Something strange and extraordinary is happening to the US economy – behind the scenes. Professionals in government, media and academia see it – but no one wants to say it. “Supply-side economics,” once called Reaganomics, is again working.
Many years ago, when working in Ronald Reagan’s first-term White House, I watched extraordinary things start to happen. New thinking emerged on national security issues, geopolitics and most immediately, economic policy. Old ways got severely questioned, new ideas boldly tested. Stunning things began to happen – and now, they are again.
Based on reduced corporate, individual and capital gains tax rates, which were implemented in late 2017; a sustained reduction of federal regulatory burdens on employers; and continuing low interest rates, the US economy has taken off – and is on a trajectory to continuing growing.
In addition to sustained high growth, the lowest unemployment in 50 years (across all demographic groups and regions), an unexpected turnaround in labor productivity, labor force participation, corporate investment, and wages – we have low inflation. But something else is afoot.
The decision of President Trump’s economic team to adopt a Reagan-like economic approach, trusting average Americans – not the federal government – to pull the US economy out of the eight-year Obama slump, was daring. It has unleashed American confidence in the economy – confidence again in ourselves.
The term “supply-side economics” goes back 40 years. In 1981, relying on academic work by Nobel Laureate Milton Friedman, Economic Policy Board member Arthur Laffer, Wall Street Journal associate editor Jude Wanniski, and pro-growth members of Congress like Jack Kemp, Newt Gingrich, and Democrat Phil Gramm, Ronald Reagan and Director of Office of Management and Budget (OMB) David Stockman, convinced Congress to pass the 1981 tax cuts. That began the avalanche.
At the same time, faithful to tenets of free enterprise, private entrepreneurship, belief that leaving earned dollars with taxpayers produces more, and the Laffer Curve – which says lower tax rates boost economic growth and raise federal receipts – Ronald Reagan offered smaller federal budgets and a regulatory rollback.
The effect under Reagan, even struggling to rebuild US defense and bring down the Soviet Union, was higher sustained economic growth, reduced unemployment, controlled inflation, and the end of Jimmy Carter’s “stagflation” and recession.
Today, Trump’s embrace of supply-side economics – bold and unwavering – is producing similarly startling results. US growth in January 2017 stood at 1.8 percent. By July 2017, growth was on a rip – at 3.0 percent.
By July 2018, growth had drifted, then leapt to 4.2 percent, and the next quarter 3.4 percent. Some thought tapering tax cuts at the end of 2018 would cut US growth, productivity and unemployment in 2019, and growth did slow to 2.2 percent in the final quarter of 2018.
But then, whoa! The first quarter of 2019 – which most US economists expected to be questionable, was anything but. Trump’s supply-side approach, Reagan-like gamble on “We, the People,” or average American workers and businesses, paid off.
First quarter 2019 numbers are all in – and they are stunning. The US economy notched 3.2 percent growth, beating all but Administration expectations. After years of liberal economists labor productivity would fall or slow, we saw a 3.6 percent labor productivity growth rate. The Wall Street Journal reported the news Thursday, under the banner “U.S. Worker Productivity Advances at Best Rate Since 2010.” That means, contrary to expectation, more people are reentering the labor market, labor efficiency and investment are rising, and inflation is likely to stay low, which means interest rates likely will too.
Then came the Wall Street Journal’s Friday (5/3) headline: “Jobless Rate Falls to Lowest in Nearly 50 Years…” What do we have in total? As a result of Trump’s corporate, individual and capital gains tax cuts, reduced federal regulation, and pressure to reduce spending, we have sustained high growth in 2019, record unemployment, stunningly high labor productivity (confounding economists who predicted the reverse), high labor force participation (ditto), and high corporate reinvestment – feeding into future labor productivity, higher wages, lower inflation.
Most of all, Trump’s supply-side economics – reminiscent of Ronald Reagan’s bold faith in the American people – has opened the floodgates of confidence in ourselves, our decisions, not government control.
To the big point, Trump’s decision – spurred by Trump White House economists like Larry Kudlow, once Ronald Reagan’s Deputy Director of OMB – has elevated federal revenue, stretching out timelines for saving federal entitlements, lowering deficit growth, and giving America a chance to regain balance in an era of mass debt.
Specifically, the Congressional Budget Office projects that the deficit for 2019 at $75 billion less than one year ago. The cumulative deficit from 2019 to 2028 is projected to be $1.2 trillion less. The federal debt remains enormous, but Trump’s daring embrace of supply-side economics puts one in mind of Reagan. Once again, it is working. Time to say so.