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Read the article from August 24, 2018 ¡°The Good Times Can Roll On,¡± by Edward Prescott and Lee Ohanian. Write a brief essay (500 words, single spaced, Times Roman 12 inch font) that assesses claims made in this article. Consider whether the article takes a ¡°supply-side¡± or a ¡°demand-side¡± perspective. Describe whether you agree with the overall argument? Have recent developments in late 2019 or early 2020 changed the outlook? Comment briefly on one or two key policy issues that now face the country. Focus on the incentive to invest and work narratives. Juxtapose these narratives against your understanding of the Keynesian view.
The article argues that policies aimed at increasing incentives to invest (lower capital-tax rate) and work lead to strong economic growth. Conversely, polices that depress these incentives lead to lower growth. The authors also point to deregulation, trade policies, and health care costs as factors that can either improve or negatively affect economic growth.

8/24/18, 9)48 AMThe Good Times Can Roll On – WSJ

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DJIA 25798.91 0.55% ▲ S&P 500 2872.93 0.56% ▲ Nasdaq 7943.79 0.83% ▲ U.S. 10 Yr -0/32 Yield 2.830% ▼ Crude Oil 69.17 1.98% ▲

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Some Keynesian economists argue that the U.S. economy’s recent uptick is only a “sugar high.”

They predict that the slow-growth conditions of the Obama years will soon return. But this

pessimistic view is misguided. Better economic policies are the primary reason the economy

has improved since 2016. If pro-growth policies remain in place, the economy’s strong

performance will likely continue.

The growth paths in a market economy depend on the quality of government policies and

institutions. These affect the incentives to innovate, start a business, hire workers, and invest
in physical and human capital. If policies are reformed to increase incentives for market

economic activity—as many have been under President Trump and the Republican-controlled

Congress—then investment and labor input expand as the economy rises to a higher growth

path. Once the economy reaches its new growth path, labor and investment stabilize at higher


When policies change to depress these incentives, the economy moves onto a lower long-run

growth path. That happened after the 2007-09 recession. Because of the severity of the

downturn, the economy recovered organically to some extent. But that partial recovery stalled

by the end of 2014 because of higher tax rates and increased regulation. These policies

produced a long-run growth path below the prerecession path.

It’s clear the recovery ended in 2014 because the two hallmarks of recovery—investment’s

share of gross domestic product and labor input relative to the adult population—stopped

increasing. This left a large gap between actual output and the output level that would have

occurred had the economy recovered to its prerecession growth path. According to our

calculations, the U.S. cumulatively lost about $18 trillion in income and output between 2007

and 2016. Everything suggested this shortfall would persist or even grow.


The Good Times Can Roll On
The economy isn’t on a ‘sugar high.’ Pro-market policy improved incentives to work and invest.



Aug. 23, 2018 6:30 p.m. ET

By Edward C. Prescott and Lee E. Ohanian

8/24/18, 9)48 AMThe Good Times Can Roll On – WSJ

Page 2 of 2

Copyright ©2017 Dow Jones & Company, Inc. All Rights Reserved

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Yet economic performance began to improve beginning in the first quarter of 2017. Real GDP

growth accelerated to about 2.7% between the end of 2016 and the second quarter of 2018, up

from about 2% between 2014 and the end of 2016. The share of GDP devoted to nonresidential

business investment rose to a historic high.

The best measure of labor input—the total number of market hours worked divided by the 16-

and-older population—is growing faster than in 2014-16, and is now close to its all-time high.

This is all the more impressive since the growth rate of the working-age population is slowing.

Perhaps the most exciting aspect of the current economy: The emergence of better job

opportunities has reduced the number of people on disability. This has led the Social Security

Administration to reverse its previous warning that the disability system would become

insolvent as soon as 2023.

U.S. economic performance is the strongest in years. One policy driving this turnaround is the

substantially lower corporate-tax rate, which has made the U.S. more competitive with other

countries. Regulatory changes—such as the partial rollback of Dodd-Frank and new leadership

within the Consumer Financial Protection Bureau—also have proved helpful, particularly for

small businesses, which are benefiting from lower record-keeping and compliance costs.

Meanwhile, the number of regulatory pages in the Federal Register has been cut by a third since

President Obama’s last year in office. That’s a major reason the National Federation of
Independent Business reports that more small-business owners are hiring than ever. They’re

also increasingly optimistic about the future of the U.S. economy.

As the two hallmarks of recovery are still rising, the economy likely has not reached its new,

higher growth path. This means that the U.S. can expect above-normal growth in the coming

months, possibly even years.

Growth rates could improve with further policy changes. One example is a reduction in trade

barriers. Since the General Agreement on Tariffs and Trade was signed 70 years ago,
international commerce has expanded dramatically, hugely benefiting U.S. consumers by

lowering prices and increasing the variety of available goods. The average household’s benefits

from trade are greater than $10,000 a year, according to the Tax Foundation. Further

cooperative trade agreements—rather than wide-ranging tariffs—would expand these already
large benefits.

A second area for reform that could put the U.S. on a still-higher growth path is health care. The

rise of health-care costs is the most important reason wages have not increased more for U.S.

workers. The extra compensation is swallowed up by health-insurance premiums. Expanding

medical savings accounts and decoupling health plans from employment would create

incentives for both consumers and their health-care providers to economize on health-care

spending. This would lower costs without compromising quality.

U.S. economic performance over the past decade illustrates the substantial influence of

government policies on growth. While some are reluctant to admit it, the current performance

is a result of policies that basic economic theory tells us will increase investment and hiring.

Even greater prosperity is possible if policy makers stay the course and continue to implement

pro-market economic policies.

Mr. Prescott, a 2004 Nobel economics laureate, is director for the Center for the Advanced Study
in Economic Efficiency at Arizona State University. Mr. Ohanian, a senior fellow at the Hoover
Institution, is associate director of the center at ASU.

Appeared in the August 24, 2018, print edition.

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