The following article by Andrew Soergel was posted on the U.S. News and World Report website December 8, 2017:
Many economists aren’t optimistic about the long-term implications of the GOP’s tax overhaul.
President Donald Trump and the GOP congressional leadership have pitched their tax package – the passage of which appears to be a virtual certainty at this stage of the game – as a sure-fire formula to propel
As recently as Wednesday, Trump was quoted during a Cabinet meeting as saying he sees “no reason why we don’t go to 4 percent, 5 percent and even 6 percent” gross domestic product expansion in the months and years ahead.
Economists have broadly doubted these claims – though few quibble with the idea that the GOP-constructed tax plan would have a modestly positive impact on markets and the economy over the near term. Analyses from the Joint Committee on Taxation, the Tax Policy Center and the University of Pennsylvania’s Wharton Budget Modelhave all predicted a final bill, in a best case scenario, would add a few fractions of a percentage point to the country’s GDP growth rate over the course of the next 10 years.
The country is currently moving on roughly a 2 percent growth trajectory, and few independent analysts have expressed confidence that tax reform would meaningfully spur growth much beyond that potential longer term.
Indeed, a growing number of experts are using the term “sugar high” to describe what the tax bill is likely to do to the U.S. economy – provide some short-term energy for growth before petering out or, even worse, pushing the country toward a crash.
“I think it would be an enormous mistake to have a tax cut that we can’t afford based on numbers that are unreliable on the hope that we get where you’re going,” former Treasury Secretary Jack Lew told CNBC in an interview last month. “I think you get a sugar high from a tax cut. You might see some quick benefit of macroecominc stimulus at a time when we don’t need it – the economy’s at full employment.”
Lew, who served as former President Barack Obama’s Treasury head during his second term, passed off an economic recovery earlier this year that was historic both for its length and for its weakness. The country is now in the midst of the third-longest stretch of growth on record, but that growth has been uncharacteristically weak in recent years, fueling arguments from Trump and his GOP allies that some sort of fiscal stimulus package – such as tax reform – must be passed to get the economy moving at a faster clip.
It’s not entirely surprising that a member of the Obama administration would criticize a new regime, especially one that has seemed to go out of its way to undo much of what was put in place during the prior eight years.
What is surprising, however, is the number of private-sector analysts and business executives who have come forward – many of whom are expected to benefit immensely from the GOP’s tax plan – expressing similar sentiments.
“I worry about a sugar rush which you crash harder from,” Gregory Peters, a managing director and senior investment officer at PGIM Fixed Income, told Reuters last month. “I don’t know if [a tax overhaul is] necessary at this point.”
Separately, a group of researchers at Bank of America warned of a “fiscal sugar high” from a new tax bill in a research note last month, suggesting “tax cuts are not necessary to keep the U.S. economy on track and would result in exacerbating the federal debt outlook.”
And a team of Morgan Stanley economists, meanwhile, wrote in a recent note that the best-case scenario for extending the current economic cycle would be “a failure of tax reform [that] would likely cause a short-term market pullback,” as such an event would help in “reducing the risk of overheating conditions and allowing policy tightening to remain gradual.”
“I can’t see that this is the moment when you’d want the most fiscal stimulus in the market, when we’re kind of mostly at full employment, when GDP last registered at 3 percent,” Lloyd Blankfein, CEO and chairman of Goldman Sachs Group Inc., told Bloomberg in an interview last month.
To be sure, the tax plans have plenty of support from the private sector. JPMorgan Chase Chairman and CEO Jamie Dimon, who also serves as the chairman of the Business Roundtable advocacy group, suggested it was “critical that we enact pro-growth tax reform that will level the playing field for U.S. business to be globally competitive” in a statement earlier this week.
But analysts have two primary concerns with a tax bill’s passage. The first is that it would cause the economy to heat up in the short-term, leading to higher inflation that would force the Federal Reserve to raise its benchmark rate more quickly than it otherwise would to keep up. That raises the possibility that a monetary policy adjustment effectively clips the wings of the recovery and sends the country into a recession.
“The only realistic analysis of this bill is that if it passes in 2018 and is not immediately repealed, 2023 will look exactly like 2008,” Howard Gleckman, a senior fellow at the Tax Policy Center, wrote in a recent blog post, predicting the tax proposal could end up sending the economy down a similar path to the one that led to the Great Recession.
It’s further argued that such a move doesn’t need to happen this late into a recovery. Mark Hamrick, a senior economist at Bankrate.com, compared such a move to “injecting an elderly athlete with adrenaline, which causes him to have a heart attack” during an interview with U.S. News earlier this year.
“One of the unintended impacts of the tax legislation could be to force the Federal Reserve’s hand to raise interest rates more aggressively in the future,” Hamrick wrote in a note Saturday after the Senate managed to pass its version of a tax overhaul. “The worry for the Fed will be whether the economy might overheat, including the creation of bubbles in the stock market and among other asset classes.”
The other primary concern is the increased debt burden that the tax bill would generate. Even dynamic scoring projections from the Joint Committee on Taxation and other non-partisan outfits have suggested both the House and Senate tax bills would drive the U.S. more than $1 trillion deeper into debt over the next 10 years.
Over the long haul, there’s concern that such indebtedness would lead to depressed levels of economic growth and the possibility that certain government obligations – such as Social Security and Medicare payments – would need to be reformed to allow the U.S. to keep up with its interest payments.
“Tax cuts in line with the House and Senate bills will lead to larger federal deficits and debt in the long term with only temporary positive growth effects,” Fitch Ratings said in a statement Wednesday. “Over the longer term, higher borrowing and the expectation of tax rises could undermine the growth impact.”
GOP lawmakers have argued that the more unfavorable scoring projections their tax overhaul has received are flawed and that the legislation would more than pay for itself going forward through stronger economic growth.
But questions remain as to exactly how long that stronger growth would last. Few argue that the economy would marginally accelerate in the near term. But the longer-term implications of a fast-moving Fed and significantly higher U.S. debt are considered by some to be more ominous.
“My main fear as we entered 2017 was that the Fed would tighten too much and too fast, pushing the economy into a deflationary recession. I still think that’s the most likely scenario,” Patrick Watson, a senior economic analyst at Mauldin Economics, wrote in a blog post Tuesday. “If this tax bill passes in its current form, the recession may happen sooner and go deeper. The combined fiscal and monetary tightening could be the triggers.”
View the post here.