Economic Outlook: Stagnation or Growth?

News media is filled with stories about how the V-shaped recovery has lost steam. The reason is said to be another spike in the number of Covid-19 cases, which is true to the extent that governments around the country respond by once again artificially restricting taxpayers from working, producing goods and providing services.

However, a more likely overall reason for bigger businesses to slow down the recovery from this year’s artificial economic shutdown is that they have come to realize what a Biden/Harris presidency will look like in terms of tax hikes. Back in October, Joseph Sullivan wrote for the National Review:

unless your household income is less than $45,600, there is more than a 90 percent chance that the Biden-Harris plan, if enacted, will raise your taxes. In the exact middle of the household income distribution, over 95 percent of households can expect a tax increase if the Biden-Harris plan becomes law. Overall, 82.6 percent of American households can expect a tax increase.

Americans for Tax Reform has an estimate of the tax increases facing residents of a state with a state income tax, in this case Georgia:

Biden has promised to impose $4 trillion in new or higher taxes on the American people. Under this plan, Georgia families and individuals will face a top tax rate of 55.09 percent. Georgia small businesses that operate as pass-through entities and pay taxes through the individual code would also face this new top rate. 

The breakdown is below: 

                                    Biden top federal rate:   39.6 percent 

                                    Georgia top rate:            5.75 percent 

                                    Medicare payroll tax:     1.45 percent 

                        Biden new payroll tax:                 6.2 percent

                                    Pease limitation:           1.188 percent

                        Additional Medicare tax:               .9 percent

                                                                          55.09 percent

Biden would repeal the Republican Tax Cuts and Jobs Act (TCJA), which would raise the top marginal tax rate to 39.6 percent. A typical family of four with annual income of $73,000 will see a $2,000 tax hike. 

A repeal of the Trump tax reform also raises taxes on corporations. Together with higher personal income taxes, this will throw a wet blanket over the U.S. economy, dampen consumer spending and cool off business investments. It is therefore no surprise that the post-shutdown jobs recovery that began this summer has tapered off. Figure 1 reports monthly private-sector employment since 1993; numbers are not seasonally adjusted, hence the wave pattern:

Figure 1

Source: Bureau of Labor Statistics

If the legal challenges to the November election result in a second term for Trump, it is very likely that the recovery will gain steam again. If Biden is cleared to be sworn in on January 20, we will see a flattening out somewhere around 123 million employees. This means that the entire jobs gain during the Trump economy will have been wiped out.

Should we get a Biden/Harris presidency and Congress ends up repealing the Trump tax cuts, it will add an unhealthy dose of instability to the U.S. economy. We already have instability in government finances, and we have seen a slow but problematic drift in macroeconomic activity from private-sector activity to government spending. These two trends have come with a slowdown in GDP growth (caused by the expansion of government) which in turn has given us a weaker, more unstable labor market. Figure 2 explains:

Figure 2

Source: Bureau of Labor Statistics

It is interesting to note the trends in private-sector jobs growth over the past three recessions. A brief, shallow drop in employment in the early 1990s was followed by a somewhat more pronounced decline in the Millennium recession. The big dip came with the Great Recession ten years ago, which in turn followed on the heels of a relatively weak period of economic growth during the Bush Jr. administration.

While the latest destruction of jobs was artificial, created entirely by government edicts, it nevertheless had a very tangible macroeconomic impact on our country. When businesses have to make employment and investment decisions, there is not much difference between a government-imposed shutdown of economic activity and a regular recession. The latter is easier to deal with over time, as it is driven by market forces, while the former unfolds at the mercy of political decree. That said, they both represent downturns in economic activity and slow down, even eliminate sales and profits.

The changes to the tax code that Biden/Harris and a Congressional Democrat majority would bring, will clearly and negatively affect the economy for the longer term. We will face an environment of stagnation and instability, as opposed to confidence and growth under a Trump second term.

The first issue of my new subscriber-only economic newsletter will explain in detail what the difference is between these two scenarios. It will take a business-oriented perspective and provide insights into how a business can navigate the uncertainties of macroeconomic instability and stagnation. Stay tuned!