WASHINGTON, October 27, 2017 – The Commerce Department just released the GDP growth figure for the third quarter of 2017. For the second consecutive quarter, GDP growth was 3%. It has been more than three years since the US economy had two successive quarters of 3% growth. This is a win for President Trump.
The economy has not seen growth of at least 3% for an entire year, since 2005. That is the longest period of economic stagnation in US history. During the eight years of the Obama administration, GDP growth averaged about 2% annually. Many believed the 2% growth rate was the new normal. Trump has other ideas.
What has Trump done to accelerate economic growth?
Trump was sworn into office in late January of this year. He immediately removed regulations mostly instituted through executive orders by Obama, who issued more than 80,000 pages of regulations in 2016 alone.
Obama’s regulations were designed, he said, to provide another layer of protection for Americans. What the regulations really did was to add obstacles to growth at a time when the economy really needed robust growth.
Once the unneeded regulations were reversed, business could expand. In the first quarter of 2017, with the regulations mostly in effect, the economy grew at a 1.2% rate. By April, when many regulations were reversed, the economy began to expand which led to the 3.1% growth rate in the second quarter and the 3% growth rate in the third quarter.
A look at the GDP Growth numbers shows the reason for optimism.
According to the Commerce Department report, the 3% growth rate “reflected positive contributions from personal consumption expenditure, private inventory investment, nonresidential fixed investment and federal government spending.”
Since November 9, 2016, the day after Trump won the election, both consumers and business became more confident in the economy. With that confidence and the belief that the long-term economic slump would be ending, consumers and business were ready to start spending. Once Trump removed some of the burdensome regulations, their spending activity increased.
In both the second and third quarters of this year, that confidence was reflected in consumer expenditure increasing and business investment increasing. That means the continued reduction in regulations will encourage more spending. It also means that business is building inventories ahead of the expected continued growth.
The third quarter numbers were held down due to the devastating hurricanes. Most economists believe that the growth number would be .2% to .3% higher if not for the effects of those storms.
Does GDP growth mean inflation will be a problem in the future?
The report also indicated that the price index was increasing, indicating that inflation may be a problem shortly. The Federal Reserve (FED) will likely respond to this by raising interest rates for the third time later this year. And if inflation accelerates, the FED will move aggressively to raise interest rates in the future.
That action will reduce demand in the economy, putting downward pressure on prices but will also put downward pressure on output, which would slow economic growth. There is, however, a better way to tame inflation. That is to gear the upcoming tax cut to expand output and grow the economy while keeping prices from rising.
That can be accomplished by ensuring that the tax cuts increase demand while increasing supply to meet the new demand. President Trump, as was the case with both the Reagan tax cut in 1981 and the Kennedy/Johnson cut in 1964, has proposed a tax cut that will grow the economy and not cause inflation.
That is accomplished by cutting taxes for all Americans which includes both the middle class and the highest income earners. The tax cut for the middle class will go almost entirely to consumption, which increases demand. The tax cut for the wealthy will go almost entirely to investment spending and capital creation which increases total supply.
As long as supply increases as demand increases, there is no upper pressure on prices.
In order for the economy to continue to grow without any inflationary pressure, the proposed tax cut must include the upper class. While the Democrats argue that the upper class doesn’t need a tax cut, the truth is that the economy needs the upper class to create more capital.
Let’s hope the final tax cut reduces taxes for the middle class to increase demand and for the upper class to increase supply. Then we will see growth exceeding 4% annually while inflation remains low.
Doesn’t everyone want that?