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Economist Mark Zandi On Why Tax Cuts Are Not A 'Game-Changer,' Rising Deficits, And Why He Is Not A 'Fan' Of President Trump’s Economic Policies

Steven Burke

Do you have any estimates of the Tax Cuts and Jobs Act’s impact on job creation?

In the near term, this year and next year, it is definitely a plus. It has probably added seven-tenths of 1 percentage point of growth to GDP. If you didn't have the tax cuts, the economy would grow this year 2.3 percent as opposed to 3 percent [GDP]. In terms of jobs, that probably ends up being 700,000 to 750,000 jobs this year.

Next year, you get a little bit less from the tax cuts because most of the benefits of the tax cuts are this year and a little bit next year. But by 2020, it actually becomes a negative because the benefit of the tax cuts goes away. You lower the rate and that is a big plus and then there is no further rate reductions and it becomes a little bit of a negative because you are left with somewhat higher interest rates. The GDP and employment effects pretty much go away and turn slightly negative by 2020 and 2021.

What is the long-term impact of the tax cuts?

In the long run, if you look out 10 years from now it probably has no net benefit to jobs or the economy. The key link between the tax cuts and the economy would be through investment and that happens to the cost of capital. The cost of capital declines because of the lower tax rate but you could also have higher rates because of the bigger deficits. So net net it is like a wash. Long run, it is hard to see much of any benefit in terms of jobs, GDP or any other economic statistic.

Is that also true also of the $840 billion American Recovery and Reinvestment Act stimulus under the Obama administration?

Yes. The stimulus after the collapse was designed to be all short term. It really wasn't about the long run. There were some elements like more infrastructure spending. But that was all about jump-starting the economy—ending the recession. That was designed to be temporary. This is also temporary. It is the same kind of stimulus, but it was kind of sold as this is going to support growth in the long run. And it would have if the tax cuts had been paid for by less government spending with the deficits not rising. But the deficits are ballooning. The budget deficit this year is going to come in at $900 billion—up from $650 billion last year and it is tracking over $1 trillion for next year.

So if you give tax cuts but you don't figure out how to pay for it—you borrow money for it—you are going nowhere because you are just raising interest rates and that offsets any benefit.

It is providing the same short-term boost to the economy that the 2009 stimulus did, but just like the 2009 stimulus it doesn't provide any long-term benefits to the economy.

 
Steven Burke

Steve Burke has been reporting on the technology industry and sales channel for over 30 years. He is passionate about the role of partners using technology to solve business problems and has spoken at conferences on channel sales issues. He can be reached at sburke@thechannelcompany.com.

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