US Economy Swinging Back

Noted economist John B. Taylor, George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University, gave an in-depth presentation on the future growth of the U.S. economy as the featured speaker at the Bradley Distinguished Lecture on June 6. The lecture, titled “Big Changes in Economic Policy and the Economy,” was sponsored by the Lynde and Harry Bradley Foundation and the UWM Sheldon B. Lubar School of Business.

The basic principles of economic freedom are predictable, Taylor stated, allowing economists to look ahead and see what the government will do, and what the federal reserve system will do. These principles, he said, allow individuals and entrepreneurs to make decisions within a predictable policy framework, based on the rule of law, with strong incentives drawn from reliance on the market system, and a clearly limited role for government.

“I felt these principles were lacking when I spoke to you on this topic five years ago (in the Bradley series),” Taylor said. “Unfortunately, things veered away from these policies until relatively recently. Now we’re swinging back towards these principles, and let’s see what happens.”

Taylor expounded on four “policy buckets” — tax reform, regulatory reform (including international trade), monetary reform (including international monetary reform), and budget reform.

In terms of tax reform, Taylor said the most significant recent tax reform was the 2017 act that lowered tax rates on business, dropping the corporate rate from 35% to 21%, and lowering the tax rate on small businesses. He also predicted that a territorial tax system will result in a low rate of repatriation (the amount of foreign profits that American companies would be able to bring back to the U.S.).

“Basically, I see these reforms as a good thing. It encourages capital investment, gets more workers working, and productivity grows. Over time, you’ll see that higher productivity equals higher wages which leads to higher economic growth,” he said.

By contrast, Taylor said that regulatory reform “is by far the most difficult thing to get your hands around. How do you assess the impact of policy?” The current regulatory reform started in early 2017, he said, citing the president’s desire to eliminate two current regulations for every new regulation put in place.

Of the president’s appointees to such agencies as the Federal Communications Commission, Securities and Exchange Commission, and the Federal Deposit Insurance Corporation, Taylor believes that, overall, they are more concerned about costs and benefits than their predecessors were. He also pointed to legislation that lifts the threshold of companies that are “too big to fail” from $50 billion to $250 billion, saying the change points to a shift in philosophy, he believed.

International trade is on everyone’s mind right now, Taylor noted. “Look at the situation between China and the United States.  It’s asymmetric.  I got a tweet from the manufacturer of Tesla cars. He said when he exports a car to China, he pays a 25% tariff. And when China sends a car to the U.S., it pays only 2.5% in tariffs. That’s what I mean about asymmetry.”

“At least until recently, tariffs were working. But now China is retaliating. This is what you worry about — when trade skirmishes may lead to trade wars.”

As for monetary policy, he said that “the positive is that we are normalizing back towards a rule-like policy that worked well in the past.”

The Bradley Distinguished Lecture Series is directed by V. Kanti Prasad, Bostrom Professor of Entrepreneurship, under a grant from the Lynde and Harry Bradley Foundation.