Monday, December 11, 2017

Why Tax Cuts Are The Wrong Medicine For US Economy

Larry Summers argues that the US economy is on a "sugar high" and that the medium term outlook cannot be improved by tax cuts.  They will be bad for the economy.

Trump points to the 24% rise in US stock prices but they are not the result of government policies.  They are driven by corporate profits.  That is part of our "sugar high" the rise in stock prices have boosted spending.  Moreover, growth in the US is lower than growth in much of Europe and Asia.  Investment has not been pouring into Trump's economy.  The dollar has dropped in value relative to the Euro and the Yen. 

Given that we are experiencing a "sugar high" what is our medium term outlook?  According to Summers it is not very good.  We have a low unemployment rate so there is no room to boost GDP by increasing the supply of labor.  The path to higher growth must come from an increase in productivity.  However, our major corporations are flush with cash and interest rates are very low.  Apparently, they don't see an opportunity to increase their investment rates.  Consequently, the public sector must expand in order to increase the productivity rate.  It would also help if we could grow the economy in a more equal fashion.  Instead inequality has been on the rise and we are making the tax system more regressive. 

Simpson and Bowles pointed out that US tax revenue should not fall below 21% of GDP to insure a healthy economy.  The Trump tax cuts reduce that healthy ratio to 17% of GDP.  There will be less room for public investments and productivity growth in that kind of fiscal environment.

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