By Matthew Fienup
In January 2017, the California Lutheran University Center for Economic Research and Forecasting team made a bold proclamation about the outlook under the new presidential administration: “We assume that Donald Trump will not succeed in changing many of the policies that are primary drivers of the country’s poor economic performance.”
As forecasters, there are some predictions that we are happy to get wrong.
On Dec. 20, Congress passed, and the president later signed, historic reforms to the U.S. corporate tax system. These include three noteworthy elements: a reduction in corporate tax rates, movement to a territorial tax system and the one-time repatriation of foreign earnings.
The reform package is fundamental change of the very type that we thought impossible.
It is also fundamental change of the type that will impact economic growth going forward. You see, we were not only wrong about the ability of Congress and the president to pass needed reform — by being wrong about the probability of reform, we were also wrong about the economic outlook for the country. In our December forecast, we called for average growth of 2.1 percent over the following two years. Now, the average growth rate is forecasted to be 2.6 percent.
The reason for the upward revision is that we view corporate tax reform as unambiguously positive for the economy. In fact, we already see evidence of the benefits of tax reform. Many hundreds of thousands of employees at Comcast, Bank of America, AT&T, Lowe’s and Walmart received $1,000 bonus checks, which company executives claim are the direct result of tax reform. Apple gave all 120,000 of its employees a bonus of $2,500, redistributing over $300 million in all. Comerica Bank, Discover Financial Services, Fifth Third Bank, SunTrust Bank, JPMorgan Chase, PNC Financial Services, Regions Financial, the Travelers Companies, U.S. Bancorp, Wells Fargo and Humana all increased their corporate minimum wage to $15 an hour. Once again, we are told by executives that the increases in pay flow directly from tax reform.
More evidence of the benefits of tax reform is provided by announcements from major U.S. corporations regarding the status of foreign earnings. Thousand Oaks-based Amgen plans to repatriate $39 billion currently held overseas. Apple plans to repatriate $260 billion.
These many billions will finally come home from what had seemed like a permanent exile created by the old tax system. That system penalized U.S. companies for bringing foreign earnings back to our shores.
Repatriated dollars will now fuel increased investment here at home. Even to the extent that these funds result in stock buybacks rather than direct increases in domestic investment by the companies doing the repatriation, investment will increase. Total economic activity and jobs will increase as a result.
Holding all else equal, we actually believe that the increase in average growth of 0.5 percentage points is a lower bound on the possible benefits of corporate tax reform. This begs the question, why then is our forecast of economic growth not even higher? In particular, why doesn’t the historic tax reform package portend a return to the 3.5 percent average growth rate that was typical of the post-World War II era?
If only the corporate tax system had been the sole constraint on economic growth.
In order for the economy to break out and to begin growing at a rate closer to the historical norm, fundamental change is still required in a number of areas. Extraordinary monetary policy practiced since the financial crisis is perhaps the single largest constraint on economic growth. Government regulation continues to thwart innovation and expansion in the private economy, and we don’t believe that executive actions are sufficient to turn the regulatory tide.
Legislation is required, including legislative changes to the Affordable Care Act and Dodd Frank. Massive deficit spending is an increasingly large concern — the U.S. is on track to return to serial trillion-dollar deficits, this time during the expansion phase of the business cycle. And then there is the president’s foray into trade protectionism.
But things are looking up.
• Matthew Fienup is the executive director of the California Lutheran University Center for Economic Research and Forecasting.