President Trump’s tax overhaul plan is a matter of timing

To understand why it is not easy to gauge the economic impact of the tax reform legislation, we have to understand the crucial role of timing.

Timing is important in a great diversity of things in our lives, even comedy. And if you have ever suffered through a TV sitcom whose actors lack comedic timing, you know how disastrous bad timing can be.

In its own way, comedy is as unforgiving as football to those who don’t respect time’s importance. Jack Benny, the radio and TV star of years ago, remains the acknowledged master of comic timing. He could bring laughter using nothing more than silence, or holding a facial expression for precisely the right interval. Today’s comedians and comedic actors — the ones who take comedy seriously. at least — still study Jack Benny’s movies and TV videos to understand timing.

Economic policy is never intentionally funny but is as reliant on perfect timing as any sitcom or quarterback. And for economic policy-makers, getting the timing right leads to prosperity; getting it wrong means misery all around.

The reason for economic policy’s dependence on timing is that the American economy never stands still. It is always expanding or contracting. If it is just beginning to expand after a recession, for example, and we hit it with a contracting force, we could easily snuff out a recovery. And if the economy is overheating and we hit it with an expansionary boost it could fuel a disastrous inflation.

Non-economists may be forgiven if they insert, “well, duh” at this point. The technical problem for economists, though, is that determining whether the economy is expanding or contracting isn’t as easy as it sounds.

The biggest obstacle to determining the direction of the economy is that most of the key data is accounting data that, by its nature, deals with the past. Statisticians and analysts labor hard and long to develop that data so that it is as close to “real-time” as possible but there is still a substantial time lapse between the data, the determination, and the decision on policy.

During the latter portion of his term as chairman of the Federal Reserve, Alan Greenspan became increasingly concerned with the elapsed time between the Fed’s data-dependent forecasting models and when he had to decide on a policy. Eventually, he developed his own anecdotal information system, based on his telephone calls to some of the economy’s key players around the country.

In theory, economic policy is divided into two areas: fiscal policy; and monetary policy. As a practical matter, the federal government’s insatiable demand for spending money it didn’t have became our de facto policy and we didn’t experience a policy decision in this area for decades. Now we have had two — one during Barack Obama’s presidency and one during President Donald Trump’s.

Obama, faced with a financial market collapse and a severe recession, decided to ignore the deficit and attempt to revive the economy with government spending. The enlarged deficit, and the continued fragility of financial markets, became a drag on the economy. The result was that instead of the “Goldilocks” economy we wanted — not too hot and not too cold — we got a pre-kiss “Sleeping Beauty” economy.

Trump, faced with a still-lethargic economy after years of deficit spending, decided to revive it by stimulating it with tax reductions and regulatory reform.

Will his economic policy work better than his predecessor’s? There are lots of opinions out there but when stripped of there political content, what is left is “we don’t know.” And the reason we don’t know is that we can’t tell yet if the timing was right

Tax reform can provide a substantial stimulus to an economy already working up a head of steam. The risk is that the economy will expand too rapidly and create an uncontrollable price inflation.

If the timing is perfect, though, and it might be, the boost in consumer and business confidence that fueled the past half-year’s growth will be supported just in time by real dollar consumer spending and corporate investment.

There is a risk to doing nothing, also. Without tax reform, consumer confidence, which was boosted by the election and underwritten by expanding household debt, would probably have evaporated. At that point our economy would have reverted to its slow-walking through history.

There is little doubt that tax reform would not have happened without the president’s prodding, so there is considerable political risk attached to the economic risk. If the president is right, and the timing is right, it will give considerable weight to the argument that there is a correct — that is, efficient — balance point between public and private spending and we had exceeded that point. We do live in interesting times.

James McCusker is a Bothell economist, educator and consultant.