Investors Business Daily has an excellent editorial on the macroeconomic effects of the recently-enacted tax reform bill. It highlights, once again, the peril of uncritically parroting top-line Congressional Budget Office analyses:
When the Congressional Budget Office released its updated budget forecast, everyone focused on the deficit number. But buried in the report was the CBO’s tacit admission that it vastly overestimated the cost of the Trump tax cuts, because it didn’t account for the strong economic growth they would generate.
Among the many details in the report, the one reporters focused on was the CBO’s forecast that the federal deficit would top $1 trillion in 2020, two years earlier than the CBO had previously said.
And, naturally, most news accounts blamed the tax cuts. “U.S. budget deficit to balloon on Republican tax cuts” is how Reuters put it in a headline.
Of course they did! But Reuters will never headline, “Republican tax cuts fuel economic growth.”
But there’s more to the story that the media overlooked.
First, the CBO revised its economic forecast sharply upward this year and next.
Last June, the CBO said GDP growth for 2018 would be just 2%. Now it figures growth will be 3.3% — a significant upward revision. It also boosted its forecast for 2019 from a meager 1.5% to a respectable 2.4%.
“Underlying economic conditions have improved in some unexpected ways since June,” the CBO says.
“Unexpectedly!” as Glenn Reynolds likes to say. Those who lack any understanding of how the world works are continually surprised.
In any case, the CBO now expects GDP to be $6.1 trillion bigger by 2027 than it did before the tax cuts.
The CBO report also makes clear that this faster-growing economy will offset most of the costs of the Trump tax cuts.
In a table buried in the appendix of the CBO report, it shows that, before accounting for economic growth, the tax cuts Trump signed into law late last year would cut federal revenues by $1.69 trillion from 2018-2027.
But it goes on to say that higher rate of GDP growth will produce $1.1 trillion in new revenues. In other words, 65% of the tax cuts are paid for by extra economic growth.
The CBO also now projects savings of $150 billion on food stamps, unemployment insurance, etc., due to a faster-growing economy.
The battle over how the CBO scores legislation–static vs. dynamic–has been going on for a long time. Static scoring, which Democrats consistently advocate, is obviously wrong, as everyone knows important legislation like the Trump tax cuts will affect economic growth. The problem comes in identifying the most accurate dynamic model in a given situation. But what the CBO deems “unexpected” was, in fact, anticipated by us and by pretty much every competent economist (i.e., everyone except Paul Krugman).
The IBD editorial concludes by fingering ever-escalating spending as the problem that has yet to be addressed. Economic growth lifts a lot of boats, but unacceptable deficits will nevertheless continue as long as swamp Republicans join Democrats in flinging money around irresponsibly.