When I graduated from high school my father offered sound advice. He said, the world is getting more complicated, learn a foreign language. So I took economics. Since that time I have added mightily to my list including, French, a little Italian and some Spanish. Dads advise turned into a life long work effort but I feel I am at my prime right this very minute.
You can only imagine how disappointed I was to read in The New York Times that “Economists Have Been Demoted in Washington” The President has eliminated the Chairman of the Council of Economic Advisors from his cabinet. Why now and why at all? Just when I was getting every bit as fluent in economic theory as in the future perfect tense of French verb: to disrupt, somebody does something like this.
What this all means in Washington is that the members of President Trump’s cabinet, the people he really trusts, will not include some really deep thinkers. Names in the past like Martin Feldstein and Alan Greenspan will not have their economic prodigy available at the highest level of our leadership.
In a way it should not be a surprise. President Trump is a businessman through and through. He likes his questions answered in clean crisp one-word responses like: Yes or maybe Yes Sir. It’s acceptable to use the word no but it must be done clearly. Economists have never said or done anything clearly often sounding like Rosanne Rosannadana on the original Saturday Night Live.
To keep the tweets to a minimum we need to add that the President welcomes decent in his administration as long as it Makes America Great Again. But, there is a real dilemma here between POTUS’s goals and the academic community. It is not a small issue either; you could say the success or failure of the Trump administration hinges on it.
Part of the administration’s tax reform strategy includes lowering tax rates for business and individuals across the board. To help make this happen, Paul Ryan insists the tax code will be simplified by eliminating loads of deductions.
Assuming Speaker Ryan gets his wish, the idea is to accelerate economic growth to 4% from the 1.6% of 2016. Republican leaders argue that 4% growth will produce such a flood of tax revenues it will overwhelm the IRS and start to pay down our $20 trillion in national debt. This plan might just work even though there is scant evidence to support the notion.
Now, here is some contrarian opinions on economic thinking from those people who live in think tanks. This group believes the single most likely outcome is for 2.5% growth this year. One scholarly chap paused, and then carefully calculated that if 4% turns out to be right, his 2.5% rate would be reached by the Fourth of July. This amazing conclusion shows the benefits of an advanced degree calculus.
But here is where the economic fog starts to take over. The difference between these two forecasts has everything to do with “potential GDP”. This term refers to the amount of so-called economic slack in the system. In other words, how many manufacturing plants are idle or could produce more goods without adding more capacity. And then there is the question of labor productivity.
The US Labor Department created the data series E6 that measures the total number of unemployed both short and long term. We know E6 contains millions of workers over 50 whose skills need updating. But for enough money, could these folks be put to work.
There is one looming complication. The 25 members of the Council of Economic Advisors as well as the database of the entire United States federal government does not have a way of measuring “potential GDP”. The government created a concept but doesn’t have a clue how to use it.
So what does any good economist do when a concise answer is missing? They turn to good old Rosanne Rosannadana for help. Maybe Trump has the right idea after all, banish the fog makers and let the economic chips fall where they may.
If tax cuts don’t stimulate growth, our $20 trillion debt will get much bigger. If growth stimulus is applied but the labor pool doesn’t increase, boom inflation kicks in at a most unpleasant way. Maybe by summer the fog will clear.
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