With econ­omy at full steam, the wrong time for a tax cut?

The Washington Post - - ECONOMY & BUSINESS - AN­DREW VAN DAM an­drew.van­dam@wash­post.com

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.


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