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| Trump Sells Tax Plan as ‘Rocket Fuel’ as Economy Strengthens | Trump Sells Tax Plan as ‘Rocket Fuel’ as Economy Strengthens |
| (about 1 hour later) | |
| ST. LOUIS — President Trump will rally for his tax plan on Wednesday in a Missouri county where the unemployment rate is 2.7 percent, a fitting backdrop for a speech where he will brag about the health of the economy while arguing that a major tax cut is nevertheless crucial to strengthen growth. | ST. LOUIS — President Trump will rally for his tax plan on Wednesday in a Missouri county where the unemployment rate is 2.7 percent, a fitting backdrop for a speech where he will brag about the health of the economy while arguing that a major tax cut is nevertheless crucial to strengthen growth. |
| Republicans have juggled those twin claims in pitching their tax bill, which was introduced at the beginning of November and remains on a path to reach Mr. Trump’s desk next month. They insist that the tax plan will deliver an immediate stimulus and encourage long-term investment. | Republicans have juggled those twin claims in pitching their tax bill, which was introduced at the beginning of November and remains on a path to reach Mr. Trump’s desk next month. They insist that the tax plan will deliver an immediate stimulus and encourage long-term investment. |
| But critics of the tax legislation question the need for such an extensive economic intervention. | But critics of the tax legislation question the need for such an extensive economic intervention. |
| The economy is strengthening and unemployment is at its lowest point in 16 years. On Wednesday, the Commerce Department said the economy had expanded at an annual rate of 3.3 percent, above the maximum sustainable level of output estimated by the Congressional Budget Office. | |
| The entire developed world is enjoying a simultaneous economic expansion for the first time since the 2008 financial crisis, and the Fed and other economic forecasters see few obstacles to continued growth on the horizon. | The entire developed world is enjoying a simultaneous economic expansion for the first time since the 2008 financial crisis, and the Fed and other economic forecasters see few obstacles to continued growth on the horizon. |
| “I’m not in favor of tax stimulus at the current time because the economy doesn’t really need it,” William C. Dudley, president of the Federal Reserve Bank of New York, said on Monday. | “I’m not in favor of tax stimulus at the current time because the economy doesn’t really need it,” William C. Dudley, president of the Federal Reserve Bank of New York, said on Monday. |
| The dispute about the economic impact of the tax plan is playing out at high speed because Republicans are rushing to pass the plan without the rounds of hearings and competing economic analyses that have shaped past efforts to substantially overhaul the federal tax code. | The dispute about the economic impact of the tax plan is playing out at high speed because Republicans are rushing to pass the plan without the rounds of hearings and competing economic analyses that have shaped past efforts to substantially overhaul the federal tax code. |
| Administration officials say that on Wednesday in St. Charles, Mo., Mr. Trump will ask Americans to imagine what is possible, economically, if the tax bill becomes law. | Administration officials say that on Wednesday in St. Charles, Mo., Mr. Trump will ask Americans to imagine what is possible, economically, if the tax bill becomes law. |
| He “will emphasize the need to get this done for the American economy,” a senior administration official told reporters on Tuesday night. The official, who spoke on condition of anonymity, said Mr. Trump is expected to pitch the bill as a boost to “Main Street” America, invoking historic downtown St. Charles, where, he will say, the bill will act as “rocket fuel” for growth. | He “will emphasize the need to get this done for the American economy,” a senior administration official told reporters on Tuesday night. The official, who spoke on condition of anonymity, said Mr. Trump is expected to pitch the bill as a boost to “Main Street” America, invoking historic downtown St. Charles, where, he will say, the bill will act as “rocket fuel” for growth. |
| But some economists question whether adding rocket fuel to the economy might backfire, in part by overheating the economy and prompting the Federal Reserve to raise interest rates more quickly. | But some economists question whether adding rocket fuel to the economy might backfire, in part by overheating the economy and prompting the Federal Reserve to raise interest rates more quickly. |
| Cutting taxes is likely to boost short-term economic growth by encouraging more spending. But Fed officials have warned that the American economy already is growing around the maximum sustainable pace, meaning that faster growth likely would cause higher inflation. The Fed could seek to dampen that effect by moving to raise interest rates more quickly. | Cutting taxes is likely to boost short-term economic growth by encouraging more spending. But Fed officials have warned that the American economy already is growing around the maximum sustainable pace, meaning that faster growth likely would cause higher inflation. The Fed could seek to dampen that effect by moving to raise interest rates more quickly. |
| “Economic growth appears to have stepped up from its subdued pace early in the year,” Janet L. Yellen, the Fed’s chairwoman, told Congress’s Joint Economic Committee on Wednesday. | “Economic growth appears to have stepped up from its subdued pace early in the year,” Janet L. Yellen, the Fed’s chairwoman, told Congress’s Joint Economic Committee on Wednesday. |
| “We welcome strong growth,” she said, adding “We’re worried about trends that could push inflation above our 2 percent objective.” | “We welcome strong growth,” she said, adding “We’re worried about trends that could push inflation above our 2 percent objective.” |
| Those concerns are shared by independent economists. Inflation has remained sluggish since the financial crisis; this is the sixth straight year that inflation is likely to run below 2 percent. But some economists see evidence that the pace of price increases already is strengthening. | Those concerns are shared by independent economists. Inflation has remained sluggish since the financial crisis; this is the sixth straight year that inflation is likely to run below 2 percent. But some economists see evidence that the pace of price increases already is strengthening. |
| Ian Shepherdson, chief economist at Pantheon Macroeconomics, said inflation is already rising fast in metropolitan areas with low unemployment. Mr. Shepherdson has revised his forecasts upward for next year, due in part to accelerating business investment. That on top of a tax cut, would be “like a double boost for an economy that doesn’t need a single boost,” he said. | Ian Shepherdson, chief economist at Pantheon Macroeconomics, said inflation is already rising fast in metropolitan areas with low unemployment. Mr. Shepherdson has revised his forecasts upward for next year, due in part to accelerating business investment. That on top of a tax cut, would be “like a double boost for an economy that doesn’t need a single boost,” he said. |
| Charles Evans, president of the Chicago Fed, said Monday that the Fed might need to raise interest rates more quickly even if growth did not accelerate. Some economists argue larger federal deficits can increase inflation. If tax cuts did increase inflation, or increased expectations of inflation, Mr. Evans said he would favor raising interest rates more quickly in response. | Charles Evans, president of the Chicago Fed, said Monday that the Fed might need to raise interest rates more quickly even if growth did not accelerate. Some economists argue larger federal deficits can increase inflation. If tax cuts did increase inflation, or increased expectations of inflation, Mr. Evans said he would favor raising interest rates more quickly in response. |
| Proponents of the tax plan argue that it will also increase the nation’s economic capacity. They say that cutting corporate taxes, in particular, will encourage increased investment. That will increase productivity, resulting in faster economic growth without increased inflation. | Proponents of the tax plan argue that it will also increase the nation’s economic capacity. They say that cutting corporate taxes, in particular, will encourage increased investment. That will increase productivity, resulting in faster economic growth without increased inflation. |
| Some economic forecasters have increased their estimates for economic growth next year, both due to underlying improvement in the economy and in anticipation of a significant tax cut. | Some economic forecasters have increased their estimates for economic growth next year, both due to underlying improvement in the economy and in anticipation of a significant tax cut. |
| The Organization for Economic Cooperation and Development said it expects the American economy to grow 2.5 percent next year, up from a forecast of 2.4 percent six months ago. | |
| The potential pace of economic growth — the effective speed limit for the American economy — is determined by two factors: the expansion of the work force and the productivity of the average worker. Both have grown slowly in recent years, a trend that is expected to continue. | |
| The government projected in October that the labor force will grow at an annual rate of 0.6 percent over the next decade. That is roughly half the pace of annual growth between 1996 and 2006, when the supply of workers expanded by an average of 1.3 percent each year. | The government projected in October that the labor force will grow at an annual rate of 0.6 percent over the next decade. That is roughly half the pace of annual growth between 1996 and 2006, when the supply of workers expanded by an average of 1.3 percent each year. |
| The slower growth of the work force reflects the aging of the American population as the baby boom generation moves into retirement. The youngest members of the baby boom generation will be 62 by 2026. It also reflects the reduced volume of immigration. The number of people moving to the United States has declined in recent years, and the Trump administration is working to further reduce the volume of both legal and illegal immigration to the United States. | |
| The reasons for the slow growth of productivity are less clear. | The reasons for the slow growth of productivity are less clear. |
| The productivity of the American economy — basically, the value of a given amount of work — increased at an annual rate of 0.4 percent between 2007 and 2016. That was about half the 0.9 percent pace of annual growth over the previous three decades. | The productivity of the American economy — basically, the value of a given amount of work — increased at an annual rate of 0.4 percent between 2007 and 2016. That was about half the 0.9 percent pace of annual growth over the previous three decades. |
| And the problem is getting worse. Productivity last year actually fell by 0.2 percent. | And the problem is getting worse. Productivity last year actually fell by 0.2 percent. |
| Some Republicans, including Kevin Hassett, the chairman of the White House Council of Economic Advisers, contend that economic growth is already increasing in part due to anticipation of a tax cut, and that failing to pass legislation would send stocks tumbling and curtail growth. | Some Republicans, including Kevin Hassett, the chairman of the White House Council of Economic Advisers, contend that economic growth is already increasing in part due to anticipation of a tax cut, and that failing to pass legislation would send stocks tumbling and curtail growth. |
| It is a matter of basic logic that lower taxes should encourage corporate investment by increasing the profitability of those investments. But studies generally find the benefits are modest, and corporate executives often discount the importance of tax rates in their decision-making. | It is a matter of basic logic that lower taxes should encourage corporate investment by increasing the profitability of those investments. But studies generally find the benefits are modest, and corporate executives often discount the importance of tax rates in their decision-making. |
| When Gary D. Cohn, President Trump’s chief economic adviser, recently asked a gathering of chief executives to raise their hands if the proposed tax cuts would affect their investment plans, only a few of the suits raised their hands. “Why aren’t the other hands up?” asked Mr. Cohn. | When Gary D. Cohn, President Trump’s chief economic adviser, recently asked a gathering of chief executives to raise their hands if the proposed tax cuts would affect their investment plans, only a few of the suits raised their hands. “Why aren’t the other hands up?” asked Mr. Cohn. |
| Another question is whether higher interest rates might offset the benefits of a tax cut. Critics of the Republican plan argue it would increase the federal debt, which would drive up rates as the government competes with private borrowers for the money it needs to fund its operations. | Another question is whether higher interest rates might offset the benefits of a tax cut. Critics of the Republican plan argue it would increase the federal debt, which would drive up rates as the government competes with private borrowers for the money it needs to fund its operations. |
| The Congressional Budget Office estimated in 2014 that every dollar of increased federal borrowing reduced private-sector investment by somewhere between 15 and 50 cents. | The Congressional Budget Office estimated in 2014 that every dollar of increased federal borrowing reduced private-sector investment by somewhere between 15 and 50 cents. |
| Proponents of the plan argue that these effects are greatly overstated. They say that the government will be able to borrow the money it needs in global markets without driving up rates. |