy shrinks, even a return to where it was — let alone reaching where it otherwise would have been — registers as significant growth.

Imagine a hypothetical GDP of 100 that had been growing at three percent annually. Then imagine it shrinks by several points to 97 percent. Simply returning to 100 the following year equals 3.1 percent growth — higher than before. Catching up to 103, where it would have been under its past growth rate without the recession, equals 6.2 percent growth — double its prior rate.

This is the reason most downturns have seemingly strong recoveries. It is also why the Great Recession's poor rebound stands out so starkly. Yet even before the crisis, America’s economy was not growing like gangbusters.
From 2009-2016, real GDP averaged just 1.5 percent per year — less than half 1946-2008’s annual 3.1 percent average. From 2001-2008, it averaged just 2.1 percent annually. Altogether, the last 16 years averaged just 1.8 percent.
Punctuated by its post-crisis pratfall, the nation’s economy has created an unprecedented launching pad for a recovery. And as if entering on cue, tax cuts appear — stage right.
What the Great Depression created with a sudden shock and more dramatically, the Great Recession has created with a subtle slowness. Yet both have similarities beyond economic retrenchment.
Today’s foundation for recovery goes beyond just measurable economic performance. Most obvious is America’s psychological view of circumstances.
The current period has created a cottage industry explaining the “new normal.” Some have been explicitly political – apologists seeking to convince that their side is not at fault. Some have argued more broadly that America’s exceptionalism is passed.
These arguments, along with Americans’ experiences, have widely lowered economic expectations. In this, the current period’s may be even lower than the Depression’s. So severe and sudden, the Depression could not pass as normal to anyone who had known anything else. The current period — without the great crash, but more prolonged — actually could as it drags on.
Analogous to the boiled frog metaphor, the Depression was scalding water from which the frog of expectations hops as fast as possible. Today’s economy is the slowly heated pot. Here the frog of expectations is made unaware by longer duration and milder temperatures. The frog is cooked to low expectations.
The Depression demonstrates the political potency of a connection to prosperity. The public’s mind joined Democrats’ attachment to it, and Republicans’ connection to the Depression, to realign American politics for decades — reversing seven decades of Republican dominance.
Today, economy and psychology again combine to make opportunity. Just as the Great Recession was the worst downturn since the Great Depression, its prolonged slow recovery offers the greatest political opportunity since the Depression. Capitalizing on it with tax cuts — even producing just normal growth — could take Trump and Republicans well beyond politically pleasing their conservative core.
For tax cuts and their Republican proponents, timing could not be more propitious.
Too many simply see tax cuts as an opportunity for short-term political advantage. Their real impact could be more economic, and could spur seismic political changes.
Returning to formerly normal growth would seem dramatic. The old normal would now look like a miracle. Notwithstanding the inevitable protestations that tax cuts did not produce a miracle, to most Americans, the benefits would be unmistakable. Republicans would reap a far larger economic benefit — and a far longer political one than many now envision.
J.T. Young served under President George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987-2000.