Tax Cuts Can Create Sustainable Growth and Are Not a Sugar High

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It appears to be a growing consensus that a fiscal policy largely of tax cuts is a ‘sugar high’ whose effects will begin to fade by early 2019. Basically, this mainstream forecast assumes that the “New Normal” of sub-2 percent trend growth is indeed a lasting state. Tax cuts are good for growth and I doubt that the effect fades quickly. Part of the improvement in the economic scene is deregulation; part is the result of rising animal spirits. Here’s how to analyze the policy mix: The correct tool is directed at the correct target. That is: a) monetary policy is focused solely on inflation-stability. Frankly, we have just had an experiment in the efficacy of monetary policy as an instrument of growth. I’ll grade it a “D” for growth, though an “A” for lifting deflation risk; b) Fiscal policy has to be graded at least a “B+”. Deregulation and tax reform have now been turned towards growth generation, and growth is happening; c) Trade policy is an “Incomplete”. If the goal is to pressure China and to lower tariff barriers globally then it will merit an “A+”. For now, there is too much uncertainty for the economy and markets (although I do not believe we will see a trade war) and d) Labor policy is an “Incomplete”. The Administration has to find a balance between growing the labor force without weighing on wages, whether skilled or unskilled. So while the monetary/fiscal policy mix appears to be on track to lift the growth rate, the latter two ‘incompletes’ need to be settled, one way or another to determine where the US is going. Currently, we have uncertainty. And, unnecessary uncertainty detracts from the long-term story. - Special Guest Blogger: Tim Kearney, PhD

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