Archive for the ‘Economic Growth’ 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 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…

Economists Running for Office

August 31, 2016 Leave a comment

I have tried to stick to economics on this blog, meaning that I do not get involved in expressing political opinions for any reason. But I learned something today that I felt should be passed on to my readers.  And that is that two economists, Lawrence Kotlikoff and Edward Leamer, are running for President and Vice President of the U.S. Their web site is

These are two established and highly competent economists but, let me be clear. I am not expressing my endorsement of them. I am merely passing on the information to those who might be interested.

Given the turmoil that we are seeing in this election season, it is quite interesting to see two economists feel that they should get on the ballot. It really is true that the U.S. economy has extremely serious problems that are not being addressed by either of the two mainstream candidates running for President. I will be interested to see just how far these two economists get to the jobs they seek.

Serious Policymaking

June 24, 2016 Leave a comment

Much of the political behavior we see is theater or, even worse, buffoonery.  I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.

This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.

The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.

The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.

Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.

There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.

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A blog by John B. Taylor

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