President Trump came into office promising some fabulous yet unspecified health-care plan to replace the Affordable Care Act. No plan existed; every plan Republicans came up with managed to reduce the number of insured. Trump promised never to cut entitlements; his fiscal 2020 budget proposal would have done just that.
Trump said he’d bring back manufacturing. In fact, it slowed and now has slumped. (“Manufacturing has slowed amid global uncertainty,” NPR reported earlier this month. “That’s one of the reasons the Federal Reserve gave for cutting interest rates this week.”)
Trump said he’d
- get tough on drug companies. He hasn’t. He said his
- tax cut would be aimed at the middle class,
- deliver $4,000 a year to the average American family and
- permanently boost business investment, pushing growth above 3 percent. Nope, nope and nope.
Yet if many workers still feel not entirely secure, there’s a reason: investment. Several policy improvements of the Trump era have buoyed business investment compared with the recent past. But America is nowhere near reversing long-run declines in business investment that continue to stress many households notwithstanding the good economic times.
A suggestive exploration of the problem emerges in a recent report released by Mr. Trump’s erstwhile rival Sen. Marco Rubio. It describes an American economy that somehow has forgotten how to invest.
Net private fixed investment (expenditures on equipment, machinery or property minus depreciation) averaged around 8% of gross domestic product between 1947 and 1990, with significant spikes during booms—it hit 10% of GDP under Ronald Reagan. It has lagged since then, however. As of late 2018, amid another burst of GDP growth, net investment was barely half the Reagan level.
The cause of this is not a lack of cash in corporate America. Since 2000, nonfinancial firms have become net creditors in most years rather than net debtors. This is astounding. For most of our history the sole purpose of a nonbanking company was to receive capital from others so as to invest productively. Now on aggregate they distribute capital to others so that those guys can invest somewhere else. This phenomenon underlies the recent trend toward aggressive share buybacks.
This long-term downward trend in business investment raises a question about how well America will sustain its recent productivity gains. Absent sustained productivity growth, voters will be right to question the potential longevity of the current boom. Without parsing earnings press releases, employees can tell when their companies seem to have a plan to invest in long-term growth. A sense of directionless management can contribute to a gnawing unease about job security. This can produce unpredictable political consequences, whatever the GDP data say.
What to do about this is open to debate. The Rubio report’s ruminations about poor market incentives for longer-term investment are fine so far as they go, although its complaint about shareholder short-termism is partly belied by two of the corporate success stories it cites. Tesla and Amazon are conspicuous net debtors that continue to invest heavily back into their businesses. It can be done, and investors will tolerate it.
The 2017 tax reform and Mr. Trump’s mammoth deregulation drive are necessary conditions for an investment revival, as the recent investment uptick shows. But comparing recent trends with the historical norm, it’s clear these policies are not sufficient to restore the level of investment America needs. Can Mr. Trump figure out what is? Since he’s a longtime businessman you’d think so, except that his business experience lies exclusively in real estate and marketing—one of which features low productivity and the other low fixed-asset investment.
Nor do Democrats have any more of a clue. The common refrain from the left, with many melodic variations, is that if the private economy won’t invest in productivity enhancements, the government must.
Did these folks sleep through the past decade? With business not investing, government already has become the “investor of first resort” via its own deficit spending. The result has been a mix of social-welfare blowouts driven by political short-termism (indistinguishable, in productivity terms, from the worst charges laid against shareholders) and such crackerjack business plans as Solyndra.
Politicians continue casting about for productivity solutions. The danger is that 2020 becomes merely another contest to decide whom voters distrust the least to deliver one.
Last week, one of President Trump’s top economic advisers, Larry Kudlow, argued the U.S. economy is “crushing it,” posting boom-like numbers in key areas, all thanks to the leadership of the president.
Evaluating such claims usually begins with assessing whether the president should get credit for an economy he inherited in year eight of a solid expansion. But the fact that Trump is claiming credit for trends that were largely ongoing before he took office is one of the few ways in which he is not much different from former presidents.
.. Who is actually getting ahead in the Trump economy?
.. . In contrast, corporate profits and equity markets truly are crushing it, both on a pre- and especially, given the large business tax cuts, a post-tax basis.
.. There is also no evidence of an investment boom, suggesting the recent, above-trend growth in GDP is Keynes, not Laffer — meaning the deficit spending is providing a temporary boost but will not have lasting, positive impacts for long-term economic growth.
.. Starting with wages, since Trump took office, the real hourly wage for the 82 percent of the workforce that is blue collar in factories and non-managers in services is up half-a-percent, an extra 11 cents per hour.
.. the growth of mid-level pay has picked up a bit, as we’d expect with such low unemployment. But inflation, largely driven by higher energy costs, has also sped up, canceling out any real gains.
.. If energy prices come down and unemployment continues to fall, real wage growth for mid-wage workers will improve. But the magnitude of their gains will likely be nothing close to the administration’s claim that the tax cut would add at least $4,000 to annual earnings within a few years of the legislation.
.. In President Barack Obama’s second term, real annual wage growth for mid-wage workers was about 1 percent, so call that the baseline.
.. Sticking with the tax cut, its proponents main claim was the big corporate cuts would generate more business investment, which would lead to faster productivity growth, which would position us for higher paying jobs. So far, every link in that chain is broken.
.. Business investment is growing, as we’d expect in an economy operating close to full capacity. But its growth rate is not faster now than at various points earlier in the expansion.
.. There has been a modest uptick in investment in structures (such as plants, offices, wells, mine shafts, warehouses) in the first half of 2018, but, as economist Dean Baker has shown, the growth in such investment was due to higher energy prices generating increased investment in mining for oil and natural gas.
.. While mining investment has increased by 36.7 percent over the last year, it rose by 47.3 percent from the second quarter of 2009 to the second quarter of 2010, when the Obama administration was still enforcing environmental laws. In both cases, the key factor was rising world oil prices.
.. It takes time to plan investments, so it is too soon to conclude the tax cuts have not made a difference. But none of the surveys of companies’ investment plans show any plans to ratchet up capital spending
.. What is clear is firms are using their tax windfalls to boost share prices through buybacks, which, along with strong corporate profits, are fueling a historical bull market for stocks.
.. instead of borrowing $2 trillion to finance the regressive tax cut, Congress could have put more money in the pockets of working Americans and made investments for our economic future.
.. First, we should have expanded the Earned Income Tax Credit to compensate for decades of stagnant wage growth. The Brown-Khanna plan, calling for a $1.4 trillion EITC expansion, would have provided working families making up to $75,000 with up to $8,000 more in take home pay.
.. the best way to raise pay for ordinary Americans is to do so directly as opposed to pretending it will come through the largesse of executives and shareholders.
.. Second, we should have put billions to expand the National Science Foundation’s Advanced Technological Education program, linking employers to technical schools to develop credentials that respond to the needs of our cutting-edge industries.
.. Third, we should have provided hiring incentives for anchor companies to create jobs in places left behind such as Paintsville, Ky., or Flint, Mich. If a company is willing to hire in places where people do not have enough access to high-wage jobs, then they should get support for doing so.
.. Fourth, we should have invested in bringing high speed Internet to every corner of America. Providing fiber broadband to every corner of the United States is the modern equivalent of rural electrification.
.. Larry Kudlow’s right: The Trump administration is crushing it for its donor base, which is in turn handsomely rewarding them.
.. But it has done nothing for the forgotten Americans and nothing to make sure America is a winner in the 21st century. We do not need more sugar highs for those already doing well. We need to give lasting pay raises to those struggling to pay the bills and then focus on the forward-looking investments that will finally reconnect GDP growth to broadly shared prosperity.
in the event Nafta was terminated—as Mr. Trump has threatened to do—and there is a reversion to tariff rates under World Trade Organization rules, Canadian economic output could be reduced by 0.4% over the next four to five years, and “by even more if nontariff trade costs increase.”
.. deep U.S. cuts to corporate tax rates pose another “considerable uncertainty” on the Canadian economy, warning the combination of lower U.S. taxes and trade uncertainty could make Canada a less attractive destination for investment.
.. trade uncertainty is prompting some Canadian firms to delay decisions on business investment, while other companies are opting to hedge bets and expand outside of Canada. “We expect business investment to increase, but not by as much as it could without this uncertainty,”