For the Weekend: Ian Richardson on Working with Alec Guinness

July 26, 2019: Weekly Forecasting Update

Back in late 2017 the Trump Administration, the Republicans in the Congress, and their tame economists were all claiming that passing the Ryan-McConnell-Trump upper-income tax cut would permanently boost investment in America by as much as the Clinton economic program of the 1990s had done, and would do so much more quickly—Clinton program was phased-in over five years, while Ryan-McConnell-Trump was phased-in immediately and had been affecting investment behavior even before it was passed.

It is simply not happening.

Gross Private Domestic Investment Nominal Potential Gross Domestic Product FRED St Louis Fed

Yet I have heard no explanations for why not. For example, a Tyler Cowen would write, in November 2017, that: Yes, a Corporate Tax Cut Would Increase Investment - Bloomberg: "Republicans have science on their side when it comes to this part of their tax plans.... The most likely result is that lower corporate tax rates will lead to more investment projects and thus more aggregate economic activity.... [The] worry... that companies will take their cash windfalls and simply return them to investors.... The evidence doesn’t support this fear.... When the critics allege that corporate tax rate cuts won’t boost investment, that’s going against basic economics..."

Has there been a peep from him since marking his beliefs to market? No.

The Ryan-McConnell-Trump tax cut did nothing other than make America even more unequal. Macroeconomically, we are where we were three years ago: Relatively stable growth at a trend a bit above 2% per year, with slowly rising employment, and no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has now recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong.

 


Talking Points:

  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
    • Those who beat the drum for it owe us an explanation for why they got it wrong.
    • They have not provided one: shame on them.
  • U.S. potential economic growth continues to be a hair above 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.

  • A change from one month ago: A no-deal Brexit is now not just a possibility, but more likely than not.

  • A change from 3 months ago: The Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018, and is now likely to cut them.

  • A change from 6 months ago: Trump trade-war tensions are higher.


#macro #forecasting #highlighted
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