No one can really see it yet but classical economic theory is coming back. This post at Instapundit by Mark Tapscott is presented and discussed in exactly the way economics would have been discussed by the great classical economists between 1776 and 1936. The issue is not about demand. It is about the redeployment of actual physical resources – capital goods – from less productive and even non-productive uses into more productive and positively productive uses. You may think you have heard this said before, because you think that is how economic theory and policy should be discussed, but I keep an eye out for it and this is the first time I have come across anything discussed in that way.
I have posted this paper before – Making Sense of Classical Theory – which is a pre-print of a paper that will appear in the April 2018 edition of the Journal of the History of Economic Thought. If you are at all interested in understanding how pre-Keynesian economists thought about the structure of an economy and what made it grow and flourish, you should read that paper. It describes in theoretical terms how Mark Tapscott explains the sudden flourishing of the American economy. This is exactly how classical economists looked at things.
TRUMP’S FIRST-YEAR BOOM IS LARGELY DUE TO DEREGULATION BUT THINK ABOUT THIS: Merely cancelling an expensive federal regulation doesn’t immediately convert the compliance cost into a potentially productive new investment. The capital has to be reallocated and some time is required for the new investment to produce sufficient return to offset the former compliance costs. Huh?
In other words: “It takes time for the economy to recover the costs of excessive regulatory compliance and to redirect capital to productive uses, so the gains seen during Trump’s first year are likely attributable in significant part to the expectations generated by his slashing the red tape. The full impact of the deregulation is still to be felt.”
And remember, the Trump tax cuts aren’t in effect until February. Wayne Crews of the Competitive Enterprise Institute estimates regulatory compliance cost the U.S. economy $1.9 trillion. Trump can’t repeal all federal regulations but what if his tax cuts and the continuing positive impact of deregulation in coming years produces an economic boom that far exceeds the Reagan era? Ponder that one a bit!
The value of tax cuts is in their ability to divert resource use away from consumer goods and governments into the hands of productive business who are then able to invest. Cuts to regulation play their role by reducing wasted efforts within business in complying with government directions and instead use the resources at their disposal to create value. It works like magic, because to a modern macroeconomist it is magic since they have no means of explaining what was once perfectly well understood by everyone.