"There's something happening
here. What it is ain't exactly clear” are the opening lines to the 1966 Buffalo
Springfield hit song, “For What It’s Worth”.
For what it is worth, the same
can be said about recent economic data in America. “Everyone”, meaning all of
the experts and commentators on talk shows, keep predicting a significant
slowdown of the American economy and have done so since the night Donald Trump
was elected in 2016.
Nobel Laureate Paul Krugman
proudly wrote in the New York Times in the wee hours after Trump won the
electoral college: “If the question is when markets will recover, a first-pass
answer is never”.
Ouch. One has to think Mr.
Krugman wished he could have a do-over with that colossal gaffe.
Except apparently he doesn’t. On
April 8, 2019, only 23 days ago, he wrote: 'It’s true that U.S. economic growth
got a bump for two quarters last year, and Trumpists are still pretending to
believe that we’ll have great growth for a decade. But at this point last
year’s growth is looking like a brief and rapidly fading sugar high”.
First quarter 2019 GDP growth
came in at 3.2% last Friday. The consensus among professional economists and
prognosticators was 2%.
What has happened? Has every
economist turned into a non-analytical clone of Paul Krugman? Why has the
source of this new-found economic growth not been “exactly clear” for everyone
to see?
One important factor could be the
higher 1-year write-off of the purchase cost of new machinery and equipment for
small businesses in the Trump tax bill. Business owners point to this tax
change as being an underappreciated aspect of the accelerated economic growth
we are seeing in the US economy.
A small business contractor can
buy a new truck and expense the whole cost of the vehicle in the first year
even though it might take 5-7 years to pay for the loan. If a small business
had $45,000 of net profit, they could offset that with the $45,000 cost of the
new vehicle and drive their taxable income way down to cite one very simple
example. Depending on their tax bracket, the owner could save up to $15,000 in
federal taxes and $2000 in state taxes which is money that stays in their
pocket, not the government’s.
Economic growth is directly attributable
to productivity gains in the economy. Buying new machines that can produce more
product at a lower cost is the very definition of “productivity gains”. We all
benefit from such productivity gains whether we are employees, owners,
investors, stockholders or retired from the workforce.
Former
Vice-President-under-President-Barack-Obama Joe Biden entered the presidential
race last week ostensibly to “take America back to the golden days” he
apparently thought happened while he and President Obama were leading our
country.
Americans throughout modern
history have considered 2% annual real growth “dismal” and “disappointing”.
Former President Obama and his Vice-President Joe Biden considered 2% to be the
“new normal” for the American economy going forward. Forever.
Annual real GDP growth never
exceeded 2% during any of the 8 years the Obama/Biden team was in charge. How
odd that as soon as they left office, GDP is now growing almost 60% faster
under the pro-free enterprise policies of President Trump as passed by a
Republican Congress with zero Democratic votes.
If you want to know one big
difference between the Obama and Trump White Houses, consider that in 8 years,
the Obama Administration did not add this provision to help spur the economy
back to full health.
The difference between 1% GDP annual
growth to 3% GDP growth across 35 years, about a generation, would mean the US
economy would double from $21.5 trillion to $43 trillion in 2054.
For what it’s worth 3.2% growth is far preferable to 2.0%. Why go backwards into the future?
(first published in North State Journal 5/1/19)
(first published in North State Journal 5/1/19)
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