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Rex Nutting

Opinion: What ever happened to Trump’s boast of 4%, 5% or even 6% growth?

How the economy under Trump went from rocket ship to lead balloon

President Trump argues that he couldn’t possibly be guilty of anything because the economy is so great. Which makes me wonder: What ever happened to his boast that the U.S. economy would be able to grow not only at 3% but at “4%, 5% or even 6%” per year?

The latest figures show the economy expanded 2.3% in the past year, exactly the pace of the past 10 years, since the Great Recession ended — with prospects for even slower growth ahead.

Like so many of Trump’s promises, his hopes and dreams have collided head-on with reality. It turns out that making the American economy great again wasn’t nearly as easy as some politicians think.

GOP flying high

It seems like a million years ago, but in December 2017, when Trump signed the Tax Cut and Jobs Act (TCJA), the Republicans were flying high. With the tax cut, they had accomplished a significant legislative victory on their top-priority issue. They celebrated that the economy would be able to soar once more.

And it did soar — a little bit, for a little while. Real gross-domestic-product growth hit 3.5% in the spring of 2018, and it seemed for a moment to some Republicans that Trump and company might have been correct about the incredible impact that the tax cuts could have.

But then reality hit. Growth throttled back to 2.9% and then to 1.1%. Since the tax cut went into effect, growth has averaged 2.5%, about the same as the 2.6% recorded in the six quarters before the tax cut was passed.

Almost every forecast from professional economists, the Federal Reserve, the Congressional Budget Office, the International Monetary Fund and the Organisation for Economic Co-operation and Development — but not the White House! — looks for growth of around 2% per year for the foreseeable future. With the growth in the potential labor force slowing from about 1% per year to about 0.2%, it’ll take some very good productivity numbers just to hit 2%.

Ripples in the water

The consensus is that the tax cut changed almost nothing. It was like throwing a boulder into a lake: A big splash, some waves, but very little change in the water level once things settled down. Jason Furman, Barack Obama’s chief economist, said he and co-author Robert Barro think the long-term impact of the tax cut will be to raise GDP by 0.04% per year.

That’s very little bang for a $1 trillion tax cut. It gets us one-hundredth of the way to 6% growth.

Despite evidence that the tax cut hasn’t been the game changer it promised, the White House is sticking to its forecast of 3% growth for the next 10 years.

But what do others say?

The American Enterprise Institute, a conservative think tank in Washington, is hosting an online bipartisan symposium (#TCJANowWhat) on the impact of the tax cut, with blog posts and papers from economists, tax and fiscal policy experts, and various other wonks culminating in a face-to-face event on Oct. 22.

So far, about all the conservatives in the debate can say is this: Don’t give up on the TCJA yet!

Incentive to invest

The tax cut was supposed to supercharge economic growth by giving businesses the incentive to invest in the equipment, R&D, software and physical structures that would boost their productivity. We are counting on faster productivity growth even more than usual now, because the other ingredient for a bigger GDP — labor-force growth — is in short supply.

But the tax cut didn’t have lasting impact on business investment. In the six quarters since the tax cut passed, nonresidential fixed investment has increased at a 4.4% annual rate, compared with a 4.7% pace in the six quarters prior to the tax cut. In the past year, investment has slowed to a 2.6% pace, about half the average growth rate since the recession ended 10 years ago.

Corporations returned most of their windfall to their shareholders, rather than putting it back into the business. And other data from the Census Bureau show that the tax cut had one other predictable consequence: The rich got richer.

All of this goes to show that making the economy great isn’t easy. Even a $1 trillion tax cut and massive deficit spending could only provide a temporary boost to the growth rate. The ability of any president to make large improvements in our living standards is exaggerated.

The ability of a president to make things worse, however, is really the more relevant story today.

Rex Nutting is a MarketWatch columnist.

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