Slaughter & Rees Report: Watch Policies, Not Performance

It is easier for government and policy leaders to implement pro-productivity policies in boom times.

No matter how you organize the basic data, as the New York Times declared in a headline a few days ago, “Every One of the World’s Big Economies Is Now Growing.” The Organization for Economic Cooperation and Development tracks 45 major economies on the planet. Not only did gross domestic product expand in every one of those 45 economies in 2017, but in 33 of those 45 countries last year’s GDP growth rate was faster than the previous year’s.

This good fortune will not last, however. In several countries, the classic signs are emerging of reaching that full-capacity rate of growth that is dictated by the growth in the labor force plus the growth in the productivity of those workers. In the United States, for example, unemployment for three months straight of 4.1 percent is basically at full employment—and many measures of wages and prices have begun accelerating. Saturday is Janet Yellen’s last day as chair of the U.S. Federal Reserve; her successor being sworn in on Monday, Jerome Powell, almost surely will continue tightening Fed monetary policy.

So, the key question we should all be asking in 2018 is not whether economies are performing well. Instead, we should be asking whether business and government leaders are taking advantage of this fortunate performance to make structural changes in public policy now to expand productivity growth tomorrow.

As we have written before, the only way that countries can sustainably create new jobs, raise real incomes, and expand opportunity is through growth in labor productivity. In turn, productivity grows when government leaders build the talent base and infrastructure and when companies invest in the new ideas, technology, and capital that allow workers to thrive. For at least two important reasons, it is easier for government and policy leaders to implement pro-productivity policies in boom times. One is that rising fiscal revenues provide more fiscal latitude for funding public investments. Another is that individuals and companies feel more confident, and thus are more inclined to pursue new ideas and take new risks. For example, the sentiment of U.S. small businesses is now at record highs. Juanita Duggan, CEO of the National Federation of Independent Businesses, said that “2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index.”

Some countries are indeed seizing the moment to pursue pro-productivity policies. In China, President Xi continues to drive the One Belt, One Road initiative that is building out infrastructure in China and far beyond to the tune of hundreds of billions of dollars. In India, Prime Minister Modi continues to implement fiscal and foreign-investment reforms that will rationalize business decisions and expand market opportunities—with all of this pro-growth reform helping deliver him sky-high approval ratings: today a remarkable 88 percent of Indians hold a favorable view of him. And in France, President Macron has pushed through parliament sweeping changes to the country’s Code du Travail—changes that economists widely expect will stimulate hiring and investment by French companies by relaxing the many labor restrictions and requirements they had faced.

And in the United States?  The overhaul to corporate taxation passed just before the New Year had two important productivity-supporting aspects: slashing the corporate tax rate from 35 to 21 percent, and sharply reducing the U.S. taxation of income earned abroad by U.S.-headquartered corporations. These changes will induce companies to make more investments in the United States, and that expansion in America’s capital stock, combined with greater after-tax profitability for its companies, will help boost U.S. wages. Indeed, January brought a blizzard of announcements by U.S. companies—including dozens of S&P 500 companies—that they will expand U.S. capital investment and/or raise wages of their U.S. colleagues. Yes, some of these investments and increases would likely have happened without corporate tax reform, especially given the tight U.S. labor market—but no one can dispute that these responses are exactly what textbooks predict.

And yet, the United States and so many other countries have much to do to seize on the current good performance. The personal side of the U.S. tax overhaul was much more haphazard: cuts today in personal income-tax rates for most Americans—but that will disappear in a handful of years, and will likely add at least $1 trillion to the country’s already-too-large federal debt. Perhaps the biggest policy question mark is what happens with international trade and investment. Last week the United States invoked rarely used powers to levy new tariffs on imported solar panels and washing machines. And America continues to equivocate about whether to withdraw from the North American Free Trade Agreement with Canada and Mexico—a decision that, as one of us explained in an op-ed column this week in The Wall Street Journal, would cost the United States at least $50 billion a year.

The year is off to an invigorating start. With you, we look forward to seeing leaders rising to the occasion to envision and implement policies that can build a better tomorrow.

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