Archive for the ‘Business Cycles’ Category

Investment and Tax Reform

March 23, 2018 Leave a comment

The tax reform recently enacted should have an impact upon investment spending by firms. In a previous post, I argued that the ability to expense (deduct from revenue in the computation of taxable income) all of the investment done by firms in a year should cause investment to rise in the U.S. This is crucial because our living standards depend in part on the stock of capital goods in our economy which in turn affects labor productivity.  More capital should enhance or increase the productivity of labor and thus real wages.

For future reference, it is a good idea to get a look at some data so that, in a future post when more data is available, we can see if investment has responded to tax reform. For this reason, consider the following table.

2017:01 19057.705 2383.409 12.51
2017:02 19250.009 2433.551 12.64
2017:03 19500.602 2468.374 12.66
2017:04 19736.491 2511.182 12.72

In the table for the year 2017, quarterly GDP is given (so we have GDP in the range of $19 Trillion), NRFI is Nonresidential Fixed Investment, a sensible measure of investment spending by firms, and the ratio of NFRI to GDP.  So we see that about 12.5 percent of GDP has been devoted to building additional nonresidential plant and equipment.

An increase in this ratio would be a reasonable measure showing that tax reform is actually raising investment in the U.S. We will see if this is the case when new data for 2018 is available.


Incentives Matter

January 20, 2018 1 comment

I have stated on this blog that if the social science of economics is about anything, it is about the powerful economic effects of incentives. The recent media reports about Apple and other firms building new plants in the U.S., raising money wage rates, and increasing employment, are extraordinary examples of how powerful incentives can be in changing economic behavior. All of these stories stem from the tax reform recently passed.

  1. Real Wages. I stated that reducing the corporate tax rate would increase the demand for labor and cause real wages to rise. We have already had announcements about higher money, and thus real, wages paid by firms.
  2. New Plant and Equipment. Apple announed that it will build new plant in the U.S. as other firms have stated as a result of the tax reform.
  3. Tax Revenue. Much has been written about the fact that firms refused to bring money back to the U.S. to avoid double taxation of their income. Apple will pay $38 Billion in taxes once it returns funds to the U.S. so the federal government gets a one-time windfall of revenue due to the tax reform from Apple.
  4. Employment. Apple and other firms are planning to increase employment, with Apple stating that it will hire 20,000 people.

There are other examples (yes they are anecdotes) that I can give but those above make the point. What is most entertaining is to watch Democratic politicians pretend that these effects are nonexistent when, in fact, they should set off a growth boom of the sort that we have not seen in many years. First quarter GDP numbers should be most interesting when they are released. Stay tuned.

But another lesson from these events is how easy it is for government to reduce economic activity or economic growth when it imposes its policies.

All of this provides a wonderful set of examples of economics in action. This is why I got interested in economics when I was a student because it has so much to offer for understanding the world around us.

The Obama Growth Record

January 4, 2018 Leave a comment

The final aspect of the new tax bill is that it may increase economic growth and so I thought I would post a final bit of data to be used down the road in assessing the impact of the new tax reform. And that data is the growth rate of real output in the economy during the two terms of Barack Obama and the record for President Trump.

The Obama Record

After the eight years that President Obama was in office, we can provide the annualized quarterly growth rates that occurred during those two terms. Using data from the Bureau of Economic Analysis (, the average over 2009-2016 is 1.8 percent (some quarterly data was provided in this post). As I pointed out previously, this is below the long-run growth rate of three percent that the U.S. generated over the century ending at the onset of the last recession. It is a bit unfair to use the first quarter or two of a presidency since the new president can hardly be blamed for what he/she inherited but we need a consistent measure so this seems as good as any.

The Trump Record

We have only a few data points regarding the President Trump growth record but here is what is available: 2017Q1 1.2 percent, 2017Q2 3.1 percent, 2017Q3 3.2 percent. This is an average of 2.5 percent which is a substantial improvement over the Obama record. The existing numbers don’t mean all that much since there are so few of them but we will see if this persists. If it does, this will provide some evidence that the tax reform has had the impact anticipated by its designers.

The U.S. Tax-Income Ratio

August 17, 2017 1 comment

I recently saw a news report about federal government tax receipts and I began to wonder what trends, if any, have been present in the public’s support of government as measured by its tax payments. Most media reports that I have seen focus on the dollar amounts of federal government tax revenue but it is more informative to include state and local governments as well so that we can get a more accurate measure of public tax payments to the government.

But rather than looking at tax payments in dollars, it is more useful to look at tax shares of our incomes. The economy grows over time and so it is more informative to see what fraction of our incomes are paid to the government so that we can adjust for the size of the economy as it changes through time. For this post, I will use Gross Domestic Product (GDP) as a measure of our incomes and I will use Federal plus State and Local receipts to capture the revenues of all sorts that flow to the government. All of the data was drawn from the St. Louis Federal Reserve Bank FRED database which is freely available to the public. The data is annual and it covers 1929 through 2016. Read more…

The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Dismal Economic Growth Continues

May 2, 2016 1 comment

The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.

The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates).  Below is a table listing annual growth rates for real output (GDP) since the last recession ended.

Quarter Growth Rate
2009:3 1.3
2009:4 3.9
2010:1 1.7
2010:2 3.9
2010:3 2.7
2010:4 2.5
2011:1 -1.5
2011:2 2.9
2011:3 0.8
2011:4 4.6
2012:1 2.7
2012:2 1.9
2012:3 0.5
2012:4 0.1
2013:1 1.9
2013:2 1.1
2013:3 3.0
2013:4 3.8
2014:1 -0.9
2014:2 4.6
2014:3 4.3
2014:4 2.1
2015:1 0.6
2015:2 3.9
2015:3 2.0
2015:4 1.4
2016:1 0.5

The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.

The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.

Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.

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