but the circumstances have changed. In his Wall Street Journal column, James Freeman argues that the U. S. economy can grow faster if only we cut taxes:
Real GDP growth in 1983 turned out to be 4.6%, followed by a remarkable growth surge of 7.3% in 1984 and another strong year after that with 4.2% growth in 1985. The U.S. economy wouldn’t slow back down to the level of Times realism until 1990.
Speaking of the 1990s, toward the end of that decade some observers once again discovered reasons that purportedly showed why America’s best days of economic growth were behind her. In the July-August 1997 issue of Harvard Business Review, an economist named Paul Krugman skillfully argued why a group of “new paradigm†economists were wrong to think that Americans could expect faster economic growth.
[…]
Mr. Krugman insisted that “it is time to get serious: an economic doctrine, no matter how appealing, must be rejected if it cannot stand up to well-informed criticism. We would like to believe that the U.S. economy can grow much faster if only the Fed would let it. But all the evidence suggests that it cannot.â€
By an amazing coincidence, Mr. Krugman published his piece right around the time that President Bill Clinton was signing the Taxpayer Relief Act of 1997, which included, among other benefits, a cut in the federal tax on capital gains.
In hindsight we know that even as Mr. Krugman was drafting his explanation of the limits to U.S. growth, the U.S. economy was shifting into a higher gear. 1997 would turn out to be the first of four straight years in which real GDP growth averaged more than 4%.
Tax reform was not all that happened in the early 1980s. Paul Volcker had thrown the economy into a tailspin to bring double digit inflation under control. And the Reagan Administration launched an enormous program of deficit spending.
The Trump Administration would like to do the same things—reduce tax rates and borrow from future economic growth. There are some good reasons to believe that won’t be as effective now as it was 35 years ago.
For one thing the federal debt was about 40% of GDP when President Reagan took office. Now it’s about 100% and there’s good reason to believe that higher debt levels suppress economic growth.
Secondly, people in the top 10% of income earners pay most of the income tax and, consequently, they will get most of any foreseeable tax cut. Will whatever they do with the additional money result in more domestic economic growth? IMO there’s good reason to doubt it, rooted in their present behavior. Why aren’t the top 10% of Americans spending more on goods produced domestically, why aren’t they starting new businesses, and why are so much of their savings in financial instruments?
Third, the best prospect for stimulating domestic economic growth is by cutting the payroll tax, the federal tax actually paid by most Americans. That isn’t on the table and, due to structural changes in the American economy, even that won’t result in as much domestic economic growth as might otherwise have been the case.
That isn’t to say that I don’t believe the greater economic growth isn’t possible in the U. S. I think it is but won’t be accomplished by cutting taxes or spending beyond our means. Reduce the burden of regulation to what is actually needed. Stop picking winners and losers in the economy. Roll back subsidies. Limit the growth in the wages of public employees and those who depend on tax dollars for their incomes to a level the communities they serve can bear. Let businesses import the workers they actually need but don’t let them use imported workers to push wages down.
That’s much harder lifting than cutting tax rates. Which is why it won’t be done.
Can we add in the lack of competition from most to the rest of the world in the early 80s as a factor. No BRIC. Germany not a powerhouse yet. Japan still building up. South Korea a non-factor.
Steve
[…] Why aren’t the top 10% of Americans spending more on goods produced domestically, why aren’t they starting new businesses, and why are so much of their savings in financial instruments?
That pretty much sums it up. One quibble: In a financialized economy, they are investing not saving. In a financialized economy, financial instruments are investments in the financial industry.
There is some tax rate, above which, will produce negative economic activity and tax revenue, but there is some tax rate, below which, will not produce positive economic activity and tax revenue, also.
You missed it by twenty years, Steve. The 50s were the salad days. By 1980 foreign competition was rampant. Steel, auto, machine tools…. and then came the main event, someone said “just imagine if I could sell one xxxx to every Chinaman.” No one ever looked at the other side of the coin.
In the aggregate, all tax dollars diminish growth, Tasty. It’s a transfer from the private to public sector. They have different efficiency coefficients. The question is the slope of that line. With tax liberation day marching forward constantly I’d suggest we have passed the optimum. Now it’s just how you whack it up. K Street makes sure that will be an ugly and unfair result.
There’s real GDP growth. I don’t see anything special in either the 1980s or after 1997.
https://fred.stlouisfed.org/series/A191RL1Q225SBEA
The problem is an economy that is undemocratic. A tiny group makes all decisions while 90% are frozen out with no say in the production process.
? To maximize the “democratic-ness” of the economy government policy would need to be directed towards making the economy more market-oriented.
Economies are either markets, command economies, or the very difficult balancing act of a little of both. Most modern economies try for the last alternative but rarely hit it. A “democratic” economy is a category error. Like a blue redhead or a hairy billiard ball.
Capitalism is always command-oriented, markets or no. In the U.S. you have a small group of people called investors/employers who make all decisions regarding what is produced, how it’s produced, where investment is directed, own the means of production and discipline their workers. In the Soviet Union you had a small group of people who made all decisions regarding what was produced, how it was produced, where investment is directed, own the means of production and discipline their workers. Markets are irrelevant in how democratic these decisions are. There’s no democracy in it whatsoever because the overwhelming majority of people involved in the production process have no say in it.
Lenin, after the 1917 revolution, did not say they were building a socialist economy. He said they were building “state capitalism.” All capitalist economies are some mixture of private and state capitalism but the relationships and institutional arrangements are the same. Only which group is making the decisions changes.
All economies over a certain size are some mixture of private sector decision-making and public, authoritarian decision-making because there is no alternative. Every organization over a certain size is a bureaucracy. The issue is not whether it’s democratic or not. It’s not. The issue is whether it’s based on private ownership or not.
All of this is why I have a prejudice towards smallness. I think that the aim of policy should be to keep all organizations including the government small.