"Kee" Points with Jim Kee, Ph.D.


  • Economic Growth
  • Tax Reform
  • Other Notes


Economic Growth

Sometimes I think media discussions regarding government policies and economic growth have gone a little too far, implying that economic growth is determined by this or that tweaking of monetary or fiscal policies. Competition in the areas of production and exchange is what produces growth, and policies can facilitate this to a greater or lesser extent. “It is impossible to have a clear understanding of the growth process,” says UCLA economist Arnold Harberger, if there is a failure “to recognize that all economic growth takes place at the level of the productive enterprise.” Harberger has probably been more engaged with individual countries in helping them to foster growth than any living economist of the past 60 years. On the subject of how to create growth, his take is surprisingly modest: “in general, economic policies typically do not determine any element in the growth process. Rather, they operate to permit or impede these elements.” I think Harberger’s views are good to keep in mind when thinking about pending policy changes.


Tax Reform

The House Republican tax bill was released last week, and it offered more detail on what amounts to a pretty sweeping proposal to reform the US tax system. I won’t go into a line-by-line discussion here, but I will provide links below to several sources that do a good job of summarizing the bill. As for the impact on economic growth and on government deficits, the proposed tax cuts would increase both, although the magnitude of each is open to debate and will be 50 years from now.


In general, capital is more responsive or “elastic” to tax changes than labor. Martin Feldstein alluded to this in his article in Monday’s Wall Street Journal, “Corporate Tax Reform is the Key to Growth.” And while I wouldn’t call Feldstein unbiased (he rarely advocates tax increases), he does point to the cut in the corporate tax rate from 35% to 20% as the most important reform in the bill. This assertion that the cut in the corporate tax rate is the most impactful with respect to growth is shared by other estimates I have seen, like those from the Tax Foundation’s econometric model (Nobel laureate Robert Mundell has also said the same). To be fair I will also point out that the Brookings Institution has argued that the proposed bill will benefit the wealthiest taxpayers, may hurt others, and will worsen an already bleak government debt and deficit picture.


Here's the bill.


Here’s a good “Old versus new” format summary from Forbes.



Central Bank Change

President Trump’s announcement that he would nominate Fed governor Jerome Powell to succeed current Chair Janet Yellen surprised almost no one, and I would reiterate that the key difference between the two will likely be Powell’s enthusiasm for bank deregulation. This needn’t be a repeal of the Dodd-Frank Banking act, but merely a roll-back of some of the massive regulatory sprawl that followed this piece of legislation after it was passed in 2010.

 

Other Notes

Brent crude oil is pushing $65 per barrel, a two-year high, over rising tensions in the Middle East (WSJ). This is quite consistent with what Amy Myers Jaffe had articulated a few weeks ago at a couple of STMM events in Houston. In Spain, direct rule from Madrid has been imposed by the Rajoy government (Mariano Rajoy, Spain’s Prime Minister) over Catalonia. Rajoy decided to call a December 21 vote to seat a new government in Catalonia (the independence movement there failed to achieve credibility, and its leaders were jailed).



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