Why Was Trumponomics a Flop?

On Wednesday, the Federal Reserve cut interest rates, even though the unemployment rate is low and overall economic growth remains decent, though not great. According to Jay Powell, the Fed’s chairman, the goal was to take out some insurance against worrying hints of a future slowdown — in particular, weakness in business investment, which fell in the most recent quarter, and manufacturing, which has been declining since the beginning of the year.

Obviously Powell couldn’t say in so many words that Trumponomics has been a big flop, but that was the subtext of his remarks. And Trump’s frantic efforts to bully the Fed into bigger cuts are an implicit admission of the same thing.

But why has Trumponomics failed to deliver much besides trillion-dollar budget deficits? The answer is that both the tax cuts and the trade war were based on false views about how the world works.

Republican faith in the magic of tax cuts — and, correspondingly, belief that tax increases will doom the economy — is the ultimate policy zombie, a view that should have been killed by evidence decades ago but keeps shambling along, eating G.O.P. brains.

The record is actually awesomely consistent. Bill Clinton’s tax hike didn’t cause a depression, George W. Bush’s tax cuts didn’t deliver a boom, Jerry Brown’s California tax increase wasn’t “economic suicide,” Sam Brownback’s Kansas tax-cut “experiment” (his term) was a failure.

What went wrong? Business investment depends on many factors, with tax rates way down the list. While a casual look at the facts might suggest that corporations invest a lot in countries with low taxes, like Ireland, this is mainly an illusion: Companies use accounting tricks to report huge profits and hence big investments in tax havens, but these don’t correspond to anything real.

There was never any reason to believe that cutting corporate taxes here would lead to a surge in capital spending and jobs, and sure enough, it didn’t.

Read the complete article by Paul Krugman on the New York Times here.

How to tax the rich

The Economist Magazine published this article on how to tax the rich. Good reading.

How to tax the rich. The Economist magazine

 

 

 

 

 

 

 

 

 

DURING HIS lesser-known run for president, which began in 1999, Donald Trump proposed levying a wealth tax on Americans with more than $10m. He may soon find himself campaigning on the other side of the issue. That is because Democrats are lining up to find ways to tax the rich. Senator Elizabeth Warren, who wants Mr Trump’s job, has called for an annual levy of 2% on wealth above $50m and of 3% on wealth above $1bn. Alexandria Ocasio-Cortez, a prominent new left-wing congresswoman, has floated a top tax rate of 70% on the highest incomes.

In one way these proposals are a relief. Left-wing Democrats have plenty of ideas for new spending—Medicare for all, free college tuition, the “Green New Deal”—that would need funding. Mainly because America is ageing, but also boosted by Mr Trump’s unfunded tax cuts, the debt-to-GDP ratio is already expected to nearly double over the next 30 years. If a future Democratic administration creates new spending programmes while maintaining existing ones, higher taxes will be necessary.

If revenues are to rise, there are good grounds to look first to the rich. Mr Trump’s tax cuts are just the latest change to have made life at the top more splendorous. Between 1990 and 2015 the real income of the top 1% of households, after taxes and transfers, nearly doubled. Over the same period middle incomes grew by only about a third—and most of that was thanks to government intervention. Globalisation, technological change and ebbing competition have all helped the rich prosper in recent decades. Techno-prophets fear that inequality could soon worsen further, as algorithms replace workers en masse. Whether or not they are right, the disproportionate gains the rich have already enjoyed could justify raising new revenues from them.

Unfortunately, the proposed new schemes are poorly designed. Ms Warren’s takes aim at wealth inequality, which has also risen dramatically. It is legitimate to tax wealth. But Ms Warren’s levy would be crude, distorting and hard to enforce. A business owner making nominal annual returns of around 5% would see much of that wiped out, before accounting for existing taxes on capital. That prospect would squash investment and enterprise. Meanwhile, bureaucrats would repeatedly find themselves having to value billionaires’ art collections and other illiquid assets. Eight rich countries have scrapped their wealth taxes since 1990, often amid concerns about their economic and administrative costs. In 2017 only four levied them.

There are better ways to raise taxes on capital. One is to increase inheritance tax, an inequality-buster that, though also too easily avoided, is relatively gentle on investment and work incentives when levied at modest rates. Another is to target economic rents and windfalls that inflate investment returns. Higher property taxes can efficiently capture some of the astronomical gains that landowners near successful cities have enjoyed. It is also possible to raise taxes on corporations that enjoy abnormally high profits without severely inhibiting growth. The trick is to shield investment spending by letting companies deduct it from their taxable profit immediately, rather than as their assets depreciate. (Mr Trump’s reform accomplished this, but only partially and temporarily.)

What about income tax? Ms Ocasio-Cortez’s boosters point out that a 70% levy is close to the rate that is said to maximise revenue in one notable economic study. In truth the study is notable because it is an outlier—one that ignores the benefits of entrepreneurial innovation or of workers improving their skills. France’s short-lived 75% top tax rate, which was scrapped at the end of 2014, raised less money than was hoped. America’s top rate of federal income tax is 37%; higher is clearly feasible, but it would be wise to keep change incremental.

Although there is scope to raise taxes on the rich, they cannot pay for everything, if only because the rich are relatively scarce. One estimate puts extra annual revenue from Ms Ocasio-Cortez’s idea, which applies only to incomes above $10m, at perhaps $12bn, or 0.3% of the tax take. Ms Warren’s proposal would raise $210bn a year, her backers say—but they assume, implausibly, limited avoidance and no economic damage. Ultimately, the price of ambitious spending programmes will be tax increases that are also far-reaching. The crucial point about a strategy for taxing the rich is to realise that it has limits.

I urge every reader interested in economics and world affairs to subscribe to The Economist magazine to access professional and thorough news reporting.

President Trump will be bad for the world economy; The Economist magazine

A Trump presidency will be bad for the world economy and worse for places outside America

A Trump presidency will be bad for the world economy and worse for places outside America

IT IS not clear precisely how Donald Trump will govern, the extent to which he will carry out some of his scarier promises on trade and immigration, and who will be his economics top brass at the Treasury and in the White House. But a decent first guess is that President Trump will be bad for the world economy in aggregate; and a second is that his actions are likely to do more harm, in the short term at least, to economies outside America.

When America has in the past stepped aside from its role at the centre of the global economic system, the damage has spread well beyond its borders. In 1971, when Richard Nixon ended the post-war system of fixed exchange-rates that had America at its centre, his Treasury secretary, John Connally, told European leaders, “The dollar is our currency, but your problem.” This election result, to paraphrase Connally, belongs to America but is potentially a bigger economic problem for everyone else.

Bringing it all back home

A deal between Mr Trump and Congress to cut corporate taxes, goes the logic, would spur flush American companies to repatriate retained profits held offshore. It would also allow them to increase capital spending in America, because they would have more ready cash; and consequent profits would be taxed more lightly. The larger budget deficits entailed by tax reform, along with more public spending on infrastructure, would underpin yields on long-term Treasury bonds. Indeed, after falling in the initial aftermath of Mr Trump’s victory, yields on 10- and 30-year Treasuries are on the rise again (see chart). Add the potential for higher inflation from the stimulus and the likelier use of some protectionist tariffs, plus a Federal Reserve with a more hawkish tilt, as Mr Trump’s appointees alter the complexion of its interest-rate-setting committee, and you have the makings of a renewed dollar rally.

trumpeconomydollarindex

A fiscal stimulus coupled with an investment splurge in the world’s largest economy should, all else equal, also be good for global aggregate demand. And if this kind of “reflation populism” improves the near-term prospects for America’s economy, it may dissuade Mr Trump from resorting to full-strength “anti-trade populism”. Well, perhaps. But given his leanings, it is easy to imagine him resorting to soft protectionism that keeps much of the additional demand within America’s borders. He might for instance lean on companies to favour domestic suppliers, or attach local-content conditions to publicly funded infrastructure projects. What is more, the repatriation of profits by American firms would draw resources away from their subsidiaries abroad.

In 1971 the world feared dollar weakness. These days, dollar strength tends to have a tightening effect on global financial conditions. The waxing and waning of the dollar is strongly linked to the ups and downs of the credit cycle. When the dollar is weak and American interest rates are low, companies outside America are keen to borrow dollars. Often big firms, flush with such cheap loans, will further extend credit in local currencies to smaller ones. But when the dollar goes up, the cycle goes into reverse, as corporate borrowers outside America scramble to pay down their dollar debts. That causes a more general tightening of credit.

Read the complete article on The Economist web site here.

Worldwide cost of living survey, The Economist

The Economist magazine has published an interactive chart on the worldwide cost of living.

One surprise in the survey was Russia. According to the study, Russia, scheduled host of the 2018 FIFA World Cup, that has seen the biggest decrease over the last year, with St Petersburg and Moscow tumbling 51 and 63 places down the ranking respectively, reflecting a 40% decline in living costs over the previous year.

http://www.economist.com/blogs/graphicdetail/2016/03/daily-chart-4

Big Mac Index from The Economist magazine

I love The Economist magazine, and one of the many reasons why is their “Big Mac Index” they assemble each year.

Their sub-title of the article on the Big Mac Index is “What do burger prices tell us about the reliability of official inflation figures?”

Below is a graph I borrowed from The Economist. The full article and readers comments is here.

Big Mac Index from The Economist magazine

Big Mac Index from The Economist magazine

Guaranteed Income making the rounds in Canada, again.

Does it make economic sense to provide a Guaranteed Income to people in Canada? Myself and others believe it does.

The idea of giving money to the poor without strings is not new. It melds altruism and libertarianism, saying both that the best way to fight poverty is to put cash in poor people’s pockets and that people can make their own choices better than bureaucrats can. As a result, it can find support in theory from both left and right.

It has been tested with success in other countries. European nations such as France and Austria, which spend slightly less than one-fifth of their gross domestic products on cash transfers to low-income citizens, have had far more success reducing poverty than Canada has.

In the only experiment of its kind in North America, every household in Dauphin, Manitoba, in the mid 1970’s, was given access to a guaranteed annual budget, subject to their income level. For a family of five, payments equalled about $18,000 a year in today’s dollars.

Politicians primarily wanted to see if people would stop working. While the project was pre-empted by a change in government, a second look by researchers has found that there was only a slight decline in work – mostly among mothers, who chose to stay home with their children, and teenaged boys, who stayed in school longer.

Evelyn Forget, a researcher in medicine at the University of Manitoba, reports that Dauphin also experienced a 10-per-cent drop in hospital admissions and fewer doctor visits, especially for mental-health issues.

This week, a House of Commons committee on poverty released a report proposing a guaranteed basic income for Canadians with disabilities, on the model already available to seniors.

Read the whole article in the Globe and Mail here.