A prominent economist reminds us about our most valuable export. We export political stability and the rule of law by being a beacon to the rest of the world. That gives us a quasi-monopoly on the production of safe assets. The US treasury can sell bonds at extremely low interest rates because they are regarded as a safe asset. The demand for safe assets is very high, and the US is has become a haven for safe assets that are demanded by central banks and global investors. That has been called an "exorbitant privilege" for a good reason. It can be a temptation that encourages the government to spend more than it raises in taxes. Therefore, we must manage our fiscal policies with care in order to maintain our "exorbitant privilege". We must also maintain our political stability and respect for the rule of law. The direction of our fiscal policy is uncertain and at risk and our president shows little respect for the rule of law. His political strategy is also based upon dividing the country.
Thursday, August 31, 2017
Wednesday, August 30, 2017
Trump Plans To Sell Tax Cuts For The Rich To His Populst Base
Trump will give a speech today that he will sell to his base the same way Republicans have sold their tax cuts for the rich to their uniformed base. Its the same old version of trickle down economics. Cutting taxes for corporations will encourage them to hire more workers in the US. We can also cut the tax rate without increasing the budget deficit because the tax base will expand in response to the tax cuts. The plan will throw a few crumbs to the middle class so that Trump can argue that everyone benefits from the plan. His base will welcome the crumbs because they have no idea about the distribution of the tax cuts. Trump the huckster can do this with the conviction of a snake oil peddler. His base has believed in this magic since Reagan.
Cutting The Corporate Tax Rate Will Not Create Jobs
The current tax plan proposal includes cutting the corporate tax rate on profits from 35% to 20%. Trump wants the tax rate cut even further to 15%. The rationale for the tax cuts is that it will create jobs. The CEO of AT&T made that argument in a recent speech to his employees and told the them to send supporting letters to Congress. The CEO lied about its tax rate and job creation.
* AT&T's effective tax rates after taking advantage of deductions was only 8% 2008-2015
* During that period with an effective rate of 8% AT&T reduced its labor force by 80,000
* AT&T used $34 billion of its profits to buyback its own stock instead of investing in capital
* Much of the CEO's compensation is in the form of stock options which benefit from buyback
AT&T was not the exception. 92 corporations with profits 2008- 2015 paid less that 20% effective tax rate:
* The median job growth in the 92 companies was -1% compared with median of rate of 6% by companies that paid more than 20% tax rate
* The 92 companies with tax rate below 20% cut 483,000 jobs during that period
Don't pay any attention to arguments about the 35% tax rate in the US. The effective tax rate is well below the top rate. Some corporations, like GE, have not paid any taxes for several years because they take advantage of deductions. More importantly, it is a myth that cuts to the corporate tax rate will create jobs. It may increase profits for some firms but they may not invest those those profits in new capital or create new jobs. Investments in new capital may increase productivity and reduce job growth. Moreover, the primary motivation for new investments has little to do with the tax rate. It is all about the market opportunity provided by the investment.
* AT&T's effective tax rates after taking advantage of deductions was only 8% 2008-2015
* During that period with an effective rate of 8% AT&T reduced its labor force by 80,000
* AT&T used $34 billion of its profits to buyback its own stock instead of investing in capital
* Much of the CEO's compensation is in the form of stock options which benefit from buyback
AT&T was not the exception. 92 corporations with profits 2008- 2015 paid less that 20% effective tax rate:
* The median job growth in the 92 companies was -1% compared with median of rate of 6% by companies that paid more than 20% tax rate
* The 92 companies with tax rate below 20% cut 483,000 jobs during that period
Don't pay any attention to arguments about the 35% tax rate in the US. The effective tax rate is well below the top rate. Some corporations, like GE, have not paid any taxes for several years because they take advantage of deductions. More importantly, it is a myth that cuts to the corporate tax rate will create jobs. It may increase profits for some firms but they may not invest those those profits in new capital or create new jobs. Investments in new capital may increase productivity and reduce job growth. Moreover, the primary motivation for new investments has little to do with the tax rate. It is all about the market opportunity provided by the investment.
Tuesday, August 29, 2017
David Brooks Is Not Happy About The Division Within The GOP
David Brooks knows the Republican Party very well. He describes how Donald Trump has divided the party and he describes the likely consequences. The party is divided between Republicans whose loyalty to the party is based upon white identity and more traditional conservatives. He argues that many of his friends are traditional conservatives who do not want to belong to a party with a large base of white identity members. Friendships have been destroyed between members who are on opposite sides of that division. Brooks also argues that Donald Trump will continue to do what he does well. He will stoke the flames of white identity that connects that base to him personally. That will encourage traditional conservatives to look for a new home. It will not be good for our nation either. Trump will encourage his base to be more aggressive and that will enrage others to respond with aggression. We are only witnessing the beginning of this process of division within the GOP and our nation. We are even seeing that division within Trump's cabinet and in Congress. We can live with a divided Republican Party. It will be more difficult to govern a more divided nation. Hopefully, enough Republicans in Congress will be encouraged to get rid of the maestro who is fanning the flames that divide the party and our nation. If they continue to support Trump the party will continue to unravel and Trump's authority will grow rapidly enough to make Congress less relevant versus a more powerful president.
The Goldman Sachs Bankers Selling Trump's Tax Overhaul
Not too long ago, Wall Street bankers were worried about federal budget deficits and the growing level of government debt. The world was going to come to an end unless the government cut entitlement spending and took actions to reduce the debt to GDP ratio. That tune has predictably changed with Trump in the White House.
Donald Trump needs a legislative victory and he has a Republican Congress. Republicans worry a lot about budget deficits when a Democrat is in the White House. They seem to worry less about budget deficits when a Republican is in the White House. The bankers heading up Trump's tax overhaul team, which they call tax reform to give it a positive spin, have been working with Congress to make steep cuts to corporate taxes among others. The problem with tax cuts is that they reduce federal tax revenue. That forces the government to cut spending to avoid budget deficits which increase the debt to GDP ratio. The process then becomes difficult for a variety of reasons. One way to pay for the tax cuts is to eliminate some of the deductions that are used to reduce taxable income. As one might imagine that becomes a questions of "whose ox do you want to gore". The other way is to reduce spending but we have a president who wants to increase military spending and build a $20 billion wall between the US and Mexico. Its also the case that tax cuts and budget deficits tend increase the economic growth rate. Consumers have more money to spend and the government is borrowing in order to increase its spending.
The other problem with budget deficits, and the expansion of government debt, is that Senate Democrats can use the filibuster to block a tax bill if it increases the level of government debt over a ten year period. In order to pass a tax bill with a simple majority, without the threat of a filibuster, the tax bill must avoid an increase in government debt at the end of ten years. That means that some the tax cuts must be temporary or some magic must used to argue that the tax cuts will expand the economy enough to compensate for lower tax rates. Consequently, a difficult process becomes even more difficult. This would be fun to watch if it were not so serious. Government is essentially about how much the government raises from taxes and where it comes from. It is also about what the government spends it money on.
Donald Trump needs a legislative victory and he has a Republican Congress. Republicans worry a lot about budget deficits when a Democrat is in the White House. They seem to worry less about budget deficits when a Republican is in the White House. The bankers heading up Trump's tax overhaul team, which they call tax reform to give it a positive spin, have been working with Congress to make steep cuts to corporate taxes among others. The problem with tax cuts is that they reduce federal tax revenue. That forces the government to cut spending to avoid budget deficits which increase the debt to GDP ratio. The process then becomes difficult for a variety of reasons. One way to pay for the tax cuts is to eliminate some of the deductions that are used to reduce taxable income. As one might imagine that becomes a questions of "whose ox do you want to gore". The other way is to reduce spending but we have a president who wants to increase military spending and build a $20 billion wall between the US and Mexico. Its also the case that tax cuts and budget deficits tend increase the economic growth rate. Consumers have more money to spend and the government is borrowing in order to increase its spending.
The other problem with budget deficits, and the expansion of government debt, is that Senate Democrats can use the filibuster to block a tax bill if it increases the level of government debt over a ten year period. In order to pass a tax bill with a simple majority, without the threat of a filibuster, the tax bill must avoid an increase in government debt at the end of ten years. That means that some the tax cuts must be temporary or some magic must used to argue that the tax cuts will expand the economy enough to compensate for lower tax rates. Consequently, a difficult process becomes even more difficult. This would be fun to watch if it were not so serious. Government is essentially about how much the government raises from taxes and where it comes from. It is also about what the government spends it money on.
Monday, August 28, 2017
What Is The Democratic Economic Message For Trump Voters?
Steve Bannon said that Trump won the election because he made a promise to address the economic concerns of many Americans. He claimed that Democrats will continue to lose elections if they stick to identity politics as Hillary Clinton did in the last election. Like most of my friends, I support Clinton's message of inclusiveness. However, despite a 4.3% unemployment rate, many American's are having difficulty paying their bills, which include lots of interest payments to their creditors, and they are uncertain about their economic future. FDR provided the economic message that Americans wanted to hear during the Great Depression. I agree with this article. The Democratic economic message is hard to discern. It can't be series of policy statements either. It has to have broader message which provides a framework for the policy proposals. Clinton offered a number of policy proposals but they fell on deaf ears.
Trump's Secretary Of State's Comments On Trump's Values
Rex Tillerson responded to a question about the values implied by Trump's comments on Charlotteville, in an interesting fashion. He said that he does not share those values, and they are not the values of the State Department that he manages. Apparently, he feels that he can do his job without interference from a President whose values he does not share. Trump's chief economic adviser has a similar problem. He wrote a resignation letter after Trump's comments following Charlotteville, but he decided to stay on board in order to protect our national economic interests.
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