Republicans in Washington are trying to cut taxes because they’re stuck in the 1980s. Maybe it’s good politics, but it’s bad policy. Far better to ask what challenges the economy is confronting right now, and what steps would address them. Here’s a hint: Corporations’ biggest hurdle is not their tax bill but a labor shortage. The urgent priorities for the U.S. economy are to increase the supply of workers and the supply of housing.
Republican ideology on taxes and fiscal policy has its roots in the 1980s when Reagan-era Republicans came to power. The challenge of that time was that capital was scarce and inflation was high. In such an environment, the combination of tighter monetary policy and tax cuts for the wealthy made sense. Tight monetary policy helps to keep inflation in check — and by cutting taxes on the wealthy you free up capital for them to invest in the economy where there were plenty of good opportunities.
The centerpiece of the tax plan put forth by the Trump administration and Republican congressional leadership is a drastic corporate tax cut. But this does not address any current problem. Profit margins and corporate profits are near record highs. The stock market is at record highs. Business in America is doing fine. Unlike in the early 1980s, capital is not scarce.
Republicans say their tax cuts will add jobs. Again, maybe that line is good politics, but it’s bad policy. With the unemployment rate at 4.2 percent, the last thing this economy needs is more jobs. The United States actually needs more workers to fill the existing openings.
Rather than targeting corporations, any tax cut should give working-age Americans incentives to join and remain in the workforce. In the absence of increased immigration, the only hope for the U.S. economy is to raise the labor-force participation rate. People are more likely to work if their take-home pay is higher.
The other structural challenge facing the United States over the next decade, in addition to a worker shortage, is a housing shortage — because so few homes were built in the years following the great recession. Here again, Congress could address the issue. Immigration reform could bring in more foreign workers for construction jobs. The federal government could even subsidize housing construction. The Trump administration could deliver on its promises of infrastructure investment by supporting transportation around cities — to create housing demand in communities that have available land but have inadequate access to nearby economic hubs.
The president’s nominee to be the next chair of the Federal Reserve should play a role. This person should be willing to let inflation run somewhat hotter than 2 percent for the next five or 10 years, as the labor-force participation recovers to pre-crisis levels and as housing construction catches up. One of the strengths of the Federal Reserve is its institutional flexibility. In the late 1970s and early 1980s, it won credibility by fighting inflation. During the 2008 financial crisis, it used any means necessary to stabilize the financial system. The Fed’s mission over the term of the next chair should be to support the labor and housing markets — not to police a 2-percent target for inflation.
Good policy starts with recognizing the challenges of today and tomorrow. Washington needs to focus on labor and housing. Leave the 1980s behind.