As the U.S. economy lumbered out of the depths of the Great Recession, it became increasingly clear that poor growth was a pressing threat to American families. In contrast to the postwar period up to 2007, when the standard of living doubled on average in one working career — 35 years — the pace stumbled to the point that it takes 70 years for someone to see the same improvement. Indeed, by 2016, the American dream all but disappeared for many as the real incomes for those households that worked full time for the full year stalled entirely.
Tax and regulatory policy has a big impact on the health of the economy, and today there is a dramatic new course for regulations and taxes. The Obama administration finalized a costly regulation at the average rate of 1.1 per day. The cost of complying with those regulations cumulated to $890 billion, a stealth tax increase of over $110 billion a year. In fiscal 2017, the Trump administration incurred essentially zero additional regulatory costs and has promised to make even more progress in reducing burdens. For 2018, the administration produced a regulatory “budget” with the goal of cutting $9.8 billion in regulatory costs.
The TCJA lowered the corporation income tax rate to a more globally competitive 21 percent, shifted to the territorial tax system used by U.S. competitors, provided improved tax treatment of global earnings from intellectual property, and enhanced incentives for investment. The message is now to innovate, invest, hire and expand in the United States. Tthe TCJA will enhance the U.S. growth prospects and is among the reasons that the Congressional Budget Office (CBO) now projects that 2018 and 2019 will see the best growth since the Great Recession.
More rapid innovation and investment is not an abstract economic ideal. It is a direct path toward higher wages for American workers, the ingredient missing from the economy for the past decade. But sustained higher growth is not yet assured, as it faces threats from the federal budget, disruptions in global trade, and the failure to move forward with immigration reform. The CBO baseline projections are a daunting reminder of the threat posed by future deficits and debt. The United States is courting a credit downgrade or worse as a sovereign borrower.
Businesses, entrepreneurs and investors perceive the future deficits as an implicit promise of higher taxes, higher interest rates, or both. For any employer contemplating locating in the United States or expanding existing facilities and payrolls, rudimentary business planning reveals this to be an extremely risky environment. Put bluntly, heading straight into a sovereign debt crisis is not a pro-growth strategy.
Over the long-term, the debt is a tribute to the growth of the largest mandatory spending programs, namely, Social Security and federal health programs. For this reason, an immediate reform and improvement in the outlook for entitlement spending would send a valuable signal to credit markets and improve the economic outlook.
Trade is an important driver of productivity and economic growth in the United States and across the globe. Trade creates jobs, increases gross domestic product, and opens markets to American producers and consumers. It is regrettable that the Trump administration has embraced protectionism at the expense of the opportunities that trade provides.
The administration walked away from the Trans Pacific Partnership, which offered both economic and diplomatic benefits. Notably, the Trump administration decided to impose tariffs on steel and aluminum for dubious “national security” reasons and is pursuing an ill-defined strategy of tariffs on Chinese goods. It would only help the economy to bring trade policy into alignment with the pro-growth regulatory and tax policies.
Similarly, immigration reform can raise both population and labor force growth, and thus can raise economic growth. Immigrants inject entrepreneurialism into the U.S. economy. The administration has advocated restricting legal immigration, which is a sufficiently misguided policy as to earn the rebuke of nearly 1,500 economists, covering the spectrum of political preferences, and including six Nobel Prize winners. The chosen course by the administration on Deferred Action on Childhood Arrivals also introduces needless policy risk into the economy.
The prospects for growth and prosperity in the United States are brightening for American workers. But the pro-growth economic policy agenda, while off to a good start, is still far from complete.