After years of sluggish growth, the U.S. economy has begun to accelerate. Growth in gross domestic product year over year has ramped up continuously from 2.0 percent in the first quarter of 2017 to 2.8 percent in the most recent data, while the unemployment rate has dipped to 3.8 percent, the lowest level in 18 years, and inflation has remained tame. All these improvements raise the natural question: Can performance be attributed to changes in economic policy?
To be sure, there have been dramatic changes in policy. The Obama administration finalized more than one costly regulation, on average, every day, imposing a cumulative cost of $890 billion on the economy, according to an analysis by the American Action Forum. The Trump administration added a mere $5 billion to this total in fiscal 2017 and plans to reduce costs by $9 billion in fiscal 2018. Similarly, the Tax Cuts and Jobs Act reversed dangerous incentives in business taxation, encouraging firms to innovate, invest, and produce in the United States.
Plans for capital spending can be adjusted relatively quickly as well. Among the key drivers of the rise in the optimism index is the fraction of small businesses that plan to increase investment. More broadly, the Morgan Stanley capital expenditures index, which tracks how much businesses are likely to spend in the coming months, was at an all-time high earlier this year. While this measure has fallen some, broad measures of capital expenditures by companies remain robust, and those spending plans are turning into reality as durable goods orders for core investment goods rose at a 12 percent annualized rate in April.
Another positive indicator is nonresidential fixed investment, or business investment outside of inventories. Investment performance thus far in 2018 is well above the pre-tax reform projection by the Congressional Budget Office, and stronger even than the CBO estimated for the first part of this year, as this American Action Forum chart shows. At 6.8 percent, it is at its highest rate since early 2014. The final metric is actual economic growth. The Commerce Department will not release second quarter GDP growth until late July, but the GDP tracker conducted by the Atlanta Federal Reserve Bank indicates that it is currently above 4.0 percent.
These data all point toward better policy generating better economic performance. Critics rarely address the numbers directly. Instead, the most repeated criticism is aimed at share repurchases, or stock buybacks, in the aftermath of the Tax Cuts and Jobs Act that supposedly evince self-enrichment by CEOs and a failure to generate business investment. Unfortunately, the critique is wrong on both counts.
It is true that the Tax Cuts and Jobs Act itself impacted the value of corporate equity investments. The corporate rate cut increases the value of equity. The move to a territorial system with a tax on deemed repatriation modestly cuts this increase in value for those with large accumulated overseas earnings with other things being equal. The imposition of expensing increases the value of growing firms with new investments, again, with other things equal. But stock buybacks do not make shareholders or CEOs richer. Stock buybacks simply exchange valuable stock for the same value in cash, and thus, have no impact in and of themselves on the wealth of one person.
In addition, a stock buyback indicates nothing about the level of investment in the economy. When the shareholder receives the cash, he or she can plow it back into the financial system in the form of another stock, bond, or the like. Those funds become available to companies, entrepreneurs, and small businesses to make investments. As they do, the quality and quantity of tangible and intangible capital rises, and new business models are formed. This investment and innovation is the foundation of higher productivity, which will translate into higher wages.
I will be the first to acknowledge that it is too early to judge the ultimate success of the Tax Cuts and Jobs Act in this regard. The pace of real wage growth has shown no discernible uptick. But I am dead sure that one learns nothing about this success or failure from stock buybacks.
The policy record certainly is not unblemished. The Trump administration’s tariff initiatives have generated unease in the business community, dismay among allies, and downdrafts in stock markets. Its stance on legal immigration is at odds with demographic reality, and its indifference to an unsustainable budget trajectory is dangerous. But there is also no statistical evidence that these are translating into a meaningful threat of a downturn in the near future. The numbers indicate that better policy is leading to the best outlook for the U.S. economy in years.