Jobs are in tax law's title, but they may be elusive
When we refer to the Tax Cuts and Jobs Act as the tax-cut bill, we aren’t intentionally ignoring the second half of the title.
It’s just that the law’s effect on job creation is hard to measure and probably small.
Joel Prakken, chief U.S. economist for Macroeconomic Advisers, sees the tax changes having “very little” effect on jobs this year, and then a slight positive effect in the next three years. By 2021, his firm forecasts an unemployment rate of 3.6 percent, about 0.3 percentage point lower than it would have been without the tax cuts.
And that’s about as good as the labor market can get. “The only way you can create jobs in the long run is to increase labor supply, which means increasing population or increasing the labor force participation rate,” Prakken says. “Since this doesn’t permanently increase incentives to work, all you’re left with is some cyclical shifting of the unemployment rate.”
Macroeconomic Advisers expects gross domestic product to grow 2.6 percent this year, with 0.1 percentage point of that attributable to the tax cuts. The tax law adds a bit more to growth in 2019 and 2020, but becomes a negative in 2026 and 2027 after key tax cuts expire.
“It’s a modest boost over the next couple of years,” Prakken says. “Then it’s essentially a wash until the provisions start expiring, and there is a fiscal cliff waiting out there.”
Other analysts predict more immediate stimulus from the tax cuts. Wells Fargo Investment Institute, for example, has boosted its gross domestic product forecast about half a percentage point, to 2.9 percent, to account for the tax changes.
“The package that passed was even better than we anticipated,” says Sameer Samana, Wells Fargo’s global equity and technical strategist.
K.C. Mathews, chief investment officer at UMB Bank, predicts GDP growth of 2.8 percent this year, with the tax cuts contributing between 0.2 and 0.4 percentage points.
Mathews is counting on a jump in consumer spending as early as February, after Treasury releases new withholding schedules. “People will have more discretionary income, and I think in most cases it will be spent,” he says.
Prakken, however, thinks the money will take longer to flow into the economy. Updating the withholding tables won’t be easy, and some experts are recommending that workers file new W-4 forms. Even after employers update their payroll systems, employees may not notice their higher disposable income right away.
“We’re of the opinion that for the first half of this year, things really aren’t going to change,” Prakken says.
The tax law also gives businesses an incentive to boost spending. It allows them to immediately deduct the cost of new equipment rather than depreciating it over several years.
Prakken says that’s a modest positive for the economy, but he sees companies needing time to make investment decisions.
All this stimulus, he notes, would be more effective if the economy weren’t so strong already.
“If the unemployment rate were 10 percent, there would be lots of room for the economy to run,” he explains.
“Under today’s conditions, with the Federal Reserve concerned about the economy overheating and the labor market close to capacity constraints, you can only push things so much.”
In other words, the timing simply isn’t right for a jobs bill. In this economy, the second half of the law’s title amounts mostly to wishful thinking.