[Vision2020] Boost from Tax Cuts: from 1 to zero percent increase in GDP

[Nicholas Gier]

SAN FRANCISCO (Reuters) – The economic boost from U.S. President Donald
Trump’s $1.5 trillion tax cut will probably fall well short of most
analysts’ “overly optimistic” expectations, two economists wrote Monday in
the San Francisco Federal Reserve Bank’s latest Economic Letter.

Instead of the boost to GDP growth this year of about 1.3 percentage points
estimated by the Congressional Budget Office and other forecasters, they
wrote, “the true boost is more likely to be less than 1 percentage point,”
with some studies pointing to as little as zero.

That is because fiscal stimulus has a large effect on economic activity
when unemployment is high and personal finances are constrained, but it
delivers much less of a jolt when the economy is strong, they wrote.

In June the U.S. unemployment rate rose slightly to 4 percent, much lower
than most economist estimates of a sustainable rate, as businesses added
many more jobs than expected and more job seekers entered the labor force.

Governments typically increase deficits with spending and tax cuts when
times are tough, not when an economic expansion is barreling toward
becoming the longest running in U.S. history.

Doing so raises concerns about the nation’s capacity to combat future
downturns, particularly if it does not deliver outsized economic gains in
the meantime, the report suggests.

“Recent research finds that the effects of fiscal stimulus on overall
economic activity are much smaller during expansions than during
downturns,” wrote Tim Mahedy and Daniel Wilson, fomer and current San
Francisco Fed economists, respectively.





-- 

A society grows great when old men plant trees whose shade they know they
shall never sit in.

-Greek proverb

“Enlightenment is man’s emergence from his self-imposed immaturity.
Immaturity is the inability to use one’s understanding without guidance
from another. This immaturity is self- imposed when its cause lies not in
lack of understanding, but in lack of resolve and courage to use it without
guidance from another. Sapere Aude! ‘Have courage to use your own
understand-ing!—that is the motto of enlightenment.

--Immanuel Kant
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