As my colleague Ryan Young says, four percent economic growth is wonderful news. It provides yet more evidence that free-market, supply-side policies work, and that the rising tide of economic growth lifts all boats. There is a risk, however, that some other policies will derail this growth—that’s a risk that responsible free-market politicians should avoid at all costs.
Some of the supply-side strengths of the economy are:
- Low corporate tax rates. These encourage business investment and innovation.
- Low individual tax rates. These encourage consumer spending and/or saving. Far from these being a “one-off” effect, the continued effect of these rates will result in the average household having tens of thousands of dollars more disposable income over the next decade.
- Deregulation. Lowering the burden on businesses allows for more investment and innovation. The forthcoming corporate average fuel economy (CAFE) deregulation on new cars and trucks will probably be a huge shot in the arm for the auto industry—and for those who need affordable vehicles.
Unfortunately, there are still some weaknesses in the economy. They include:
- Minimum wage laws and other labor regulations. These discourage the hiring of unskilled labor and are therefore a barrier to low-tech entrepreneurialism.
- Banking regulations. These discourage much-needed lending and therefore restrict access to capital.
- Environmental regulations. These delay, postpone, or stop much-needed infrastructure projects.
And there are significant threats:
- Global trade war. Tariffs represent taxes on American consumers, workers, and job creators. There are already signs that the tariffs introduced by the President are counteracting the effect of the tax cuts mentioned above. Moreover, it seems that at least some of the high growth numbers were caused by exporters rushing to get their goods exported before retaliatory tariffs came into effect. The current trade environment has also hurt foreign direct investment in America.
- Antitrust. The European Union recently fined American-based tech giant Google $5 billion for alleged breaches of competition law. There are calls to use American antitrust law to break up Google and other tech giants. This would be a huge blow to innovation and hurt entrepreneurs.
- Federal Reserve action. Such a high growth rate often leads to fears about the economy “overheating” and high inflation, which can lead the Federal Reserve to raise interest rates in order to prevent this. That would be a mistake. The economy is not a machine that can overheat, and inflation only occurs when more money is chasing the same amount of economic output. As David Henderson reminds us, in the presence of economic growth, there will be less inflationary pressure, not more. Indeed, that is part of the point of supply-side policies.
- State and local policies. States like California are doing their best to counteract the supply-side reforms with actions like higher minimum wage laws, more labor regulation, and stricter environmental regulation. Municipalities are also proving hostile to new ways of doing business like Airbnb or Lyft.
In order to keep growth going at this excellent pace, which could lead to a doubling of the size of the economy in less than 20 years, the president and Congress should do several things:
- Stop the trade war. The agreement with the EU to stop further escalation was welcome in this regard. Congress can also take back powers over trade from the president.
- Pass further supply-side measures like the JOBS Act 3.0 recently introduced in the House, which will help banks get back into the lending business.
- Keep up the pace of deregulation. Permitting reform, for instance, would be a major benefit to the economy.
- Resist calls to use antitrust law to break up tech companies—and work to modernize antitrust law.
- Make the tax cuts permanent and further reform individual tax law, such as by abolishing the Foreign Account Tax Compliance Act (FATCA).
The economy is in better shape than it has been for years. It’s important to recognize that is because of supply-side policies, and work to keep those policies going.