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.
On professionals who sold their integrity, and got nothing in return.
As 2018 draws to an end, we’re seeing many articles about the state of the economy. What I’d like to do, however, is talk about something different — the state of economics, at least as it relates to the political situation. And that state is not good: The bad faith that dominates conservative politics at every level is infecting right-leaning economists, too.
This is sad, but it’s also pathetic. For even as once-respected economists abase themselves in the face of Trumpism, the G.O.P. is making it ever clearer that their services aren’t wanted, that only hacks need apply.
.. Professional conservative economists are something quite different. They’re people who even center-right professionals consider charlatans and cranks; they make a living by pretending to do actual economics — often incompetently — but are actually just propagandists. And no, there isn’t really a corresponding category on the other side, in part because the billionaires who finance such propaganda are much more likely to be on the right than on the left.
.. Even during the Obama years, it was striking how many well-known Republican-leaning economists followed the party line on economic policy, even when that party line was in conflict with the nonpolitical professional consensus.
Thus, when a Democrat was in the White House, G.O.P. politicians opposed anything that might mitigate the costs of the 2008 financial crisis and its aftermath; so did many economists. Most famously, in 2010 a who’s who of Republican economists denounced the efforts of the Federal Reserve to fight unemployment, warning that they risked “currency debasement and inflation.”
Were these economists arguing in good faith? Even at the time, there were good reasons to suspect otherwise. For one thing, those terrible, irresponsible Fed actions were pretty much exactly what Milton Friedman prescribed for depressed economies. For another, some of those Fed critics engaged in Donald Trump-like conspiracy theorizing, accusing the Fed of printing money, not to help the economy, but to “bail out fiscal policy,” i.e., to help Barack Obama.
It was also telling that none of the economists who warned, wrongly, about looming inflation were willing to admit their error after the fact.
But the real test came after 2016. A complete cynic might have expected economists who denounced budget deficits and easy money under a Democrat to suddenly reverse position under a Republican president.
And that total cynic would have been exactly right. After years of hysteria about the evils of debt, establishment Republican economists enthusiastically endorsed a budget-busting tax cut. After denouncing easy-money policies when unemployment was sky-high, some echoed Trump’s demands for low interest rates with unemployment under 4 percent — and the rest remained conspicuously silent.
What explains this epidemic of bad faith? Some of it is clearly ambition on the part of conservative economists still hoping for high-profile appointments. Some of it, I suspect, may be just the desire to stay on the inside with powerful people.
<blockquote class=”twitter-tweet” data-lang=”en”><p lang=”en” dir=”ltr”>China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…</p>— Donald J. Trump (@realDonaldTrump) <a href=”https://twitter.com/realDonaldTrump/status/1020287981020729344?ref_src=twsrc%5Etfw”>July 20, 2018</a></blockquote>
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And yet, both his tax cuts and trade war are contributing to these dynamics.
- You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed’s naturally going to ramp up their concerns about overheating.
- At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit.
- Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.
The figure below, an index of the value of the dollar against a basket of foreign currencies, shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit. Relatedly, as Trump’s tweet mentions, the Chinese yuan is falling sharply against the dollar, down about 7 percent since April, a movement that directly offsets that same amount of Trump’s tariffs.
In other words, the president has a point. But while part of this is what he gets from inheriting a strong economy — something I suspect he wouldn’t trade — part of it is because of his and his party’s actions.
.. The Fed is different, as its independence from politics is so vital. There are many sad examples of countries whose economies did a lot worse than they should have because their central banks became an arm of the government.
.. That said, I’m not reaching for the vapors. I really wouldn’t want to see Trump ratchet up his Fed critiques to a regular feature of his daily rants.
.. So, if you’re listening, Mr. President, no point in whining about a currency appreciation to which you’re contributing. Whine as you might, you can’t have a “great economy” closing in on full employment, an independent Fed, a big tax cut, a trade war — and a falling dollar.