Caution! This is a political blog, not investment advice. Implications - should the reader choose to accept the premise - are intended relative to the 2018 and subsequent elections, rather than DOW 30,000. There are three somewhat distinct perspectives which occasionally get mingled in political demagoguery.
- The Nancy Pelosi / Paul Krugman perspective: The Tax Cuts and Jobs Act is a give away to the rich, and will be of virtually no benefit for the middle and lower classes.
Nobel Winning liberal icon economist Paul Krugman in December: "The economy's pretty good. In fact, it looks like we're close to full employment, although we don't know why wages aren't rising more. Trump gets essentially zero (credit)... First of all, there have been no actual policies. There hasn't really been any policy change." And, relative to the tax reform: "Realistically we have to imagine there will be some effect, but will it be visible? Will workers see their wages increase in a way that anyone will notice over the next five years? No."
House Speaker Nancy Pelosi: “It’s an all-out looting of America, a wholesale robbery of the middle class. The GOP tax scam will go down, again, as one of the worst, most scandalous acts of plutocracy in our history.”
The sacrifice of economic analysis and linguistic hyperbole is not news for these two. What is interesting and important is that Pelosi and Chuck Schumer were able to prevent a single Democratic member of either chamber from voting for the measure. Those looking forward to wrangling over immigration and government shutdowns should take note of the extraordinary party discipline. The Left is in a full "Resist" mode, and the Democratic center dare not whisper about compromise.
2. The Larry Kudlow / Art Laffer perspective: It is a boon for everybody, and will pay for itself as lower tax rates multiplied by higher rates of economic activity will yield higher net tax revenue.
The most realistic projection is from the Congressional Budget Office and the Joint Committee on Taxation who determined that provisions in the bill as passed would decrease gross receipts over the 2018-2027 period by $1.45 trillion, that economic activity would increase by .7%, resulting in increased taxes of about $450 billion, and that interest expense would rise by $66 billion, resulting in a net deficit of about $1.1 trillion or $110 billion per year. This is understated by some $300 billion because it assumes that individual rates will be increased in 2025 to make the numbers work.
Out of the box the results are better than any Republican politician could have hoped for. Employers from AT&T, to Comcast, to Wells Fargo, to Boeing, to regional banks have announced $1000 bonuses for hundreds of thousands of workers, wage increases, increased job training, and capital spending as the top corporate rate drops from 35% to 21%. Apple, the largest of the companies holding an estimated $2.6 trillion in profits offshore, has announced plans to repatriate $252 billion, pay a $38 billion tax bill, build a third major campus in the United States, and add 20,000 workers over a period of five years. Announcements continue weekly.
It is not possible to separate the causal factors for economic growth accelerating from 2% to 3% since President Trump took office - the global economy is doing universally well; deregulation is rolling through the energy, healthcare, banking, and labor sectors; and the tax reform is impacting 2018 plans for both large corporations and small businesses. Public opinion promises to shift from pre-conditioned Democratic talking points as employee paychecks start to see federal tax withholding rates drop $100 or more in February, and Clinton strategist James Carville's famous 1992 aphorism "It's the economy, stupid" clicks in.
3. The Bob Corker / National Review perspective: Deficits and resulting debt as a portion of GDP are on a fatal trajectory.
President Trump came into office following the two most profligate presidents ever - George W Bush who ran up $3.3 trillion of debt, and Barack Obama who ran up $6.7 trillion. According to the Office of Management and Budget's most benign-sounding calculations which exclude intra-government debt, the federal government is running at a 3% deficit (about $600 billion per year), and will reach about an 80% debt to GDP ratio this year - about 92% if one includes debt that the government owes itself. We will cross 100% in the 10 year projections supporting the tax reduction.
This is real, and there is little hope in sight. Paul Ryan and many House Republicans want to take on Social Security, Medicare, or at lease Medicaid, but Mitch McConnell has announced that there is no way to get the necessary votes in the Senate. Instead, the discussioin is about billions of more spending for a wall, hurricane and fire relief, increased payments for low wage earners with children, new nuclear capabilities, and a general upgrade to the military. And our real estate developer president is comfortable with debt. Apologies to our grandchildren.
The Democrats and the media would keep the focus on the latest Trump outrage as we move into election season, tossing off an occasional reference to the first and third perspectives above. At least for the short term, the Republicans will be able to put a billion dollar marketing campaign behind Perspective 2, hoping to have an election on the economy rather than Russia or Trumps' personal failings.
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This week's video celebrates (?) the legalization of recreational pot in California. FWIW, Gavin Newsom the leading gubernatorial candidate, was an early supporter and is now a leading proponent of state funded universal healthcare - which would triple the state budget.
bill bowen - 1/19/18
HOW IS TRUMP's ECONOMY? As I am sure you are beginning to feel the atmosphere of confidence is growing day by day in American businesses and consumers. This confidence has buoyed the stock market and is beginning to add to the consumer’s willingness to spend. The lower price of oil and gasoline is beginning to show up as more money in consumer’s pockets and in lower costs to American businesses. The result now is that revenues of businesses, so stagnant for the past 8 years, are now growing. That is combining with lower expenses to create more profits. Technology is playing a huge role as well.
Baby boomers are retiring at nearly 10,000 per day. This has been allowing American companies to financially engineer as they reduce the number of high paying jobs in their company by promoting lower paid workers as well as using technology to supplement the workforce. But, as the unemployment rate declined the pool of experienced, talented people has been drained. Now, real competition for talent is beginning to show up and wages will increase beginning in the critical needs positions. Baby boomers represent the most experienced portion of the employment pool and they have delayed retiring as long as they could. The stock market refilled their drained IRA and 401k accounts. The retirements will accelerate, fueled as well by rising home prices. This will push employers to compete more and more for high performance talent. One of our business leaders many years ago predicted that this would happen. Unfortunately he did not foresee the 8 year downswing that we went through to get here. I believe now that 2018 budgets are being approved and new 2018 contracts are being signed for purchases managers will begin to hire and competition in the next few years will drive wages higher.
We are already seeing the devastating toll that the past 9 years have had on the development of the young grads into productive members of the work force. In many industries there is a gap of experienced workers with 2-8 years of experience. This will take years to overcome. But, at least now the economy has believers and believers solve problems. Step one: create a positive mood in the country's business leaders has been well done by Trump. Fewer and fewer business leaders are castigating him now.
Posted by: Bill McCormick | January 23, 2018 at 04:47 PM