San Francisco Fed: Don’t Expect Much From Those Tax Cuts

Tax cuts and spending increases can help boost the economy during a recession. But what if the economy is already in good shape? Tim Mahedy and Daniel J. Wilson of the San Francisco Fed review the literature for us:

A burgeoning economic literature has studied whether fiscal stimulus affects the macroeconomy differently in good times than it does in bad times….The predominant research finding is that the fiscal multiplier is smaller during expansions than during recessions….To put the above results in perspective, recall that the CBO, similar to other macroeconomic forecasters, expects the TCJA to boost 2018 GDP growth by around 1.3 percentage points, from 2.0% to 3.3%. The findings by Gross et al. suggest the true boost is more likely to be less than 1 percentage point, while the literature on fiscal spending multipliers suggests an even smaller boost, as low as zero according to some studies.

….Many analysts have forecast large increases in GDP growth over the next two to three years as a result [of the Republican tax cut]. However, recent research finds that the effects of fiscal stimulus on overall economic activity are much smaller during expansions than during downturns. This suggests these forecasts may be overly optimistic.

That’s OK. An economic boost was never the point of the tax cuts. Making rich people richer was the point, and that worked great.

UPDATE: Actually, CBO projected that the Republican tax bill would increase GDP by about 0.3 percent, so their forecast is roughly the same as Mahedy and Wilson. They’ve corrected their paper.