The media hyperventilates daily over the latest Trump Tweet or news out of the administration. But while they spin out of control and Democrats predict the apocalypse, the market remains high and the average American has more confidence in the economy now than they have in the last 20 years. These contrasting assessments highlight a massive disconnect between progressive politicians and the American consumer, stemming from a fundamental lack of understanding of the mind of the consumer.
Rep. Steny Hoyer (D-Md.) announced last week plans to roll back the Tax Cuts and Jobs Act of 2017, supplementing a broader Democrat strategy for the 2018 midterms laid out earlier in March to raise the top marginal income tax rate and corporate tax rate. If Democrats were to regain control of Congress and succeed in rolling back the provisions of the new landmark tax legislation, it would severely undermine much of the economic progress made in the past two years because it would reduce expectations for future economic growth and productivity.
According to the University of Michigan Survey of Consumer Sentiment, consumer sentiment is at its highest levels since 1998. The civilian unemployment rate of 4.1% is also tied for the lowest since 2000, unseen since 1969. Growth in real investment (money invested in tangible and productive assets) has also returned to its pre-recession average between 5% and 10% per year. These are numbers that any politician would dream of and would, in normal times, attract bipartisan praise. Despite anyone’s personal feelings towards the president, his pro-business policies have been successful.
The steady growth of private investment and decline in the unemployment rate has led to a return to pre-recession growth rates in consumer spending and industrial production. These gains ultimately benefit households and small businesses, reflected in the wide array of wage increases and bonuses announced by companies following the tax overhaul in anticipation of lower tax burdens.
President Trump’s victory in the 2016 presidential election led to an increase in consumer spending and confidence, particularly among conservatives, as did the passage of the new tax law. A pro-business agenda has raised American household’s expectations about future economic activity, which has provided the assurance needed to return to trend consumption. That, in turn, has raised company’s expectations for expansion, which is reflected in higher investment and hiring.
Consumer sentiment matters because it influences how individuals behave in anticipation of future policy. In addition to the positive effects of tax cuts on consumer sentiment, declines in local regulatory exposure are also associated with increases in economic optimism and life satisfaction. The agenda of deregulation and tax cuts has played a major role in fueling economic growth. This is where we see the disconnect with the current economy and the 2018 Democratic economic agenda—raising taxes will undo the gains in consumer confidence and optimism, as well as corporate investment over the past two years. A Democrat plan to scale back the tax plan and to increase regulation will raise economic uncertainty among individuals and businesses, which will in turn decrease investment, employment, and wages.
Part of the reason that the deregulation and tax cuts agenda of the Trump administration has had such a positive impact on consumer optimism is because households and firms undertake actions today in anticipation of their beliefs about the future. Consumers report higher levels of economic confidence and life satisfaction when the regulatory reigns are reduced. The current proposals by Democrat leadership will undermine the consumer optimism and corporate investment that has emerged due to the administration’s pro-business and pro-growth agenda.
While we recognize that lower tax rates can pose a problem for the large federal deficit, the Trump administration argues that heightened economic growth resulting from lower corporate tax rates will expand the tax base and ultimately raise both U.S. competitiveness and federal revenues. Instead of a protracted debate on raising taxes that reduces all of the positive gains mentioned in this piece, the Congress should leverage the additional resources from these years of higher aggregate growth to implement bipartisan solutions to our broken entitlements and expanding federal deficit.
Unless the Democratic Party has a reckoning with the mind of the American consumer, their policy proposals will continue moving further to the left and threaten steady economic growth. No matter your political preference in this election, consumer confidence can and will suffer if higher taxes and higher uncertainty are introduced to our economy again.
Morgan Ortagus is the Co-Host of Bold Business, a former deputy U.S. Treasury Attaché to Saudi Arabia, and has worked in senior roles at several global financial institutions. Christos Makridis is a PhD candidate at Stanford University, a Digital Fellow at the MIT Sloan Initiative on the Digital Economy, and a non-resident fellow at the Harvard Kennedy School of Government Cyber Security Initiative.