We noted, just prior to the election, that the United States has gone a rather long time since the last recession. The ‘Great Recession’ technically ended after the second quarter of 2009, though the persistence of high unemployment and the very slow growth rates of the economy certainly made it feel like it was still going on for several more years. But, using the technical definition only, the United States has gone 8 years and three months since the last recession ended, and the longest period since the end of the Depression that we have gone without a recession is ten years. By that metric, we should fall into recession by the third quarter of 2019, still within Donald Trump’s first term, though predicting the timing of the business cycle is, quite frankly, a matter of pure guesswork. There will be someone who gets it right, by pure dumb luck, and then you’ll see all sorts of ads on social media telling you how absolutely brilliant he was, and therefore you need to buy his book, so that you can be ready for unparalleled security and economic prosperity.
The President’s Council of Economic Advisers published an economic analysis of the proposed tax cut/tax reform plan last month. It’s full of references and other gobbledygook that you have to be an economist to understand, but, in conclusion, the CEA states:
In the foregoing analysis, we have cited a wide range of academic studies demonstrating that reductions in corporate tax liabilities have significant positive short – and long -run effects onGDP growth and wages, in particular by lowering the user cost of capital and thereby inducing higher investment in capital formation, financed principally by increased capital inflows. On the basis of these studies, we have calculated that a reduction in the statutory Federal corporate income tax rate from 35 percent to 20 percent simultaneously with the introduction of immediate full expensing of capital investment would generate an increase in GDP ofbetween 3 and 5 percent in the long run. Studying the impact of this growth on the typical household, we again find that the average household would, conservatively, realize an increase in wage and salary income of $4,000.
That’s over ten years, of course. How about this one:
While a full analysis of the individual side of the Unified Framework is premature at this time, a final factor to consider when thinking about the impact of tax reform on the welfare of our citizens is the likely impact of marginal personal income tax rate changes on pre-tax incomes. In this section, we sketch this additional factor using genera; economic principles frequently covered in the literature. Changes in personal income tax rates can affect both pre-and-post-tax income. The simplest intuition for the pre-tax income changes is that individuals must make decisions regarding how much labor to supply based on the income which might be earned from that labor compared to the opportunity cost of working. A reduction in the marginal tax rate on earned income provides a bigger incentive to work. That is the substitution effect of labor taxation. On the other hand, rate reductions on individual income will reduce tax payments and increase net income. This increase in household net income may trigger the so-called “income effects’ of lower tas rates because households will likely want more leisure time as their income rises, all else equal. The empirical literature has come to the general conclusion that labor supply elasticities for prime age males are near zero. However, other segments of the population — in particular married women — are more responsive to changes in marginal tax rates; for women, the substitution effect outweighs the income effect.
That is a paragraph full of weasel words like “intuition,” “may,” “likely,” and “general conclusion.”
The Council of Economic Advisers referenced, as a baseline, the Congressional Budget Office’s Update to the Budget and Economic Outlook, 2017-2027. The chart to the right indicates the CBO’s estimates, based on current law, not changes if the tax cut is passed. The rate of GDP growth is, however, nominal GDP, which does not account for inflation; the CBO projected a GDP price index inflation rate of 1.9% from 2018 through 2020 and 2.0% 2021 through 2027, which reduces real GDP growth to the 1.6 to 1.9% range.
Why did I include that? Because in no year does the CBO, just like the CEA, figure in a recession! Yet, if there is no recession before the end of 2027, we will have gone 18½ years between recessions, blowing the current record of ten years out of the water. Does anyone believe that there won’t be another recession between now and the end of 2027?
There is, of course, a very good reason for the CBO not to figure in a recession. If they included one in, say, 2019, not only would they be engaging in the kind of economic speculation that has always been beyond economists’ capability, but they would be negatively impacting private economic activity, as some people would see such a projection as, hey, 2019 is going to be a bad year, and adjust their economic behavior in such a way that it could trigger a recession. The CBO specifically state, on page 8:
CBO’s projections do not incorporate explicit business-cycle developments; rather,they include a growth rate of real GDP that reflects underlying trends in the economy’s capacity to produce goods and services.
Even that is too generous, given that a recession occurs when the economy’s capacity to produce goods and services significantly exceeds the demand for goods and services; businesses fail and people lose their jobs because those businesses and employees depend upon a demand for their business that isn’t there.
There are many competing estimates on the economic impact of the proposed tax cut plan. The Tax Foundation, which always advocates for lowered taxes, has a particularly optimistic one. The National Federation of Independent Businesses supports the plan. But the truth is that nobody knows what the tax cut plan will do. The most optimistic projections have it increasing the deficit by $1.496 trillion over the next ten years. But without a recession figured in, there is no way to have any certainty that the deficit impact will be that low. The deficit exceeded $1 trillion the first four years under President Obama, as he was attempting to deal with the recession and slow growth; the next recession could easily add just as much deficit spending as the last one.
Whatever the estimates are, they are wrong, and without a recession figured in, they are all wrong to the low side of the deficit, and the high side of economic growth.