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Intended Effect of Economic Measures

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Gross Domestic Product (GDP) is one of the most widely used measures of an economy’s output or production. It is defined as the total value of goods and services produced within a country’s borders in a specific time period — monthly, quarterly or annually. GDP is an accurate indicator of the size of an economy and the GDP growth rate is probably the single best indicator of economic growth while GDP per capita has a close correlation with the trend in living standards over time.

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Dallas Fed economists forecast growth for 2019 of approximately 2.1 percent. This forecast is based on estimated first-half growth of approximately 2.5 percent and an expectation for second-half growth of approximately 1.7 percent. This compares with a 2.5 percent rate of growth achieved in 2018. Dallas Fed economists had predicted some of the recent slowing due to the expected waning of the impact of fiscal stimulus. However, some of the slowing is also due to heightened trade tensions, which have contributed, at least in part, to decelerating rates of global growth as well as weakness in manufacturing and business direct investment in the U.S. Despite these headwinds, U.S. growth has been resilient primarily due to the strength of consumer spending, which accounts for approximately 70 percent of the U.S. economy. The consumer is bolstered, in particular, by a strong jobs market as well as improvements in the level of household debt to gross domestic product (GDP) which have occurred since 2008. On October 4, the Bureau of Labor Statistics reported September jobs growth of 136,000. The current rate of unemployment is now approximately 3.5 percent. This is the lowest level of U.S. unemployment in the past 50 years. To further gauge labor market slack, Dallas Fed economists also look at the U-6 measure of unemployment, which includes people who are unemployed, plus discouraged workers, plus workers who are working part time but would prefer to work full time. This measure now stands at approximately 6.9 percent, below its prerecession low of 7.9 percent (reached in December 2006) and only slightly above its historical low of 6.8 percent (reached in October 2000). These measures, as well as our Eleventh District surveys of employers and discussions with contacts, indicate that the U.S. economy is at or past the level of full employment

Many of our contacts report particular difficulty in hiring and retaining lower-skilled workers (who earn wages in a range of 12 to 15 dollars per hour), as well as finding and retaining more skilled workers, who typically require some level of advanced specialized training.

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Foertsch (2004) obtains similar results using Congressional Budget Office models. In the 12-author CBO study cited above, the sole exception to the result that tax cuts lower long-term size of the economy occurs when the tax cuts are financed by reductions in government purchases and the policy is run through the Ramsey model, in which case long-term GDP would rise by about 0.8 percent. However, as the authors note, the Ramsey model implies that the reduction in government saving due to the tax cuts in the first decade is matched one-for-one with increases in private saving (Dennis et al. 2004). Empirical evidence rejects this view (see Gale and Orszag 2004b)

The analysis of tax cuts financed by reductions in government purchases is subject to an important caveat. The models assume that government purchases either represent resources that are destroyed or that government purchases enter utility in a separable fashion from private consumption. For some purposes, like national defense, the latter assumption might be appropriate. In those cases, the cut in spending would reduce households’ utility and thus impose welfare costs but would not affect choices at the margin. However, in all of the analyses, it is assumed that there is no investment component of the government purchases – so the analysis would not be representative of the effects of cuts in, for example, education, research and development, or infrastructure investment.

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Briefly, some people mistakenly think a higher income (and larger GDP) is correlated with a higher quality of life and more happiness, but only up to a certain income level. Some studies have actually found that beyond a certain income level, additional increases in income are no longer correlated with higher quality of life. Instead, other, non-income factors (such as the equity of income distribution and access to education and health-care) are more closely correlated with a happier, healthier society. Some of the poorest countries in the world may actually appear poorer than they really are if we only consider their official GDP figures. If a large percentage of the workforce is employed in the informal sector, then their incomes will not be reflected in the nation’s GDP. As a result, the nation’s GDP will appear smaller than it would be if all economic activity were included.

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Feldstein, Martin, and Douglas W. Elmendorf. 1989. “Budget Deficits, Tax Incentives, and Inflation: A Surprising Lesson
from the 1983-1984 Recovery.” Edited by Lawrence H. Summers. Tax Policy and the Economy (3). Cambridge: National Bureau of Economic Research.

Foertsch, Tracy. 2004. “Macroeconomic Impacts of Stylized Tax Cuts in an Intertemporal Computable General Equilibrium Model.” Washington, D.C: Congressional Budget Office.

Gale, William G., and Peter R. Orszag. 2004a. “Budget Deficits, National Saving, and Interest Rates.” Brookings Papers on Economic Activity 2004 (2): 101-187.

National Commission on Fiscal Responsibility and Reform. 2010. “The Moment of Truth.” Washington, D.C: The White House

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