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Trump Tax Cut, Fewer Regulations Will Fuel Economic Prosperity

Trump Tax Cut, Fewer Regulations Will Fuel Economic Prosperity

By Wednesday, 30 May 2018 04:55 PM Current | Bio | Archive

Americans have forgotten what economic prosperity feels like. And it’s no wonder.

Annual economic growth has been less than 3% since 2005. That’s about to change. President Donald Trump has severely rolled back counterproductive regulations, reduced tax rates for all Americans and repealed much of the Dodd Frank law. The Dodd Frank repeal will allow banks to start lending more robustly.

Economic growth has averaged nearly 3% since the second quarter of 2017. Indications are that growth in the second quarter will reach 4%.

An economy based on increases in spending

The reasons are simple: every sector of the economy should see increased spending. That means the consumer, business, government, and foreign sectors will all grow.

The potion of the tax cut geared to the middle class will mean consumers have more to spend, which increases consumption. That’s what happened in March and April, as consumption expenditure increased by 0.6% in March and 0.3% in April.

The business sector should also increase investment spending. Since the corporate tax rate was reduced from an average of 35% to 21%, corporations will now have more net income. That will provide new funds for them to increase investment.

But some economists argue that investment may not substantially increase.

Will Corporations Provide New Economic Growth?

Those economists say that corporations will use much of the new income to increase dividends and/or buy back some outstanding shares. That means the corporations may not increase investment.

That is true, but ... Even if corporations increase dividends or buy back shares, the funds will still likely result in increases in investment. That’s because the recipients of the dividends and buybacks will simply invest the money into other corporations which have better investment opportunities.

If a corporation does not have good investment options, they should increase dividends. That will allow the stockholders (owners of the corporation) to invest the funds where better opportunities exist.

Similarly, an investor selling stock back to a corporation does so because better investment opportunities exist elsewhere.

The bottom line is that the reduction in corporate taxes will lead to an increase in business investment. Government spending will also increase.

The federal government recently passed a $1.3 trillion discretionary spending budget. That represents about a 10% increase in discretionary government spending. That money will further stimulate economic growth.

Because the president is renegotiating poor trade deals, exports will increase and imports could fall. This too has a positive effect on growth, although there may be some negative impacts if the new deals take time to finalize. That means all four sectors of the economy are now poised to have positive effects on economic growth.

There are some headwinds.

While the groundwork has been put in place for the best year since 2005 for growth in GDP, there are some potential problems. The Federal Reserve is raising interest rates. In 2017, rates were raised three times. In 2018, they could be raised four times. Normally that would really slow economic growth. This time, it is not likely.

That’s because even with the increases, rates are still historically low. For instance, mortgage rates have increased from the low 3% range to the upper 4% range. History shows that the housing market is usually strong when mortgage rates stay below 6%. Even with Federal Reserve’s actions, we are still probably 3 to 4 years away from 6% mortgage rates.

Winds of Trade Wars

A trade war could be a problem. That could lead to fewer exports and rising prices for imports. But a trade war is also unlikely. Trump is simply creating a sense of urgency in order to bring our trading partners to the negotiating table. He also wants to negotiate from strength.

Trump recognizes our free-trade agreements simply aren’t fair and favor the other countries. Instead of waiting years to resolve that, he wants it resolved immediately. By threatening to impose tariffs Trump created a sense of urgency, which brought other nations to the bargaining table immediately.

Inflation could also be a problem. Rising energy prices could push up consumer prices. Fortunately, Trump has removed counter-productive regulations and opened up land for drilling. The US can now increase energy production enough to keep prices in a reasonable range.

At the end of July, the Commerce Department will release their estimate for second-quarter growth. The consensus view is that it will be at least 3%. But the economy could be growing at a 4% rate and that rate could last some years into the future. It may even accelerate.

That’s what happened after the similar Kennedy/Johnson tax cut in 1964 and the Reagan tax cut in 1982. And that’s what will happen this time too.

Dr. Michael Busler, Ph.D., is a public policy analyst and a Professor of Finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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All four sectors of the economy are now poised to have positive effects on economic growth.
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Wednesday, 30 May 2018 04:55 PM
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