The allure of economic growth
I was listening to NPR on the way home from work, and they were talking about tax reform. Now that Trump and the Democrats have cut a deal on protecting DACA people (those people who were illegally brought to the United States by their parents), the president is moving on to tax reform.
Oh, boy, here we go again.
President Trump is trying to drop the corporate tax rate from 35% to 15%. The idea is that because big corporations are holding so much overseas because of the high tax rate, they’ll be incentivized to bring it back if they only lose 15% instead of 35%. And when they bring all that money back, they’ll invest it into the economy and create more jobs, or at least increase the wages of their workers.
Tax cuts for corporations aren’t that popular among Democrats, but I guess the idea is that since Trump gave the Democrats protection for DACA recipients (including no building or funding of a giant [idiotic] wall on the border), they’ll reciprocate and give him some tax cuts which are always popular with Democrats.
But will it even work?
I wrote about how tax cuts don’t deliver the intended returns people think they do compared to a tax cut. TL;DR: they don’t expand the consumer class. Yet in the interviews with various officials in government leadership, people have asked how a drop in revenue in taxes from corporations and also people (you don’t get tax cuts from Republicans unless they go to wealthy people) will not increase the federal budget deficit.
And once again, the myth of economic growth comes into play. “We can afford tax cuts because it’ll grow the economy, from 2% to 3%. The tax cuts will pay for themselves; growth covers a multitude of sins. And if we can grow from 2% to 4%, wow! It’ll cover every sin!”
The problem, of course, is tax cuts don’t deliver the economic growth promised. To get that kind of growth, productivity would have to increase by 50%. Furthermore, in the past, when the corporate tax rate was temporarily lowered, companies didn’t bring back the money and use it to expand their businesses (thereby boosting productivity), they use it to pay dividends to their investors, or buy back stock (which decreases supply of the stock in the market, thereby boosting demand and increasing its price). In neither case are they increasing production, but instead giving money back to the shareholders.
How it affects me, and how it can affect others
As someone who has a good chunk of money in stocks and receives money in dividends, this is good for me. But I am under no illusion that this will increase the economy. Instead, it will increase the deficit and in order to maintain services, the government will have to borrow more money, which will cause the Federal Reserve to print more money, which will lead to inflation. Inflation helps the wealthy, particularly those owning real estate, but it degrades the buying power of the working and middle class if wages don’t keep pace with inflation.
The counter-argument is “Lots of Americans own homes! Inflation will help drive up their personal wealth!”
To which I say “Poppycock!”
Your home going up in value only helps you if want to sell it, otherwise it just increases your property taxes. And if you sell, it only helps you if you move to someplace cheaper and pocket the money. Most adults have to move into bigger places as their family expands, and it just costs more to maintain a bigger place. It only helps you if you want to downsize, and most people only downsize as they get older and their family moves out. But by that time they are spending more on healthcare costs.
Furthermore, growth in real estate isn’t that big a deal for most people. Unless you live in a city that has high rates of property appreciation like Seattle, Los Angeles, San Francisco, New York, Boston, and a handful of other urban areas, real estate as an investment is a pretty lousy one. It returns perhaps 0.2% per year after inflation. But inflation does erode your buying power if wages aren’t keeping up.
But wait! Wages will go up thanks to inflation!
This is also incorrect. Wages go up when there is a shortage of workers. And where is there a shortage of workers? In places where companies need them, and that’s in cities. And it’s mostly in cities that have high real estate costs like Seattle, Los Angeles, San Francisco, New York, Boston, and a handful of other urban areas. These are the places where wages are keeping place with inflation, or even exceeding them. But it’s also what’s driving up the price of real estate.
What compounds this problem is that the working and lower middle classes cannot afford the price of real estate so they have to move out from the cities – the ones where all the growth is taking place – to more rural or smaller urban areas. They then start overwhelming those markets with additional labor. Yet there isn’t enough demand for these additional workers. The result of more supply (labor) than demand (open job vacancies) is downward pressure on wages. That is, people leaving the high-cost cities can’t make as much in lower cost areas either, because there’s not enough demand for their skills and employers don’t need to pay as much because there’s so much to choose from.
So, growth doesn’t cover a multitude of sins. It goes towards those who are already doing pretty well, and leaves out the ones who weren’t. And the ones that weren’t are the very ones that voted for Trump, and his tax cut policy will hurt them more than it will help them. The whole point behind tax cuts is that it motivates wealthy people to save and invest more, but they’re already saving a large chunk of their income – around 30%. If they aren’t investing now, a few more percentage points won’t increase that. And if companies simply return their overseas money back to investors in the way of dividends and stock buybacks, this doesn’t increase productivity either. While companies can certainly choose to do this, as an economic policy it doesn’t make sense.
Now what?
Growth covers a multitude of sins if it is spread out evenly throughout the economy and expands the consumer class. Tax cuts don’t do this. Instead, it makes far more sense for the government to invest in education and job training for workers to boost their productivity in order to do more with less.
This is doubly impacted by the United States’s current administration is on the warpath to reduce immigration. The US’s population growth rate isn’t enough to sustain constant economic expansion. Even if you did boost productivity, you need someone to buy the products you produce. Without enough domestic consumption, you need to export to the rest of the world with economies where the consumer base is expanding. This is primarily China and other emerging economies.
I’m going to cut this blog post short because it gets more complicated from here. The pursuing of growth is a noble goal, but it’s inefficient and won’t deliver the results that the Trump administration and the rest of the Republican leadership is hoping for.