Here come the Confidence Fairies

By now we’ve experienced enough slight of hand by the Republican Congress to know that every proposal needs to be seriously questioned.  Since going 0-fer-2 on ACA Repeal, Republicans are now keen on rolling out their fantastical new Tax Reform package that’s reportedly going to make everyone rich!  Tax cuts around the horn!  But the devil is in the details.  Just because a party would like to see 4% GDP growth doesn’t make it possible.  Leading experts say that tax cuts do in fact spurn growth, but what gets returned to the economy is about 1/3 of what was lost in revenue. That leads to the concern that the tax cuts around the horn strategy is going to lead us down the path of insolvency sooner rather than later, but it’s worse than that.

Nobel prize winning economist Paul Krugman goes into pretty good detail in a New York Times article Trump’s Rosy Scenario breaks it down pretty well – detailing why Trump’s 4% goal is a lot of wishful thinking.  Below are the highlights.

Krugman:

Real GDP grew 3-4% annually under Reagan;  it grew 3.7% annually under Clinton.  But there are fundamental reasons to believe that such growth is unlikely to happen now.

First, demography: Reagan took office with baby boomers — and women – still entering the workforce; these days baby boomers are leaving.   Here’s the UN data on a 5-year growth rate of the population aged 20-64, a rough proxy for those likely to seek work:

021817krugman3-tmagArticle.png

Just on demography alone then, you’d expect growth to be around a percentage point lower than it was under Reagan.

Furthermore, while Trump did not in fact, inherit a mess, both Reagan and Clinton did — in the narrow sense that both came into office amid depressed economies, with unemployment above 7 percent.

So even if you (wrongly) give Reagan policies credit for the business cycle recovery after 1982, and believe (wrongly) that Trumponomics is going to do wonderful things for incentives a la Reagan, you should still be expecting growth of 2 percent or under.

Cut taxes, grow the economy!  Sounds good but the data doesn’t support it.  As George Bush #41 aptly stated, this is “voodoo economics” at its best.

 

 

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