With economy at full steam, the wrong time for a tax cut?
Two lines just crossed on a chart, and they show why, by at least one prominent measure, the Republican tax plan is coming at a mighty strange time.
Congressional Republicans promise their proposed tax plans will turbocharge the economy and complete its long recovery from the Great Recession. In a little-noticed development, recent economic data indicated the economy has actually, finally, reached its potential capacity.
For the first time since the end of 2007, the economy, measured by gross domestic product (GDP), is at its (theoretical) potential.
The return to potential GDP can be thought of as the true end of the long road back from the Great Recession.
All that extra capacity helped the economy grow at an average of 2.2 percent a quarter since the recession began, well above what economists consider to be possible in the long run.
It is unlikely that pace can be sustained, and because there’s not much more room to grow, the ambitions of President Trump and Republicans in Congress carry some big risks.
It requires deft policy to manage growth in an economy that’s nearing capacity while keeping inflation low and simultaneously quashing bubbles or other dangerous distortions. The last three times the economy ran above potential, it was followed by a recession.
It’s possible the tax bill could increase the economy’s potential. Corporate tax revisions could make the United States more competitive or let companies invest more in research and development.
Economists doubt the tax effort will have that pronounced an effect — perhaps just a fraction of a percentage point of GDP.
The Congressional Budget Office forecasts potential GDP will grow an average of 1.8 percent a year.
We can break the potential GDP barrier for a while, but think of those high growth rates like putting the pedal to the metal.
It’s fun and even useful in spurts, but if you keep it up for the long haul, you increase the risks of losing control or crashing.