Coinciding with the Presidents 100-day milestone on April 29, the first quarterly reading on economic growth during the Trump Administration was released on Friday and the results were disappointing. The tepid 0.7 percent growth rate was: below expectations; below the economys long-run average (3.3 percent); and, even below the sub-par growth of the Bush II and Obama presidencies (1.8 percent).

This continued sub-par performance illustrates that a pro-growth policy mix is essential. In this light, the tax reform outlined by the Administration is a positive sign. Lower marginal income tax rates and a simpler tax system: reduces the costs of complying with the federal tax code; increases the return from working, saving, and investing; and, encourages faster economic growth. It also addresses the concerns of a majority of Americans who, according to the latest Gallup survey, believe that their federal taxes are too high.

Federal taxes are not the only way that the government impacts the economy, of course. Taxes at the state and local level, government expenditures, regulations, trade policies, and monetary policies all matter. It is the combined impact from this broad array of policies that ultimately encourages, or discourages, robust economic growth.

The slow economic growth during the Bush II and Obama presidencies is the result of anti-growth policies across most of these policy areas. Consequently, reinvigorating economic growth requires reforms to the broad policy mix.

Taking this comprehensive view, the Administration is sending conflicting signals.

Starting with the positive, in addition to the tax reforms, the reversal of the regulatory assault on the business sector, particularly on the energy, banking, and telecommunications sectors, is an encouraging sign. Overly burdensome regulations have played a very significant role in the current growth malaise, and easing these burdens will go a long way in restoring the vibrant economy of the 1980s and 1990s.

Spending control, on the other hand, is a negative sign. While the ill-advised surge in spending associated with the Great Recession has passed, total government expenditures continues to rise relative to the private sectors ability to afford these costs; and, the agreement to fund the government through the remainder of FY2017 does nothing to alter these trends.

The longer-term trends are even more disconcerting. Based on the current spending patterns, the Congressional Budget Office (CBO) continues to project expanding budget deficits that aresignificantly above the historical average.

Historically, there is a strong relationship between the size of the federal governments deficits and the private sectors ability to increase its asset base (after adjusting for depreciation). A growing private asset base is a necessary condition for robust and sustainable growth.

The governments spending problem does not justify delaying the tax cuts. The U.S. currently imposes the most burdensome business tax system among the industrialized countries. This has encouraged U.S. companies to hold more than $2 trillion outside of the U.S. Reducing these tax rates and encouraging the repatriation of the dollars held overseas at a discounted tax rate will incent economic growth.

The repatriation will also provide a one-time revenue boost to the government. The last repatriation opportunity in 2004 netted the federal government an additional $34.5 billion.

Ultimately, the governments tax burden reflects its expenditure commitments; and the federal government has a spending problem. Therefore, preserving the growth benefits from the tax reductions requires effective spending reform.

Effective spending reforms would impose a hard cap on total expenditure growth, identify (and eliminate) duplicitous and unnecessary spending, and address the third rail of politics entitlement reform (particularly Social Security, Medicare, and Medicaid). Without budget reforms and prioritization, the long-term benefits from the tax reductions will not be realized.

Even more disconcerting are the anti-trade actions such as imposing a 20 percent tariff on Canadian lumber, and the buy American, hire American campaigns. Exemplifying these negative consequences, according to the National Association of Home Builders, the 20 percent tariff on Canadian lumber will raise lumber costs 6.4 percent and add over $1,200 to the average cost of a home. Restricting international trade opportunities is a net negative for the U.S. economy and works against the goal of promoting greater economic growth.

The combined growth incentives created by these conflicting signals is unknown. While lower tax and regulatory burdens encourages growth, declining opportunities for international trade and the growing costs from unproductive government spending discourages growth.

Maximizing our long-run growth requires a policy mix that implements a pro-growth tax system, reforms government spending, improves the anti-growth bias inherent in todays regulatory environment, and expands international trading opportunities. Such a pro-growth policy environment will help ensure 0.7 percent growth is the aberration, not the norm.

 

Wayne Winegarden, Ph.D. is the Managing Editor for EconoSTATS and a Sr. Fellow in Business and Economics at the Pacific Research Institute

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