Scott Grannis at Calafia Beach Pundit handicaps the Trump tax cut in Predictions for 2018:
If 2018 is going to be about just one thing, it will be whether boosting the after-tax rewards to business investment results in a stronger economy. Beginning in 2009, Obama and the Democrats gambled that a massive redistribution of income would boost demand and thus boost the economy, but they lost. They ended up flushing $8 trillion down the Keynesian toilet. Trump and the Republicans are now gambling that a significant increase in the after-tax rewards to business investment will boost the economy. Only time will tell, but there are already hints of a stronger economy in the data: e.g., capex is up, industrial production is up, business confidence and the ISM indices are up, and industrial metals prices are up. It’s likely that the current quarter could mark the first time we’ve enjoyed three consecutive quarters of 3% or more growth in over 12 years.
From my supply-sider’s perspective, we now have the essential ingredients for a stronger economy in place. Tax incentives are correctly aligned to encourage more business investment; regulatory burdens are being slashed, business confidence is high, and the Fed is not a threat for the foreseeable future. Swap and credit spreads are low, as is implied volatility, and that tells us that liquidity is plentiful and systemic risk is low. The fact that the rest of the world is also doing better as well is just icing on the cake.
Deficits do matter, but like the stimulus it also matters how they are spent. Stimulating demand is less effective than stimulating investment. Demand stimulus is only effective briefly under certain conditions. Stimulating investment pays dividends (pun intended) much longer.
Morgenthau warned FDR that lack of capital investment was triggering another recession in 1938 before we have fully recovered from the Great Depression. It is hard to have a greater contrast than the economic policies of Obama and Trump. Obama took a chance and failed. Trump is also taking a chance.
During the Obama years we heard form some analysts that the elements of our previous historical growth no longer existed. They may be correct, but after eight years of reluctant investment we may see a surge towards a mean.