The Community Voices article by Angelo Haddad ("So who's going to pay for the tax cuts? The economy, brother!, Feb. 2) clearly shows the degree to which our economy is politicized, as well as romanticized. If one were skeptical of the economic environment 2-4 years ago, you might align with the Republicans. To be so now would align you with Democrats. Heaven help us — and our economy. In his article, Haddad supports the view that the recent tax cuts will pay for themselves, citing the Reagan experience, positive corporate reaction and low jobless claims.
I call that bet. In the interest of background, allow me to set the stage as to how the economy and investment markets arrived at this point. To not do so tends to validate the current levels of the markets as well as the economic environment (who is to say yesterday’s price is the correct one?).
During the period from 2007 to 2016, the average annual growth in U.S. gross domestic product (GDP) was 1.3 percent. Incidentally, this average matches the depression years of 1930-1939. A reading of 1.3 percent, for what it’s worth, is just below stall speed. During this period, real median income has been flat. The U.S. public debt has more than doubled, and the stock market was up 50 percent (up another 50 percent a year later).
Were the above paragraph less lengthy, it might make a good double jeopardy answer. The correct question could be (of several): What is a debt-driven asset bubble? What is how the rich get richer? What is a wealth transfer scheme?
As to the effect of the general bullishness of the tax cut: Often cited as cause is tightness in the labor market, leading to higher wages and higher corporate profits — leading to increased capital investment. The unemployment rate recently has been clustering around the low/mid-4 percent level. A counter view, parroting blogger Jim Quinn (The Burning Platform), with some context is in order. There are 94 million Americans of working age employed, supporting 102 million working-age Americans not employed and 21 million government workers. In what universe is this considered tight employment? According to the Econimica Blog, full time jobs added during the 1990-2000 period was 14.5 million. During the 2008-2018 period, the number added was 5.9 million. It seems to this correspondent that candidate Trump was correct, at least until inauguration, that low unemployment numbers are fake news.
On the surface, the concept that lowering corporate taxes means more profits means more capital investment and expansion seems logical. Except for the experience of the past 10 years. During which, corporations have had access to historic low interest rates, and utilized them, doubling corporate debt between 2008 and present. What did said corporations do with this cheap credit? It’s commonly called financial engineering, including stock buybacks, dividends and mergers. (Stock buybacks should conjure up thoughts of the Greek word ouroboros, in this case meaning corporations are eating their own tails.) Corporate priorities strongly suggest that they are not finding sufficient demand to engage in capital investment (see above 2007-2016 GDP figures). It has been reported that the above-mentioned stock buybacks account for as much as a third, likely more, of the post-global financial crisis advances of the major stock indices.
Accordingly, research by the Academic-Industry Research Network and the Drucker Institute captures the initial reaction by corporations to the recent tax plan. There have been 44 S&P companies promise $5.2 billion in wage increases and bonuses. There have been 34 companies commit $157.6 billion in stock buybacks. Enough said.
As an intellectual exercise, perhaps the geniuses in Washington might explore how it is that the workforce participation level has decreased markedly (see above). Either it would seem that more working-age people do not need to work or simply do not want to work. Maybe many just gave up looking. On the local level, the increasing number of shopping cart people in our town is perhaps a symptom, though not a bullish one.
In summary, due to Trump’s tax plan, corporate profits will increase, other things equal. As to whether the economy escapes from the muddle-along era it has been in for 10 years, the jury is still out. Problem is, somebody keeps jury-tampering in the court of public opinion.
Andy Wahrenbrock is an independent investment adviser from Bakersfield.