There Was No 'Secular Stagnation,' But There Were Major Tax Hurdles to Growth
The World Record for the men's 100-meter dash is 9.58 seconds, while the men's world record for the for the 100-meter hurdles is 12.80 seconds. The athletes run the same distance on the same track and yet the Hurdlers consistently turn in times almost 33% slower. It's obvious that each of the ten hurdles in the Athletes path slows them down. If there were fewer hurdles, it would stand to reason that their times would improve. If the hurdles were removed completely you would expect the times to improve to the point where they were the same as the 100-meter dash. Hurdles in sports and business slow you down.
The government imposes hurdles on the economy in the form of taxes and regulations. While admitting that punitive taxes and regulations on things like cigarettes are levied with the intent of reducing consumption, they want you to believe that other taxes and regulations have little or no effect on economic growth. Those who suggest that these hurdles have little impact and that removing them won't make much difference are the same people who told us last year that the anemic, 1.6% economic growth rate was the new normal.
They told us we should expect to see more of the same slow economic growth moving forward. They reminded us that the economic recovery was getting old and it wouldn't be long before economic growth would decelerate. What happened to their predictions? Far from decelerating the economy has been accelerating all year long with annual economic growth heading towards the 3+% range. Their nearly 1.5% miss on economic growth is no small miss. A 19 trillion dollar economy growing at 3.5% is 3.6 trillion dollars larger at the end of ten years than an economy that grows at 2%. Our tax code which has proven that it routinely provides 18% of GDP in the form of tax revenue, regardless of the rate structure, would produce an additional 660 billion dollars in tax revenue per year because of the increased growth.
Why did growth pick up so much this year, why did the pundits miss the mark by so much, and importantly, what does that tell you about their models and future projections of the economy? Little was passed in the way of legislation this year, so what explains the acceleration in growth. What has changed from last year? The only real change is the tone in Washington, the tone from the top is business friendly. The current administration is rolling back the regulatory state. Business regulations are taxes without rates or brackets, and it costs time and money to comply with them, much as it does when dealing with the tax man. They can also have a much bigger impact on startup and newer businesses who may not yet be profitable and subject to taxes, but still have to bear the cost of complying with regulations. They also take away focus from the business. Instead of concentrating on growth, the entrepreneur has to focus on complying with regulations and filling out forms. In some cases, the business may find itself working on how not to grow in order to avoid an even greater regulatory burden imposed on larger companies. Some rules are surely necessary, but the regulatory state was clearly out of control. The proof is in this year's economic rebound which has occurred in absence of tax cut legislation and can largely be attributed to a less onerous regulatory regime.
With over 800 regulations rolled back in just the first six months, and many more being delayed, companies can now breath easier with the governments' regulatory boot lifted from their necks. As these regulatory hurdles continue to be removed we should expect to see better economic numbers as the new normal. Rolling back the regulatory state has already led to an increase in economic growth that is greater than what the JTC is projecting as a result of the tax bill.
Next up is the tax hurdle. It would be great to say that the bill working its way through Congress is great, but it's not. Reducing the corporate rate to 20% is long overdue, but missing is any cut in the capital gains tax. The top marginal rate should be lowered to at least 28%, where it was after the last major tax rewrite, but it stays at 39.6% in the House version and is only 1% lower in the Senate's.
So while a smallish tax cut is better than nothing, don't worry about the dismal projections from the JTC that economic growth from the tax cuts will amount to no more than 8 tenths of one percent. Remember, this is the agency whose projection for 2017 of 23 million ACA enrollments came up short by 13 million. If tax and regulatory hurdles didn't matter, the economic acceleration we are now experiencing could not be taking place. They do matter and the more of them that are removed the better economic growth will be.