Trump Is Slowing US Economic Growth
The current state of US macroeconomic policymaking across four key areas does not bode well. Although the 2017 tax legislation has done its job in promoting faster growth, rising trade tensions, persistent regulatory burdens, and a lack of investment in infrastructure all threaten to limit the US economy's potential.
CAMBRIDGE – For some time, the four horsemen of US macroeconomic policymaking have been taxation, regulation, trade, and infrastructure. Having studied the first in detail, I have found tax cuts to be a positive contributor to economic growth. Though I have considered the second area in less detail, the evidence suggests that regulation is, at best, only a minor contributor to growth. The third area is very important, which is why today’s trade tensions are so worrying. The fourth area exists only in rhetoric: an infrastructure program is currently not a part of the macroeconomic policy repertoire.
In the first area, I estimate that the 2017 tax legislation added 1.1% per year to the United States’ GDP growth rate for 2018‑19. Of that, 0.9 percentage points reflected the reduced tax rate on individuals, whereas 0.2 percentage points derived from the rate cuts and improved expensing provisions for businesses. While the growth-enhancing effect of the tax cuts for individuals is not expected to continue beyond 2019, the impact of the corporate-tax reform will likely persist for some time to come.
As for the second horseman, there is some indication that the expansion of federal regulations has begun to taper off, after undergoing a long period of growth. As of 2017, RegData, which tracks the number of words relating to constraints on economic activity in the Federal Register, shows that new regulations have plateaued. The regulatory burden on business and economic activity is no longer rising, but it is not diminishing, either.
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