Megalextoria

U.S. stock markets remain volatile and their direction uncertain, although the S&P 500 may have broken out of what technical traders would call a “bullish triangle,” which began forming after the market fell approximately 12 percent in early February from a high of 2,872 the previous month. However, traders will also tell you every technical pattern can tell at least two stories. One must look to the fundamentals for confirmation, and they have been anything but unanimous on the underlying economy.

Stagnant Growth

Corporate earnings have been strong, but that may not be a real indicator of economic growth, as much of the earnings per share increases are due to stock buybacks rather than organically increasing profits. And jobs numbers continue to disappoint. Not only did April’s number come in lower than expectations, January’s number was adjusted down by a whopping 63,000 jobs.

Job growth for the first four months of 2018 is still ahead of 2017, but by a lot less than previously thought, and we don’t know if March and April numbers will be adjusted downward. Consumer spending remains weak, and surging energy prices, especially gasoline, may continue to eat up what would otherwise be discretionary spending dollars for average households. While unemployment is at or near record lows, so is workforce participation—a statistic conservatives seem to have completely forgotten about since President Trump was inaugurated.

GDP growth slightly beat expectations at 2.3 percent but is far below the 5.4 percent predicted by the Atlanta Federal Reserve just two months ago. Despite missing the real number by a country mile, the same institution is now predicting 4.0 percent growth for Q2. Why should anyone expect this “irrational exuberance” to be any more accurate than last quarter’s?

Tax Cuts?

The trump card (pun intended) is supposed to be tax cuts. Although they obviously haven’t delivered the jobs or growth promised to date, sooner or later the supposedly smaller slice the government is taking must result in more domestic investment, jobs, production, and growth.

The problem is taxes haven’t really been cut. They’ve simply been deferred. The federal government is going to spend more this year, and every year for the foreseeable future, than in any year in U.S. history. That spending is ultimately going to be paid with taxes, either now or in the future.

Lowering corporate and individual rates now merely allows Americans to pay for the spending at a slower rate. But unless you believe in leprechauns who donate their pots of gold to the government, the $4.1 trillion the government will spend this year must come from the American economy. The roughly $1.1 trillion in spending not covered by current tax revenues will be borrowed, meaning Americans will pay for not only the spending but the interest due to lenders when the bonds come due. All that spending comes at the expense of productive investment in the private sector.

Contrary to conventional wisdom, the government borrowing money now doesn’t just harm future generations. It hurts economic growth in the present, the same year the money is borrowed. Every Treasury bond purchased on the open market represents a U.S. corporate bond that isn’t purchased. The result is new jobs that aren’t created, new production that doesn’t occur, and existing production that doesn’t expand.

Price Inflation

The bill is also paid for partially in price inflation, which the government tells us is low. But that is just another deceiving statistic for two reasons. First, by its own admission, the government manipulates price inflation numbers lower with “hedonic adjustments” (negating price increases because a product has new features), “substitution” (ignoring price increases under the assumption consumers will just buy something else), and other accounting tricks.

Second, and rarely mentioned, is the massive price deflation we should be seeing. Technology is allowing the economy to produce more with less people. With U.S. manufacturing output at or near all-time highs while using only a fraction of the personnel it once required, for example, the prices of manufactured goods should be falling, just as they did throughout the 19th century. The natural result of economic growth is falling prices. If you increase supply, all other things being equal, prices will fall.

The massive wave of baby-boomer retirements is also a deflationary force. Retirees spend about 37 percent less on average than working adults. That decreased demand while supply is increasing should result in sharply falling prices. That prices can rise 1-2 percent (or higher, if measured honestly) under present conditions is a testament to the magnitude of the Federal Reserve’s inflationary interventions, especially over the past decade.

The privilege of printing the world’s currency has allowed the United States to direct massive amounts of capital towards non-productive endeavors, including avoidable wars that have yielded no discernible benefit to the taxpayers who fund them, a freakishly oversized military establishment even in peacetime, health care and higher-education industries that cannot survive as they are without massive subsidies for the former and government-backed loans for the latter, an entire generation owed entitlement benefits future workers can’t possibly underwrite, and a $21 trillion federal debt the government can’t possibly pay back.

Those economic distortions represent a mega-bubble that will pop, just as all the others have, but the results will be far more catastrophic due to the relative size of the problems. With the federal funds rate target still below 2 percent and the signs of a correction already appearing, we may be at the leading edge of the worst correction in U.S. history. Even if the Fed has one more trick up its sleeve, that must certainly be its last.

The key vote in Congress over the past year wasn’t to cut tax rates; it was to increase federal spending. We’re not seeing the jobs and growth expected because the federal government is consuming more of what society produces rather than less. Until that trend reverses and the fundamental, structural problems with the U.S. economy are addressed, real economic growth will continue to prove elusive.

Tom Mullen

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? and A Return to Common  Sense: Reawakening Liberty in the Inhabitants of America. For more information and more of Tom’s writing, visit www.tommullen.net.

This article was originally published on FEE.org. Read the original article.

One needn’t support the recently-enacted tax legislation to be disturbed by the tenor of much criticism of it. Many opponents, and indeed some press reporting, took for granted that if one voted for a significant tax cut after having expressed longstanding concerns about federal deficits, one must be an irredeemable hypocrite. But lower taxes and smaller deficits can coexist.

Some examples of the criticism: Neera Tanden wrote in NBC news of the “staggering hypocrisy” inherent in passing “shameful tax cut legislation” after sponsors had previously warned of a “forthcoming debt crisis.” Robert Schlesinger opined in US News & World Report that the legislation suggested “an incredible case of cognitive dissonance or simple breathtaking hypocrisy and/or duplicity.” Ezra Klein fumed at Vox that lawmakers who supported the bill were “nihilists.”

This refrain was repeated on editorial pages nationwide: you could be for deficit reduction, or alternatively, you could be for tax cuts. Only a nihilist hypocrite could possibly have taken both positions.

The Case for Lower Taxes and Smaller Deficits

Beyond its closed-mindedness, this outpouring of indignation was all premised on a mistaken foundational assumption. It is entirely possible to be for both lower taxes and smaller deficits. In fact, I would argue this was not only possible but that it represented the most responsible policy position given the projections lawmakers faced when the tax bill was debated. (Disclaimer: the following should not be misinterpreted as necessarily an endorsement of the specific tax legislation, nor of prioritizing tax relief over fiscal consolidation.)

When the tax bill was debated, lawmakers faced baseline budget projections that looked like this:

Everything on this graph is shown as a percentage of GDP, so in effect, this shows how both federal spending and (to a lesser extent) revenue collections are growing faster than our economic output. Beyond the time window shown here, the long-term fiscal picture looked even worse. Spending would continue to rise dramatically faster than our ability to finance it, threatening escalating deficits in the decades ahead.

The graph also shows that undertaxation is not the cause of this fiscal gap. Over the next decade, tax burdens were actually projected to be higher than the historical average and to increase gradually faster than our economic capacity.

This was not and is not a stable situation. Taxing and spending as a share of our economy cannot keep increasing forever. (Actually, there is a theoretical sense in which we can spend more than 100% of our economic output if all spending takes the form of domestic income transfers. In other words, we could theoretically tax people several times the amount of their income, provided that we simultaneously write government checks that give it all back to them.

However, this is neither practicable nor politically feasible. In the real world, we must moderate both our tax and spending growth. Fixing this problem within historical political norms would mean cutting future spending growth substantially – but importantly, also lowering some future tax growth, even as projected deficits are reduced.

In other words, the baseline budget picture was such that there was no contradiction between reducing projected deficits and lowering projected tax collections. Indeed, that is exactly what a solution consistent with historical experience would require.

The Case against Lower Taxes and Smaller Deficits

Now, there is a standpoint from which it would be inconsistent to claim support for both lower taxes and smaller deficits – specifically if one argued that projected spending growth must never be slowed. Some progressives seek not only to preserve currently projected spending growth but to add enormously to it.

In this mindset, deficits could only be closed if tax collections rise faster than projected. Importantly, this would still not produce a stable budget situation because tax collections would need to grow much faster than Americans’ ability to pay them. Nevertheless, some advocates effectively take this policy position.

But those who voted for the tax bill are not generally guilty of this. To the contrary, those members have repeatedly been assailed for their allegedly heartless determination to cut spending. House Speaker Paul Ryan has even been depicted — in one particularly revolting ad a few years ago — as dumping an innocent grandmother out of her wheelchair over a cliff, because of his efforts to address rising entitlement spending. And just a few months before their tax vote, lawmakers were attacked for supposedly taking away people’s health care because of their efforts to tackle hundreds of billions of dollars in projected spending growth under the ACA.

Credit and Criticism Where It’s Due

It is legitimate to oppose legislation to slow the growth of federal spending, if one believes that spending is needed. But one cannot fairly attack legislators who try to address runaway spending growth, and then later assail those same legislators as hypocrites for widening the deficit.

Now, it is fair to criticize sponsors of deficit-widening legislation for denying they are increasing the debt. There has been a regrettable amount of such denial, where the public would have been better served to hear arguments as to why the benefits of tax cuts outweighed the downside of a debt increase.

One can simply assume growth-stimulation effects under which tax cuts do not add to long-term debt, but non-partisan scorekeepers widely reject them — in the same way they rejected assumptions crafted during the last administration to conclude additional stimulus spending could pay for itself. Advocates should acknowledge adverse fiscal consequences of any legislation under consideration, even as they argue for its passage.

The bottom line is this: prior to the tax legislation, lawmakers faced projections in which both tax burdens and spending patterns exceeded historical norms and were projected to rise still further, driven principally by growth in the major federal health entitlements and Social Security. The merits of this specific tax bill aside, a responsible and sustainable fiscal policy would reduce both projected spending and deficits substantially, while also slowing tax growth somewhat, and ensuring that neither taxes nor spending ultimately grow faster than our ability to finance them.

Recognizing these realities involves no hypocrisy, but attacking lawmakers for fiscal recklessness — just a few months after taking political advantage of their efforts to rein in part of the federal spending explosion — most certainly does.

Reprinted from Economics 21.

Charles Blahous

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

This article was originally published on FEE.org. Read the original article.