Skeptical reporting has still been too favorable.
The 2017 tax cut has received pretty bad press, and rightly so. Its proponents made big promises about soaring investment and wages, and also assured everyone that it would pay for itself; none of that has happened.
Yet coverage actually hasn’t been negative enough. The story you mostly read runs something like this: The tax cut has caused corporations to bring some money home, but they’ve used it for stock buybacks rather than to raise wages, and the boost to growth has been modest. That doesn’t sound great, but it’s still better than the reality: No money has, in fact, been brought home, and the tax cut has probably reduced national income. Indeed, at least 90 percent of Americans will end up poorer thanks to that cut.
.. But these transactions are simply rearrangements of companies’ books for tax purposes; they don’t necessarily correspond to anything real. Suppose that Multinational Megacorp USA decides to have its subsidiary, Multinational Mega Ireland, transfer some assets to the home company. This will produce the kind of simultaneous and opposite movement in dividends and direct investment you see in Figure 1. But the company’s overall balance sheet – which always included the assets of MM Ireland – hasn’t changed at all. No real resources have been transferred; MM USA has neither gained nor lost the ability to invest here.
.. So the tax cut induced some accounting maneuvers, but did nothing to promote capital flows to America.
The tax cut did, however, have one important international effect: We’re now paying more money to foreigners.
Bear in mind that the one clear, overwhelming result of the tax cut is a big break for corporations: Federal tax receipts on corporate income have plunged (Figure 3).
.. The key point to realize is that in today’s globalized corporate system, a lot of any country’s corporate sector, our own very much included, is actually owned by foreigners, either directly because corporations here are foreign subsidiaries, or indirectly because foreigners own American stocks. Indeed, roughly a third of U.S. corporate profits basically flow to foreign nationals – which means that a third of the tax cut flowed abroad, rather than staying at home.
This probably outweighs any positive effect on GDP growth. So the tax cut probably made America poorer, not richer.
And it certainly made most Americans poorer. While 2/3 of the corporate tax cut may have gone to U.S. residents, 84 percent of stocks are held by the wealthiest 10 percent of the population. Everyone else will see hardly any benefit.
.. Meanwhile, since the tax cut isn’t paying for itself, it will eventually have to be paid for some other way – either by raising other taxes, or by cutting spending on programs people value. The cost of these hikes or cuts will be much less concentrated on the top 10 percent than the benefit of the original tax cut. So it’s a near-certainty that the vast majority of Americans will be worse off thanks to Trump’s only major legislative success.
The Trade Deficit Is China’s Problem
These figures are usually described as a huge vulnerability for the United States. They are also often told as a morality tale of American self-indulgence or (alternatively) American naivety. Either because Americans do not work hard enough or because they have been sold out by globalist elites, America is losing and China is winning.
.. In about 1890, the U.K.-U.S. relationship looked a lot like the U.S.-China relationship today. In 1890, Britain held the world’s largest pool of investible wealth, as the United States does today. In 1890, the U.S. economy was growing much faster than the U.K. economy, much as China’s economy grows faster than America’s today.
.. In 1890, investment capital flowed from Britain (the more mature economy) to the United States—and on a huge scale. In those days, Britain invested something like 6–8 percent of its national income overseas, with the U.S. as the single largest destination.
.. Instead of attracting capital, however, China is repelling it.
.. China’s trade surplus is the flipside of its failure to attract foreign direct investment. It’s an axiom of national accounting that the current account (the trade balance plus earnings on overseas investment) must precisely equal the capital account (net foreign investment in a country).
.. China’s foreign investment is working out exactly as economic theory would predict:China’s foreign investment is working out exactly as economic theory would predict: It is yielding much lower returns than it would if it were invested in productive enterprise at home... A 2008 World Bank study found that the average return on multinational corporations’ investments in China was 22 percent. American multinationals earned even more, an average of 33 percent. China earns less than 3 percent on its immense holdings of U.S. Treasury... In 1890, when the U.S. was fast industrializing, it was not the dream of every candy maker in Cleveland or every furniture maker in Buffalo to gain a French passport for his children and a second home in Germany for himself... not only earned its profits in the U.S., but it saw its future and its security here as well... When Chinese business leaders invest tens of millions of dollars in second homes in Vancouver or send their granddaughters to Los Angeles to give birth to U.S. citizens, what are they saying about their expectations about China?.. She looked at entrepreneurs a rung or two below the ruling oligarchy, people with some money but no political power. Their overwhelming wish was to see their children emigrate to a democratic country: Canada, Australia, the United States. Their overwhelming fear: the democratization of their own country, which they worried would mean their poorer fellow citizens seizing the opportunity to plunder them. .. When the United States was growing fast, in the 1890s, it imported goods on a massive scale from the United Kingdom: locomotives, engineering equipment, and other high-technology items; high-quality consumer goods like Sheffield cutlery and Staffordshire ceramics; and hot-weather commodities grown within the British empire and reexported from London to the U.S., including rubber, chocolate, and palm oil.
.. They were paid for by U.S. food exports—but even more, by selling the British an opportunity to participate in future U.S. growth, which is what a capital account most fundamentally represents.
.. Because China cannot or will not attract foreign capital, it must run a huge trade surplus. That means fewer food imports (and thus a lower standard of living for its people). That means China must finance its future development out of its own savings (which means its people must consume much less of the proceeds of their own development).
.. very visibly, those who have accumulated savings are redeploying them elsewhere.
.. They accept radically lower returns on their investments in order to gain from Canada or Australia or the United States the security of property that their own government cannot provide.
If this is winning, it’s no wonder that so many Chinese every year seek to emigrate to the countries on the “losing” side.
What is a wonder is that so many in the Trump administration want to emulate on this side of the Pacific the Chinese model of economic development that terrifies so many of those who must live under it.
Putin Has Overplayed His Hand
Mr. Putin has prided himself on playing a strong game with weak cards. He sees plenty of opportunities to hobble his adversaries abroad and further cement his position at home. That requires engaging in an asymmetric game — relying on dark arts to make inroads in a brutish world, exploiting the vulnerabilities of open societies while highlighting the benefits of his closed one.
.. Mr. Putin is likely surprised, but not fazed, by the breadth of the world’s collective response to the Skripal incident. He can overcome the inconvenience of losing intelligence operatives. He is also betting that divisions in the West will mean that these actions are the end, not the beginning, of a response.
It’s critical that Mr. Putin lose that bet.
.. Mr. Putin’s muscular revanchism can camouflage his weakness, but it cannot erase it. He remains reliant on a one-dimensional economy, constrained by sanctions, mired in the reckless adventures he’s pursued in Ukraine and Syria, and increasingly subordinate to China and its growing ambitions. An effective diplomatic response needs to expose Mr. Putin’s vulnerabilities as effectively as he has sought to exploit ours.
.. His biggest vulnerability is his diplomatic loneliness. He has nothing close to the web of alliances and partnerships that have anchored the United States and its partners.
.. It’s critical to work with our allies and the Organization for the Prohibition of Chemical Weapons to establish a clear baseline to forcefully counter Mr. Putin’s unserious denials of culpability.
.. We have demonstrated our ability to work in concert on painful sanctions after Mr. Putin’s invasion of Ukraine. Now it’s time to tighten those screws further, fully apply the sanctions passed by Congress last summer, and work closely with our partners to follow suit.
.. The project of making Russia great is part and parcel of making Mr. Putin and his crony capitalist friends rich. That is also a vulnerability. Too many countries for too long have facilitated the enrichment and corruption of Mr. Putin’s inner circle. That needs to end.
.. Mr. Putin knows that the longer he is denied foreign direct investment, the further behind his economy will fall.
.. The Trump administration has signaled policy shifts, like pulling out of the Iranian nuclear agreement, that will make it easier for Mr. Putin to create wedges.
China to Target Trump’s Base in Tariff Response
Beijing prepares to deliver pain to President Trump’s support base, including with tariffs targeting agricultural exports
China is preparing to hit back at trade offensives from Washington with tariffs aimed at President Donald Trump’s support base, including levies targeting U.S. agricultural exports from Farm Belt states, according to people familiar with the matter.
The plans are part of a strategy that has taken shape in recent weeks as China seeks to avert tariffs by warning of possible repercussions and offering incentives to the U.S., including better access to China’s markets, especially in the financial sector.
China’s President Xi Jinping has taken this carro
.. China is likely to target U.S. exports of soybeans, sorghum and live hogs
.. The U.S. is among the top suppliers of these products to China, which imports around a third of soybeans that the U.S. produces
.. Any duties to be levied by China on those products would depend on how broad-based the U.S. tariffs are on Chinese imports, and plans could change based on what the Trump administration proposes, these people said.
Beijing is also weighing concessions including easing restrictions on foreign investment in securities firms and insurance companies, they said.
.. At the meeting, Commerce Ministry officials sought the companies’ views on the effects of scaling back U.S. agricultural imports, the people said. Since then the companies have been lining up alternatives sources—for soybeans, for instance, countries including Brazil, Argentina and Poland.\
.. At the same time, China plans to extend an olive branch to the U.S., which has been calling for better access to China’s markets. The opening could include scrapping foreign-ownership limits on Chinese brokerages and insurers, they said.
.. U.S. and other Western officials have often treated Beijing’s market-opening pronouncements with skepticism, saying hurdles have risen despite similar pledges in the past. Early last year, for example, it promised U.S. credit-card companies “full and prompt” access to China, but so far none has been given a green light.
.. The administration officials countered with a far-reaching proposal, the people said, for China to eliminate subsidies for state firms and take other measures
.. China has other measures besides agricultural tariffs in its arsenal, including
- diverting large orders for aircraft and other goods away from U.S. manufacturers and
- slowing the wheels of bureaucracy in approving operating licenses, or even
- targeting U.S. companies with antitrust investigations.