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GOP Tax Cuts Won’t Cause The Economy To Overheat; Here’s Why | Stock News & Stock Market Analysis

Economy: After eight long years of subpar growth, economists now warn that the economy, which is just starting to show signs of life, is at risk of overheating. Can these warnings be believed?

X While Republicans were debating the particulars of their tax plan, various economists were busy warning that enacting a pro-growth tax cuts would risk “overheating” the economy.

The argument goes like this: The best the U.S. economy can do these days is about 2% annual GDP growth, which is the path it’s currently on. If the tax cuts boost growth above this pace, there’s a risk that it could spark inflation, which would require the Fed to raise rates, which would risk a recession.

But who says the economy can only grow at 2%? And why? The answer is remarkably simple, and almost certainly wrong.

To get at that 2% figure, economist basically add together the growth in the labor force and a measure of output-per-worker — better known as productivity. Based on current trends, the expectation is that the population will climb at slightly less than 1% a year, and productivity will climb at about 1% a year.


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“This is why many economists argue that the U.S. economy has a potential growth rate of 2% per year, possibly less,” notes First Trust chief economist Brian Wesbury. “And they also say it can’t be fixed.”

Wesbury, along with his colleagues Robert Stein and Strider Elass, explain that while population growth is fairly easy to measure, productivity isn’t.

In fact, they say, the government is underestimating real productivity growth, because it doesn’t know how to measure the impact of new technologies.

“Yes, government sources say it’s weak. But anyone who goes outside instead of living in the data knows nearly everything is getting better, faster and cheaper,” they write. They note that, among other problems, the government doesn’t know how to account for free stuff, like GPS navigation on smartphones, free language translators, Google search results when it measures productivity.

Zachary Karabell, writing for Bloomberg View, notes that, as a result, “there is a growing chasm between what our economic system is and what our numbers are capable of measuring.”

Wesbury and company point out that, to the extent that overall productivity isn’t higher, one big reason is government. Indeed, two of the industries with the worst productivity growth in the past decade have been power generation and banking — both of which are extremely heavily regulated by government.

Putting this together, it would seem that there is clearly room for additional growth without sparking inflation, especially if the Trump administration continues to liberate industries from excessive, productivity-killing, government regulations.

Indeed, the bigger risk isn’t that the economy will overheat, but that the Fed will overreact and raise rates too aggressively.

RELATED:

China And Europe See What U.S. Critics Don’t: A U.S. Tax-Cut Boom Is Coming

It’s Official: Tax Cuts Will Grow The Economy

The Coming Tax-Cut Boom


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