Laffernomics and Tomorrow’s GDP Estimate

Financial FAQs

The decline of so-called Laffernomics, an economic theory first proposed by conservative economist Arthur Laffer in 1974, posited in so many words that lower tax rates of the wealthiest, in particular, would increase overall tax revenues as well as economic growth. It has been Republicans’ economic doctrine since then.

Yet it hasn’t worked in numerous examples of what has also been called ‘trickle-down’ or Reaganomics since the 1980s, at least. And we will see further evidence of this in tomorrow’s initial estimate of first quarter GDP growth. First estimates were that it would be less than 1 percent.

image

FRED/Tradingeconomics.com

Considering full 2018, the economy advanced 2.9 percent, the most since 2015 and above 2.2 percent in 2017. In reality, growth has been trending down since the 1980s. However, GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2018, reaching an all-time high of 16.70 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958,” which illustrates the uncertainty of predicting growth for any quarter, per the graph.

Tomorrow’s initial estimate of Q1 GDP growth will tell us just why Laffernomics in the guise of a one-time slashing of tax rates via the 2017 Republican Tax Cut and Jobs Act for the wealthiest and corporations doesn’t work for most Americans.

image 

BEA.gov

Consumer can’t spend what they don’t earn and the average household income (that means for most Americans) has barely risen since the 1980s, after inflation is factored in.

As economic blogger VOX put it last December, “The 2017 tax bill cut taxes for most Americans, including the middle class, but it heavily benefits the wealthy and corporations. It slashed the corporate tax rate from 35 percent to 21 percent, and its treatment of “pass-through” entities — companies organized as sole proprietorships, partnerships, LLCs, or S corporations — will translate to an estimated $17 billion in tax savings for millionaires this year. American corporations are showering their shareholders with stock buybacks, thanks in part to their tax savings.”

Some commentators are saying Q1 GDP growth might look better, due to higher consumer spending (retail sales just shot up), and One of Wall Street’s top forecasters, Macroeconomic Advisers, has lifted its GDP estimate to 2.8 percent from just a little over 1 percent a month ago. Other Wall Street firms have done the same, says MarketWatch.

But there are many caveats. “The increase in spending by consumers looks to have been the weakest in a year and business investment appears to have been flat,” contended Scott Anderson, chief economist at Bank of the West. “A festering U.S. trade dispute with China, a weak global economy and uncertainty stemming from the government shutdown all had a negative effect on investment. The U.S. economy isn’t out of the woods yet.”

There is one other leg to any economic recovery—government investment, yet what can the government spend when the Republican tax bill reduced almost $1.5 trillion of its revenues, and decided to pay for it with almost $1.5 trillion in cuts to Medicare and Medicaid benefits over the next 10 years?

The CBO estimates that implementing the Act would add an estimated $2.289 trillion to the national debt over ten years, or about $1.891 trillion after taking into account macroeconomic feedback effects, in addition to the $9.8 trillion increase forecast under the current policy baseline and existing $20 trillion national debt.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Keynesian economics, Politics, Weekly Financial News and tagged , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s