• Ryan O'Connell

The 4% Solution?

We should admit that the 4.1% growth of the economy in the second quarter was impressive, even if it did give Trump the chance to strut and crow. An expanding economy and a 4% unemployment rate are good for all Americans. But Trump has not engineered an economic miracle, despite his claims, and the second quarter growth rate may well not be sustainable. Furthermore, many of Trump’s policies are likely to hurt the economy’s long-term prospects.

First, though, let’s give credit where it’s due. The corporate tax cuts helped to accelerate the economy’s growth, by encouraging some companies to invest more in their operations. In addition, Trump’s highly publicized rollback of certain regulations seems to have boosted the “animal spirits” of some manufacturers, leading them to expand their operations.

Two caveats are in order: Democratic leaders in Congress were in favor of lowering corporate tax rates, though less drastically, because they were worried about increasing the deficit. Trump has mostly curtailed environmental regulations, which do not depress overall growth. That’s a case of perception triumphing over reality, but the rise in animal spirits still has an impact.

In any event, a boost in government spending also played a role. Trump has talked about cutting expenditures, but Congress has defied him on that front. The combination of tax cuts and spending increases is like a sugar high. They rev up the economy in the short term, but they are also causing the deficit and the ratio of government debt-to-GDP to skyrocket. We will have to pay that bill someday, as higher interest rates and less money available for government programs may well lead to slower growth.

Where Did The Tax Cuts Go?

We have a very mixed picture of how companies deployed the money they saved through the tax cuts. Some have invested more in plant and equipment, boosting the economy, because their after-tax return has increased. They can take more risk with a tax rate in the low 20s than in the mid 30s.

However, many corporations have just increased their share buybacks and dividends. That’s great for shareholders, but for most middle-class Americans, stocks represent only 10% of their assets. The top 10% of Americans own about 80% of shares.

And it’s clear that companies are not using the money to raise wages much, aside from some one-time payments that were mostly for public relations. Wage growth in the second quarter was not that impressive. Anecdotal evidence suggests that when companies are raising wages significantly, it’s because they have to do that to attract workers. That’s a benefit from a 4% unemployment rate, rather than the tax cuts.

Consumer spending rose, because most Americans are reasonably optimistic about their prospects. However, the individual tax cuts don’t seem to have had a huge impact on most consumers; they’re just too small. Ally Financial, a large auto lender that finances consumers across the credit spectrum, estimates that the average benefit for an Ally customer is $100. One hundred dollars.

That may be on the low end. Still, for most Americans, the tax cuts may cause a short pop in spending but not firepower for sustained economic growth. The main driver here may be instead the 4% unemployment rate.

The tax cuts certainly helped the top tenth of the top 1%, but those people tend to use such cuts to add to their investments, not to ramp up their spending. Unlike Betsy DeVos, most rich folks think one yacht is enough; they don’t need 10 boats.

Trade Wars Are Bad and Impossible to Win

Have you noticed that the stock market peaked in mid-January? The market has basically see-sawed year-to-date, as investors struggle with two conflicting forces: strong underlying momentum in the economy and the growing realization that Trump is dead serious about imposing tariffs.

Tariffs are like climate change; there is no fundamental disagreement among experts. Trump’s proposed tariffs are opposed by:

  • All reputable economists

  • Republican and Democratic leaders in Congress

  • The industries they are supposed to “help”

  • Key allies such as Canada, Germany, France……

But our Economic Emperor won’t listen when GM, Ford and Harley Davidson warn him that his proposed tariffs will damage their businesses and, in Harley Davidson’s case, move production overseas to avoid tariffs. (The one exception is the steel industry, which has a long record of seeking tariffs to protect itself…and sells only to the domestic market). Analysts have estimated that the auto companies’ losses from tariffs could wipe out their savings from tax cuts.

By the way, did you know that BMW is the largest exporter of cars from the U.S?

Cutting Immigration Will Hurt Economic Growth

Trump’s crusade against immigrants is not only racist; it is very bad economic policy.

One of the reasons the U.S. grows more rapidly than many other developed nations, besides being the Land of the Free and the Home of the Brave, is large numbers of immigrants. Without immigrants, the U.S. would look more like Japan and some European nations, which have higher proportions of old people. Immigration has helped to keep America young and dynamic.

Immigrants also tend to start more companies than native-born Americans. Indians, and other Asians, have been a major force in Silicon Valley for decades. But Trump is trying to prevent wives of Indian tech workers from getting visas to work in the U.S., even though many are highly educated. The New York Times has reported that some tech workers are considering returning to India, because of the economic burden of living on one salary and the government’s hostile attitude.

That’s no way to spur innovation …or to beat China in the looming struggle to dominate the technology industry. We should be recruiting such workers, not discouraging them from launching careers.

Foreign investment in the U.S. has declined, because of Trump’s harsh rhetoric. So has the enrollment of foreign students, who often pay full tuition and help to support second-tier colleges. This has led some institutions to curtail their programs…and it deprives our country of talented people who could help us innovate and grow the economy.

And as ICE hounds Hispanics, harassing citizens and legal residents as well as undocumented ones, Latinos have curtailed their trips to the mall. Several retailers have mentioned this as a factor in disappointing sales. Oppressing millions of brown-skinned people is not only cruel; it’s bad for the economy.

So, for the moment, Trump can take a victory lap. But he may be plantig the seeds for hindering America’s economy, not improving it.

The Wall Street Democrat

  • Grey Twitter Icon
  • Grey LinkedIn Icon
  • Twitter Social Icon