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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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https://www.wsj.com/articles/the-good-times-can-roll-on-1535063430
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
levels.
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.
OPINION COMMENTARY
The Good Times Can Roll On
The economy isn’t on a ‘sugar high.’ Pro-market policy improved incentives to work and invest.
|
ILLUSTRATION: DAVID KLEIN
Aug. 23, 2018 6:30 p.m. ET
By Edward C. Prescott and Lee E. Ohanian
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8/24/18, 9)48 AMThe Good Times Can Roll On – WSJ
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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.
