Last week, on This Week with George Stephanopoul0s, this exchange took place. One of the guests was Chris Ruddy, the CEO of Newsmax; another was Megan Murphy, a financial reporter from Bloomberg News, and another was a columnist named Charles Blow. Stephanopoulos describes the passage of the Senate tax reform bill as a legislative victory. Here was the response:
Murphy: Let’s contest the first point of this, whether this is a legislative victory, ’cause it is a deeply unpopular bill, and I want to bring up something the Senate Majority leader said; their own economic analysis says that this will not do much for economic growth, less than one percent over the next ten years, not only their model, but top economists surveyed by the University of Chicago, there is no survey that shows that this will generate the kind of economic growth that they need to make it pay for itself, it just doesn’t exist. So where does this leave them? With faith, that tax cuts for corporations and the wealthiest members of society will actually be the juggernaut that drives manufacturing job growth, and more specifically, wage growth in this country. . . there’s no factual basis for that assumption. In fact, when we talk to CEOs, they say exactly the opposite. They say they’re going to use that money for M&A (mergers and acquisitions), to pay down debt, and for share buy-backs, and to give more incentives to wealthy executives.
Ruddy: I’m not sure if you’re all living in a bubble. . . This tax bill, this is actually going to be a watershed. Three trillion dollars in off-shore money–forget about the individual and corporate tax rates, three trillion dollars is coming back into the economy, three times the Obama stimulus. It will propel Trump’s re-election; it will drive the economy for the next ten years.
Blow: This idea of this tax break is just fascinating to me, because basically, it’s an article of faith. Basically it’s saying, we’re going to make rich people richer, and we’re going to hope that that makes them happy, and if they’re happy, maybe they’ll create jobs. And there’s no fallback position, and we have no way of absorbing the trillion and half dollars debt we’re creating.
Later on the show, Alex Castellanos suggests that the tax bill will result on 3 to 4 percent economic growth, and Murphy just explodes: ‘there’s no evidence for that.’
I’m not an economist. I’m just a playwright with wifi. I did study economics for a play I once wrote. But based on what real economists say, here’s what I think, assuming the Senate bill becomes the basis for a conference committee bill that ends up passing the House and Senate (which seems likely, though not necessarily inevitable, thank heavens).
I think the tax cut will provide a small stimulus. I think the idea that three trillion dollars of money stored by American corporations offshore, as a tax dodge, that this bill will cause all that dough magically to return to the US and stimulate our economy is a fantasy. The whole idea of this tax return was to lower the corporate tax rate, but simultaneously close tax loopholes, so that the actual amount of money collected goes up. I wouldn’t necessarily oppose that, but I also don’t believe it. This tax bill is so slapdash and haphazard, it will inevitably open a new tax loophole for every one it closes. And it didn’t close every loophole; just some of the less popular ones.
Besides, the whole idea of supply-side economics is that if you increase supply, you increase economic growth. That’s just not true. Increasing supply will lower prices, but that doesn’t automatically increase demand. It doesn’t matter how many Edsels you build; if people don’t want them, they won’t sell. What matters is demand.
Pumping more money into corporations through cutting their taxes may result in some economic growth. Tax cuts don’t always generate growth. Tax cuts can have a modest stimulative effect if and only if the biggest problem facing the economy is a lack of investment capital. That is absolutely not the problem with the US economy today. There’s plenty of investment money sitting on the sidelines. Why? Because businesses are leery of expanding right now. Why? Because demand is low. Too many people just don’t have enough money. But this bill is massive; maybe it will facilitate some companies to expand. Could happen.
More likely, it will make things worse. The US economy has been in recovery since the Obama stimulus in 2008, but it’s not a robust recovery. We’ve averaged about one percent growth, and for the most part, that hasn’t gone to lower class, lower-middle class, or middle class people. Wages remain fairly stagnant, job growth, relatively anemic. And there’s a important reason for this. It’s called income inequality.
Thomas Piketty’s Capital in the 21st Century has been called the most important economics book of the last decade. Essentially, he lays out the case. Income inequality leads to economic stagnation. It’s not just that income inequality is immoral, or destructive of social norms. It is those things too, but the big problem is that it doesn’t work. It’s bad economics. Laissez faire, libertarian economics aren’t just brutal, and violent; they’re ineffective. Whenever conservatives talk about economic freedom–and that’s such a fine word, freedom–they mean, let the rich do what the rich do. And maybe they’ll build a factory and hire people to run it; that can happen. But the problem isn’t a lack of factories. The problem is, people don’t have enough money to buy what factories produce. Demand creates supply. Supply does not create demand.
So, part of the Senate plan–the only part Mitch McConnell wants to talk about–is a small middle-class tax cut. And that’s real, that is part of the plan. And it will have a mild stimulative effect. Not three percent. More like .3 percent; a fraction. And that will go away almost immediately. And then we’ll see how long it takes the massive deficit this will create to drive inflation up, leading to another recession.
One of the Democrat talking point about the tax cut is that the Republicans are acting on the behest of their big money donors. I don’t question that rich Republicans like the idea of getting their taxes lowered. But I’m not that cynical. Nor should we oppose this because rich corporations are evil or anything like that. No, we should oppose this bill on economic grounds.
I think Republicans genuinely believe in the power of tax cuts. I think it’s probably the one thing Republicans still believe. But as Blow put it on This Week; it’s akin to religious faith. Certainly there’s no economic analysis that supports the preposterous notion that this tax cut will pay for itself by stimulating the economy to massive growth. There’s just no evidence that that’s true. All the evidence is on the other side. This is a bad idea.
As I write this, the bill is not yet in its final version, and still hasn’t passed. All that is expected to happen within the next couple of weeks, and there are political considerations that could derail it. Let’s hope it fails. Because this is the exact opposite of what the US economy needs.