It’s hard to tie a booming economy to the health of each individual’s retirement account, but few would argue a causal link. Anyone closely watching that most damning of retirement risks, sequence-of-return, would certainly smile at the strong GDP growth numbers released last week.
They were especially welcome after the previous administration’s attempt to sell the American public on the “New Normal,” a new fiscal paradigm of lower growth, returns and employment going forward. It’s just the way it would be, they shrugged, so get used to it.
Voters said no, and Trump was the result.
Friday provided (partial, at least) vindication. Mike Solon, a partner at US Policy Metrics, ran through the numbers in The Wall Street Journal on Monday, crediting the Trump tax cuts for what we’re now seeing.
“In the first five quarters of the Trump presidency, growth has been almost 40 percent higher than the average rate during the Obama years, and per capita growth in gross domestic product has been 63 percent faster,” Solon wrote.
However, he acknowledges the largest single beneficiary of faster growth is (as usual) the government.
“The Congressional Budget Office reports that faster growth under President Trump has already added $1.3 trillion to the 10-year federal revenue projection, with the CBO’s April economic adjustment alone showing an addition of $1.1 trillion—the single largest growth-driven revenue gain ever reported. State and local governments can anticipate a similar dividend, amounting to as much as $600 billion.”
Yet Keynesian crusaders should temper their cheer, as the CBO nonetheless projects that additional revenue from this economic surge will offset 88.2 percent of the estimated 10-year cost of the tax cut.
“That contrasts sharply with the CBO’s assessment that President Obama’s economic slump lost $3.2 trillion in projected 10-year revenues during his last three years—almost five times more revenue lost than was gained by his 2013 tax hike,” Solon noted. “These results have confirmed again that weak growth is the fastest way to lose revenue and strong growth is the fastest way to raise it.”
The unavoidable conclusion?
The current revenue trend shows that the Tax Cuts and Jobs Act was “fiscally conservative as a tax cut but economically powerful as tax reform, as accelerating growth appears likely to cover its cost and more,” something voters are likely to remember in November.
In comments seemingly timed to slam the point home, Mohamed El-Erian, Allianz SE chief economic adviser and the man who famously coined the term while at PIMCO, told Bloomberg Television on Monday that the U.S. alone has exited the New Normal, and “is now finding a higher growth equilibrium.”
Now, the stage is set for labor force participation to rise while the unemployment rate stays low, El-Erian added.