Wednesday, March 14, 2018

'We Will Have 5% GDP Growth Again In America!'

'Morning in America--Part 2', 2017-2018
(first published in North State Journal 3/14/18)

The great thing about making predictions is that people only remember when it is correct and the vast number of prognosticators were wrong.

Unless the prediction is so out-of-bounds proven wrong that it is never forgotten as one of the greatest bone-headed predictions ever.

Such as when Nobel Prize-winning economics professor Paul Krugman on Election Night, 2016 said: ‘If the question is when markets will recover, a first-pass answer is 'never'".


Economists get ridiculed, deservedly so, for breathlessly predicting '10 of the last 3 recessions!' However, in 2008, before the greatest Crash since the 1930s, hardly any economist was sounding any alarm bells.  Many were caught on tape saying how great everything seemed at the time and smooth sailing was ahead for the American economy ‘for the foreseeable future’.

Ouch again.

One private economic guru has made the following argument against the backdrop of an army of professional economic forecasts predicting an average of 2.5% quarterly and annual GDP growth for the next 3-5 years:

'We will see economic growth rates well in excess of 3% on a quarterly and yearly basis for the foreseeable future!'

His reasons for the extra economic growth are as follows:

  1. Lowering corporate tax rates to 21% down from 35% will raise retained earnings (profits) in American businesses by $2 trillion over the next 10 years according to former Reagan economic advisor Martin Feldstein, now at Harvard.
  2. Adding to that pool of available cash to invest is the immediate expensing of capital equipment in the first year versus depreciating such assets over 3, 5, 7 or 10 years. Depreciation is a complicated concept for non-accounting types but pairing off the cost of buying modern new equipment against current year revenues in 1 year is far better than spreading it out over a number of years.
  3. Cash kept in year one will be much larger due to the tax protection offered by immediate expensing even though new, more efficient machines will be financed over a number of years.
  4. Under old depreciation rules, companies had to account for future tax payments on their balance sheets for several years. With immediate expensing of new equipment, their deferred tax liability goes way down which means they can borrow more money to buy more modern equipment to replace more old inefficient broken-down equipment.
  5. Productivity rates go up across every industry sector that buys new equipment. When productivity goes up, wages go up; people take home more money in real wage growth on top of the $1000-$2000 tax cuts that are perennial in effect now and a vicious cycle starts to feed on itself upwards in a positive manner.
  6. The lower 21% tax rate will repatriate, or bring back, to the US $2-3 trillion in corporate profits corporations have held in Europe for a long time instead of being taxed at the previous high 35% rate.
  7. Large subchapter S corporations will convert to C corporations to take advantage of the new lower corporate tax rate.
  8. Wage growth should exceed 3% later in 2018 when these changes work their way through the economy.
  9. We should see slightly higher rates of inflation but that is a good sign after close to a decade of near zero inflation which reflected the relatively dormant state of the economy from 2008 to 2017.
  10. The capital expenditures of the corporate sector will supercharge companies that build plants and equipment.
'We may see several quarters where economic growth exceeds 5%’ says this expert.

If he is ‘wrong’ and it is ‘only’ 4%, that is far better than any growth rate we have seen since 2000. Young people may finally see what a booming economy looks and feels like.

To their benefit.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.