Why do politicians care so much about economic growth? Or: Why did the US need a tax reform?

Question

In the US, economic growth does not seem so hard to achieve. If you look at the GDP of the United States, it seems to just grow and grow. Even the multiple crises along the way have only had minor effects. The graphs of other countries look far more bumpy and occasionally stagnant, which would suggest that they have real issues with getting the economy going on. But in the US, economic growth does not seem to be a problem.

Here's the US GDP, followed by e.g. the GDP of Denmark.

These figures would suggest that economic growth is not a problem in the USA. And yet, as an outsider, I often hear in particular conservatives but also a lot of libertarian commentators constantly say that taxes need to be cut so that the economy can grow and so we can have jobs, jobs, jobs, etc.

But why are those things even necessary? How much more economic growth can you have? Even the unemployment rate is at 4 %, which is about as low as it has ever gotten in the US, at least for the past many decades.

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To sum it up, my question is, why is cutting taxes (as was recently done), boosting the economy, and creating jobs such an important political agenda in the US, when it seems like they are already doing perfectly fine at those things? Does it not make more sense to keep the current level of taxes, given how they aren't really hurting the economy, and in turn using those taxes to fix other more prominent issues that plague the US society, such as low social mobility and inequality? The argument that taxes will prevent economic growth doesn't really apply when all data suggests that the current level of taxes are perfectly suitable to sustain economic growth and a low unemployment rate, so why was there a need for a tax cut?

Answer 1

There are at least two problems with your question's premises.

The first is that, there's no causation link between lower taxes and economic growth except in the fantasy world in which some ideologists live. So-called supply-side economics just doesn't work - except, perhaps, when you're a small tax haven. Everywhere else, demand is driving the economy, and the latter requires (publicly funded) infrastructure. Because, you know, paying workers well ensures they can eventually afford a model-T like in the good old days of Ford, and roads to drive them on tend to get built using taxpayer money.

The other is that "it seems like they are already doing perfectly fine at those things" is incorrect. While the unemployment figures are low on paper, the labor participation rate is also low. Put another way, part of the workforce is just no longer bothering to look for a job. The real unemployment rate in the US (and elsewhere) is higher than official figures may suggest.

The need for Trump's tax cuts was ideological. Reagan once quipped: "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." Today's Republicans are faithful to the latter mindset and continue to want lower taxes - in spite of structurally deficient infrastructure that, as it happens, requires tax money to maintain.

There's also something to be said about the small government ideology promoted by Republicans and Libertarians. There has been an effort by the latter to sabotage everything government in the US, since the Reagan era or so, in any way they could, to prove the point that government isn't useful. I'd put forward that they've succeeded to a large degree. The party line seems to be: if you can't kill it through legislation, kill it through spending cuts. (The obvious question then, of course, is whether tax cuts lead to spending cuts. But I'll leave that as an exercise to the reader.)

Then again, and to the Republicans' credit, US public unions negotiated, between the end of WW2 to Reagan, a number of benefits that are on track to bankrupt a number of municipalities, counties, and possibly states. So in a sense it's no wonder that parts of the US public are so hostile towards the public sector.

At any rate, the point is that yes, there's no causation link between lowering taxes and having better growth, but the topic is murky because of all of the special interests involved.

As to whether more growth is desirable or indeed feasible in the long term to begin with, I'll differ to Steve Keen (in the comments): "a 2% rate of return from the year dot to now on $1 would yield a ball of gold 1.3km in diameter; 4% gives you a ball of gold 2/3rd the diameter of the sun; and 6% I think returns a ball of gold larger than the Milky Way."

Answer 2

As a Dane I have to inform you that comparing these two particular nations is going to create weird results.

Denmark is a small export dependent nation following the ups and downs of global trade. 70% of Danish exports is shipped to other European countries.

The internal domestic market is not enough to keep things moving along when crisis occurs. So we keep expanding and contracting as the economy goes through its cyclic ups and downs. With unemployment benefits managed by the unions and most workers voluntarily paying into the unemployment insurance, the Danish state finances can sort of remain balanced for years even though unemployment sometimes doubles to 10% during global recession periods.

Danish GDP is highly influenced by Container Freight shipping (20% of the global market). So shift in transport activity creates spikes in the GDP without it really influencing the domestic market. The same with oil. Danish companies involved with fossil fuels contributes erratically to Danish GDP, but the wind (and hydro from Norway and Sweden) powered Danish energy market will just keep fumbling along.

So there is two different circumstances for USA and Denmark. Denmark is a tiny sailboat going up and down and sometimes being thrashed by the storms. USA is a massive tanker that moves the waters around it.

Answer 3

Your assumption is flawed.

GDP growth in the USA is bumpier than in Denmark, if you look at GDP of both nations in Danish Krona. The bumps you're analyzing are the USD/DKK exchange rate.

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As to why politicians promise economic growth: It's promising wealth to individuals, without actually promising wealth. It's selling hope of getting a raise, without being accountable if people don't actually get a raise. As a politician, that's a no brainer.

As to why economic growth happens steadily and pretty much on its own, unless you crash the economy: Inflation, increased automation, and growing population.

Answer 4

I am not very sure about the situation in the US, as it has a bit of a different social state implementation compared to the European countries. But I think that it has a lot to do with the way social systems are constructed. If you have a retirement system that is not based on saving somewhere the contributions (or investing them) but on redistribution now to the elders of the tax money and promising the now active people that their pension will be paid in the future by the then active people -which is the case in many EU countries- then you need an ever expanding population and GDP growth.

Same if you create treasury bonds to finance some spending the state does now. You need then growth over the next years so that you can tax more (if the GDP increases then the same percent of taxes generate more money) so that you can pay the interest on the treasury bonds.

Answer 5

1. Economic growth is a buzzword. Politicians use buzzwords to get people's attention. An increase in economic growth should always be a good thing so it is a safe thing for politicians to espouse. ALL politicians support economic growth, they just have a different way of pursuing it, just like all people support eating food, we just have different perspective of what it should be. I think a candidate using economic growth as a primary platform can be safely ignored.

2. The US tax code is incredibly complex with loopholes granted for all kinds of stuff, requiring expert, dedicated knowledge. To help understand how complex it is, not only is accounting an expansive career field, but Tax Law is an entire , lucrative, field of law on its own, focused on finding loopholes to avoid paying taxes.

Most of the changes were to close loopholes (there a far too many remaining), others were to reduce state control on the federal revenue stream. For most people, the difference between a loophole and a tax break is whether they can personally claim it.

There is a tipping point in which high taxes reduce economic incentive, in which people don't see a significant return on their labor and become complacent about the quality/quantity of their work (e.g. USSR), thus reducing GDP. However, I don't think the US is close to that point and so taxes and economic growth are not closely linked.

High taxes require the government to be responsible for services. Low taxes require private industry to fund services. The balance between public and private funding can be endlessly argued.

In my opinion, I feel the private sector can do a better job in the large majority of fields than the government. In segments that have near universal political approval (Fire Departments) , significant investment requirements (Highways) , or serious consequences for the populace as a whole (Disaster Recovery), I feel the government is best suited to owning the service. In other areas, I feel the government should regulate, but not participate, as the private industry can more effectively do the job (Elementary Education). In yet other areas, I think it should be left to private industry to determine what quality/quantity of services are provided.

Everyone has their own priorities and preferences for what services are needed, and that is one of the things that makes the United States a great, but very diverse, country.

Answer 6

The first thing to keep in mind, in the US, politics is about what the politician can sell. "That guy did a terrible job, I will make things great". Nobody votes for "I'll keep things steady", people vote for promises, at least, generally speaking. People also vote for competance, intelligence, policy, it's not just promises, but promises are a big part of running for and wining government office.

There's also an idealogy in the US, that some people choose to believe, others don't, that tax cuts = economic growth. It happened under Reagan's tax cuts where a stagflation crisis turned into a robust economy, but there were extenuating circumstances and it was a different kind of tax cut than is possible now as Reagan went from over 50% to under. All that's possible now is different shades of under 50% - so it's not possible to re-create the Reagan taxcut effect today but that doesn't stop politicians from making promises.

We had strong economic growth under Clinton with tax increases, but the (somewhat flawed) argument that we must cut taxes for growth is still used a LOT. There's a percentage of voters in the US, who believe in tax cuts no matter what, and at times, the results have been disastrous. But the argument is still made with regularity, to the point where it's a key voting issue pretty much every election.

Also, consider the economics of the Obama years. (note - this isn't just Obama. No president really controls the economy, though they can influence it), but during his 8 years, initial recovery from a bad recession then steady but unspectacular growth and many people never felt the recovery. What your GDP chart doesn't show is how people felt about the economy, and that's important.

So, despite your chart showing steady growth, sentiment was much more mixed. You have the "cut taxes" voters and you have the "We want better jobs and a stronger economy" voters. Voters who expect things to be better than they are. So there is a strong desire among many voters to have the good jobs that a strong economy provides. If you lived in the US (I'm guessing by your question you don't) you couldn't miss those 2 voting blocks, the tax cut voters and the "bring back a strong economy" voters, generally the working class.

Some people say that one of the reasons Hillary lost was that she didn't reach out to the working class, and they didn't support her on election day.

Answer 7

I'm going to try answer the main question you ask which is why politicians seem to care so much about economic growth, especially in the US, when the economy seems to be doing fine.

I think a lot of people talk about the phrase being a buzzword used by politicians which is able to show that they are effective at making the country flourish and work. To get into a bit more detail about why that's more important you have to understand the relationship between the government and the people. People see the government as being accountable to them, they vote it in and they do that for reasons that the party has said they will fulfill. So in the cases where they fail to do that you lose buy in from the people who voted you in so they are more likely to stop supporting you.

The reason why economic growth is such a key example of this in America is because of 2 main reasons.

1. The 2008 economic recession and all other recessions hit the US incredibly hard and it is still fresh in a lot of peoples memories. This is something they want to desperately avoid especially with all the fear mongering around it. This means that even if the economy is doing well that's not enough since a recession can still occur in a function economy. The way to prevent that is to have continual growth since stagnation is one of the causes and problems with recessions.

2. One of the main characteristics that America holds close to its identity is its economic domination. This was the main reason they became a superpower. When their industry after the first world war boomed and shot them up. So to show that this is alive when you are in government is to fulfill the patriotic narrative of american continued supremacy.

A prime example of this occurring in other nation to an even more extreme level is China. In China one of the main ways the current ruling party keeps control and limits unrest is by fulfilling their main promise of keeping economic growth above 10% every year. That's why it is such a major thing that they have been failing this in current years because it's a violation of the contract they have with their people.