Data from the Bureau of Economic Analysis released today showed inflation continuing to come down. In November the Personal Consumption Expenditures (PCE) price index was 2.6% over the previous November, down from 2.9% in October. The Federal Reserve aims for 2%. Falling gas prices meant that overall, prices actually dropped in November for the first time since April 2020. 

In a statement, President Joe Biden reminded Americans that “[a] year ago, most forecasters predicted it would require a spike in joblessness and a slowdown to get inflation down. I never believed that. I never gave up on the hard work, grit, and resilience of millions of Americans.” In addition to the falling inflation rate, he noted that “the unemployment rate has stayed below 4 percent for 22 months in a row, and wages, wealth, and the share of working-age Americans with jobs are higher now than they were before the pandemic began.” 

“But,” he said, “our work is far from finished.” To continue to lower prices for hardworking families, he said, he is focused “on lowering costs—from bringing down the price of insulin, prescription drugs, and energy, to addressing hidden junk fees companies use to rip you off, to calling on large corporations to pass savings on to consumers as their costs moderate.”

The administration is highlighting economic numbers not just because they are good—and they are: real gross domestic product (GDP) grew by an astonishing annual rate of 4.9% in the third quarter of 2023; under Trump it was 2.5% before the pandemic knocked the bottom out of everything—but also because they illustrate the administration’s return to an economic theory under which the U.S. government operated from 1933 to 1981.

In those years the federal government focused on supporting people on the “demand side” of the economy in the belief that what drives economic growth is demand for goods and services. This theory means that the government should work to make sure workers and those at the bottom of the economy have money to afford the goods and services they need. This theory suggests that education and good wages and a basic social safety net are good for the economy because they enable people to have enough disposable income that they can buy things.

After President Ronald Reagan took office in 1981, though, a different economic theory took hold. People in power believed that what drives growth is not the demand side, but rather the “supply side” of the economy: the people who create goods and services. This theory means that the government should work to make sure that producers can concentrate wealth and use it however they wish, because they will invest in the economy, producing more goods more cheaply and thus creating more jobs at better wages. This theory calls for little business regulation or taxation, both of which hurt the accumulation of wealth, and trusts market forces, rather than government policies, to keep the economy fair. 

Neither of these theories is new in the United States, although in every incarnation they have had different elements and emphases. But today the struggle between those who believe in one side or the other is central to politics. 

While Biden and the Democrats are working hard to support the demand side of the economy, Republicans are firmly in the camp of the supply side. On this date in 2017, then-president Trump signed into law the Tax Cuts and Jobs Act, sometimes referred to as the Trump tax cuts. Passed with Republican votes alone, the law cut tax rates for individuals until 2025 but made cuts in the corporate tax rate from 35% to 21% permanent. 

Together with the tax cuts enacted in 2001 and 2003 under President George W. Bush and made permanent by lawmakers of both parties in 2013, the Trump tax cuts went primarily to households in the top 1% and to large corporations. In testimony in May 2023 before the Senate Committee on the Budget, tax analyst Samantha Jacoby of the Center on Budget and Policy Priorities noted that these tax cuts “ballooned deficits” while there is little evidence that they promoted growth. 

Bobby Kogan from the Center for American Progress, who previously worked in the Biden-Harris White House, noted in March 2023 that Reagan’s tax cuts, which amounted to about $10 trillion, started a bipartisan effort to reduce spending and increase revenues. Those efforts meant that President Bill Clinton left office with budget surpluses. At the time, the nonpartisan Congressional Budget Office projected that even with an aging population and increasing healthcare costs, revenues would keep up with the costs of domestic programs.

But the massive Bush tax cuts threw that projection off. By the end of fiscal year 2023, those cuts will have cost more than $8 trillion, and most of the savings went to the wealthy. Trump’s tax cuts continued both of those patterns: they will cost about $1.7 trillion by the end of fiscal year 2023 and they, too, benefited primarily the wealthy and corporations. At a cost of almost $10 trillion, these combined tax cuts are central to the budget deficit and growing national debt.

For all the complaints about American tax rates, the U.S. ranks 32nd out of 38 nations in revenue as a percentage of GDP in the Organization for Economic Cooperation and Development (OECD), a group of market-based democracies devoted to “achiev[ing] the highest sustainable economic growth and employment and a rising standard of living.” The U.S. is so much below the average ratio that if its ratio were simply average, it would bring in $26 trillion more over 10 years. 

Yet Republicans back making all the Trump tax cuts permanent; Trump and his advisors have called for still deeper tax cuts, possibly cutting the corporate tax rate to 15%; and House Republicans want to cut funding for the Internal Revenue Service that enables it to audit wealthy tax cheats.

Meanwhile, Republican representative David Schweikert (R-AZ), vice chair of the Joint Economic Committee of Congress, who is deeply concerned about the budget deficits, believes that what is driving those deficits is that Americans are aging. Like many of his colleagues, including Republican presidential candidate Nikki Haley, he believes the answer to fixing the budget is cutting Social Security, Medicare, and other services. 

Tax policy and economic news sometimes come across as piecemeal and dull, but they are, at the end of the day, the story of how we think societies prosper and what role governments and markets should play to nurture that prosperity.

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Notes:

https://www.bea.gov/news/2023/personal-income-and-outlays-november-2023

https://www.forbes.com/advisor/investing/pce-inflation/

https://www.nytimes.com/2023/12/22/business/inflation-federal-reserve-economy.html

https://www.whitehouse.gov/briefing-room/statements-releases/2023/12/22/statement-from-president-joe-biden-on-the-november-pce-report/

https://www.bea.gov/data/gdp/gross-domestic-product

https://www.wsj.com/articles/what-happened-to-the-economy-under-trump-before-covid-and-after-11602713077

https://www.cbpp.org/research/federal-tax/after-decades-of-costly-regressive-and-ineffective-tax-cuts-a-new-course-is

https://www.americanprogress.org/article/tax-cuts-are-primarily-responsible-for-the-increasing-debt-ratio/

https://www.cnbc.com/video/2023/09/26/rep-david-schweikert-the-number-one-driver-of-the-deficit-is-demographics.html

https://www.jec.senate.gov/public/index.cfm/hearings-calendar?id=B06EA009-ECD1-4504-81A2-D69F43F97479

https://www.oecd.org/about/document/oecd-convention.htm

https://www.washingtonpost.com/business/2023/09/11/trump-tax-cuts-2024/

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