The $1.5 trillion tax reform initiated by U.S. President Donald Trump in 2017 has boosted the American economy, but the positive effect of lower corporate and individual taxes can only last so long, according to a Nobel-winning economist.
The U.S. economy has been a bright spot among advanced economies over the past year, partly thanks to higher corporate investment that followed Trump’s tax cuts. But such an effect will only last for another two years at the maximum, said Edmund Phelps, a professor at Columbia University.
“We’re in a boom, but all booms come to an end. This high level of output and employment cannot be sustained,” he told CNBC’s Martin Soong on Sunday at the China Development Forum in Beijing.
Phelps won the 2006 Nobel in economics for his work on the short-run and long-run effects of economic policy.
“I would be surprised if the elevated level of investment continues much longer. Maybe another year, maximum two years,” he said. “Then, I think we’re going to subside to a more normal level of employment and unemployment.”
The U.S. Federal Reserve has warned that the United States grow at a slower pace this year than last.
The central bank said weakening European and Chinese economies are dampening U.S. growth. It estimated that the American economy would grow by 2.1 percent this year, down from an earlier forecast of 2.3 percent and last year’s 2.9 percent.
Some analysts have even predicted that the U.S. could be in recession by the middle of next year.