The job market is booming and wages are rising. Yet gross domestic product growth is still languishing. What gives?
Last Friday, the Bureau of Labor Statistics announced that 223,000 jobs were created in the month of May and unemployment is now at its lowest level since April 2000. A record 155,474 million Americans have jobs. Just over six million people were unemployed, which is the lowest level since 2001, and that was when the labor force was 18 million people fewer than it is today. Now there are 6.7 million job openings – a record – and openings are outpacing the number of people looking for work. Black unemployment is at an all-time low. Wages rose by 2.7 percent over the past year to an average of $26.92 an hour. Best of all, the employment growth is not only not built off growth of government but off the Trump administration cutting 24,000 public-sector jobs.
In terms of the business cycle, it doesn’t get better than this. We are finally at the prosperity “boom” stage of the cycle. But the good news also portends very bad long-term economic health. If this is the best the economy can get, how come economic growth was just 2.2 percent last quarter and we are still not hitting 3 percent, much less 4 or 5 percent growth annually that has historically been associated with an economic boom?
The sad reality is that we no longer have a free, organic economy. We have a centrally planned and distorted economy that even at its peak strength is weighed down by the albatross of statism so much that even solid tax cuts cannot ameliorate the effects.
It’s hard to deny the success of the tax cuts in promoting this degree of expansion in the job market. One could argue that the economy was on its way to recovery before the tax cuts, but it’s unlikely that the job market would be this good with wages increasing if not for the historic corporate tax cut.
The biggest argument against promoting a tax cut and enjoying all the economic benefits thereof was the budgetary cost. The Congressional Budget Office predicted the feds would lose $144 billion in this fiscal year alone, $271 billion in the next fiscal year, and a total of $1.5 trillion over 10 years. But that is not panning out. To begin with, revenue was already on a record trajectory over the past year. For the first seven months of the fiscal year, revenue is up $83 billion over this time last year. Now, obviously since the tax cuts were enacted in January, revenue has gone down some relative to the baseline, but it’s actually still increasing in absolute numbers.
Overall, revenue for the first four months of the calendar year is up roughly $50 billion or 4.2 percent relative to January-April 2017. Clearly, some of this is temporary due to businesses and individuals front-loading and shifting their tax filing to the earlier tax year to benefit from some of the expiring deductions. Over time, the Treasury has to lose some money, but if you peek inside the numbers, it’s clear the loss won’t be anywhere near what the CBO predicted, because the economic growth is adding more jobs and more taxpayers.
Obviously with the massive corporate rate cut, that section of revenue plummeted 30 percent for the first four months of the year. However, corporate taxes were never a big share of the revenue pie to begin with (accounting for only 9 percent of gross revenue last year), so it only amounted to a $26 billion revenue loss relative to last year. While corporate taxes never meant much to the federal coffers, they do matter for economic growth, especially when coupled with the individual rate cuts. Revenue from individual income taxes, on the other hand, increased by $68 billion, and payroll tax revenue grew by $12 billion.
Again, lest we think we will downright increase revenue in the short run, a few caveats are in order. Opponents of the tax cuts will say that some of the economic recovery was already baked into the cake for this year even without the tax cuts, so we are still losing money relative to what could have been. On the other hand, without the tax cuts, it’s very unlikely we would have actualized this degree of job growth producing this much revenue.
Also, some of the spike in individual income tax receipts, especially for the month of April, were from individuals paying enormous capital gains taxes on last year’s market returns because of the extraordinary year for the stock market.
Nonetheless, with payroll taxes up and withholdings steady, it’s hard to make the case that we are losing much on the individual income side. Also, the loss of corporate tax revenue should actually slow down as time goes on because much of the precipitous loss this year was the result of businesses accelerating their deductions into 2017 because, thanks to the law changes, 2017 deductions were much more valuable than 2018 deductions. The pendulum will swing back in the coming months.
In totality, if revenue begins to drop relative to a hypothetical baseline, this is a pretty good trade for historic job creation and putting money in the pockets of Americans both from the individual rate cuts and from increased wages.
Which brings us to the spending side of the ledger. What have we gotten for the massive increase in spending other than slowing down economic growth and creating more dependency? While revenue is up $83 billion from last year during the first seven months of the fiscal year, spending is up almost $120 billion. That follows the previous year of GOP governance when we racked up another $1.2 trillion deficit of net fiscal operating costs, the most accurate measure of government liabilities. And thanks to the omnibus bill, this number will accelerate every month, as spending surpasses $4 trillion for the first time this year and Republicans keep passing budget bills built off that baseline.
Interest on the debt is now the fastest-growing expenditure, and it is all wasted. This is not just some abstract number representing a future problem of funds that the next generation will have to pay off. It is hampering economic growth right now. Tax cuts can only get you so far.
Why is it that we have unprecedented health in the job market but the economy is still not growing at an annual pace of three percent? The current economic growth is not bad, but it should scare us that this is the most favorable climate in 18 years, yet GDP growth is not moving. We have not had a year of three percent growth since 2004-2005, a year of four percent growth since 2000, or a year of five percent growth since the Reagan years. Back when unemployment was not even as low as today, the economy was growing at 3.8 percent in 2004 and 4-4.7% in the late ’90s.
The answer is, tax cuts or not, we no longer have a free market economy. We have so much misallocation of resources, with all sorts of capital going into government-mandated schemes that increase dependency programs or debt, rather than the most efficient investments. As interest rates are pushed higher, more private money is used to purchase higher-interest Treasury securities rather than invest in capital goods, such as factories and plants. Thus, we have a vibrant employment market at the peak of the business cycle, but that peak is flattened by the endless market distortions of mandates, regulations, debt servicing, and the Federal Reserve’s market manipulation.
We are leaving our rising generation with government-sponsored health care and education cartels that destroy innovation, sky-high insurance bills, crushing student debt, and nothing to show for it but a public debt that will soon force us to pay more than the cost of the military just on interest payments.
Our 2018 economy is akin to your 1960 appliances in terms of energy efficiency and wasted output. Our economy in the past was built on common sense and best practices. In that sense, the misallocation of resources in debt, regulations, and the domino effect of market distortions is permanently capping the growth of our economy.
Imagine how the economy would do if we fully repealed Obamacare regulations and market distortions that are crushing businesses and had a functioning market in medical care. Imagine if Congress repealed the ethanol mandate, CAFE standards, all of Dodd-Frank, and section 404(b) of Sarbanes Oxley. Imagine if they passed the REINS Act. Imagine if they pushed true welfare reform at a time of so many job opportunities.
The tax cuts were a smashing success. At the same time, they offer a glimpse into what our economy could actually produce if we stopped manipulating it for cronyism and political favors.
Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.