And there is no chance of a “morning in America”-type boom over the next two years.
For one thing, in 1983-84 America was able to grow very fast by taking up the huge amount of economic slack that had accumulated over the course of the double-dip recession from 1979 to 1982. Right now, with unemployment below 4 percent, it’s not clear whether there’s any economic slack at all. There’s certainly not enough to allow the 7-plus percent growth rates in real personal income that prevailed in the run-up to the 1984 election.
Also, a housing boom driven by dramatic interest rate reductions was central to the rapid growth of Reagan’s third and fourth year in office. (No, it wasn’t all about the miraculous effects of tax cuts.)
But today’s Fed can’t — literally can’t — deliver the kind of boost it did back then by bringing double-digit interest rates down to single-digit levels, because rates are already quite low. And with housing prices looking rather high, it’s hard to imagine a huge surge looking forward.
Are there other ways that the economy might rescue Trump? What about the 2017 tax cut, which Trump said would be “rocket fuel” for the economy?
Well, by increasing the budget deficit, that cut probably gave the economy some stimulus, temporarily raising growth. But that effect is already fading out, and the economy would have been slowing down even without the extra drag created by the Trump shutdown. This doesn’t necessarily mean that we’ll have a recession soon, but we’re almost surely looking at unimpressive growth at best.
But wasn’t the tax cut supposed to increase long-run growth, by increasing business investment? Yes, it was — but it isn’t delivering on that promise. Corporations received huge tax breaks, but they mostly used the money to pay higher dividends and buy back stocks, not for investment. And even the modest rise in business investment that did take place in 2018 seems to have been driven by higher oil prices, not tax cuts.
