We now have about six months of macroeconomic data since the passage of the 2017 tax cut, reform, scam, or whatever you want to call it — since the “Tax Cut and Jobs Act” name was removed in the amendment process.
What do these data tell us about whether or not the tax cut is working? The data support the hypothesis that policy is boosting short-run economic performance but do not give us any reason to expect this growth boost to persist.
Moreover, the data are at odds with one of the arguments made by supporters of the tax cut — that it would lead to an immediate boost in wages.
The macroeconomic data has been excellent. The economy grew at a 2.8 percent annual rate in the first quarter (according to my preferred measure of growth) and tracking estimates expect second-quarter growth to be about 4 percent.
Remarkably, the pace of job growth has picked up from 182,000 per month last year to 215,000 per month so far this year, an unusual development this late in the cycle that is boosting the labor force participation rate.
Business fixed investment was up a 10.4 percent annual rate in the first quarter, although the latest data indicate the pace may slow considerably in the second quarter. Just about the only complaint — and it is a major one — is that real wage growth has been slow, in fact much slower than it was from 2012-16.
It is impossible to know with any degree of confidence how much this overall macroeconomic strength is due to policy changes and how much would have happened regardless because of the underlying evolution of the economy.
A medical researcher trying to assess the effectiveness of a medical treatment would get a large treatment group, a large control group and make sure that the only difference between them was the treatment. But when it comes to studying macroeconomic policy, economists do not have this option.
Just about the best we can do is to note that other advanced economies have not had the same dramatic fiscal changes and are underperforming the United States in the first half of the year, with euro-area growth likely less than a 2-percent annual rate in the first half and Japanese growth actually negative in the first quarter.
With lots of caveats about the small sample size and the many differences in treatments across economies, this certainly is consistent with a short-term boost to U.S. GDP due to policy.
The more important question is what is the relevant policy and why is it boosting the economy. One view is that it reflects a demand-side fiscal stimulus, the traditional Keynesian response of the economy to both the tax cuts but also the spending increases passed by Congress earlier this year that are providing a total stimulus of nearly $250 billion this year.
Another view is that it reflects a supply-side response of the economy, for example increases in work or investment encouraged by lower tax rates.
The truth likely reflects a combination of demand and supply, but most economists would put most of the weight on the demand-side explanations either because the supply-side changes in the bill are relatively small and tend to take more time to develop.
To the degree that the economic boost from the tax cuts in 2018 is largely due to demand, it will be temporary and the growth boost will reverse itself in future years. This is the view the majority of forecasters have had.
As the tax cuts went from uncertain to a legislated reality, the Survey of Professional Forecasters boosted its 2018 growth forecast by 0.4 percentage points but lowered its growth forecast for the next decade by 0.3 percentage points.
Finally, one of the main arguments for the tax cuts was that corporations would pass the tax cuts through to higher wages for workers. So far, at least, the data are reasonably clear that this not happening.
In the first quarter of this year, after-tax profits grew at a 39 percent annual rate while compensation grew at only a 5 percent annual rate. The bonuses the administration frequently touts seem both relatively small compared to overall compensation and in many cases unrelated to the tax law.
The corporate tax cut could eventually raise wages, but so far, the corporate tax cut appears to have gone to corporations.
The United States needs higher growth, especially of wages, in the medium and long run. The data so far show that a large fiscal expansion may be helping with higher GDP growth in the short run but give us no reason to believe that the tax changes are going to make a meaningful difference for American workers over time — beyond leaving them with a large bill that they will eventually have to repay.
Jason FurmanJason FurmanThe Fed needs to articulate its framework for inflation Biden signals tough stance on tech with antitrust picks GOP seeks to make Biden synonymous with inflation MORE is the former chairman of the Council of Economic Advisors and former deputy director of the National Economic Council, both under President Barack ObamaBarack Hussein ObamaBill Maher, Isiah Thomas score over the NFL's playing of 'Black national anthem' Democrats confront 'Rubik's cube on steroids' White House debates vaccines for air travel MORE. Furman is currently a professor at Harvard University's Kennedy School of Government and a senior fellow at the Peterson Institute of International Economics.