Trump called it the largest reduction in history. There’s no question that a lot of money delivered in a big box of tax cuts last Christmas was taken away from the Treasury and given to corporations, the rich, and the working class.
A few days before Christmas, Congressional elves delivered a big box o’ tax cuts. Trump called it the largest reduction in history. People living in the Fact-Based World said it came in 8th at best, but there’s no question that a lot of money was taken away from the Treasury and given to corporations, the rich, and the working class.
The idea was that suddenly flush companies and “job creators” would use their windfalls to create new businesses, hire new workers, and raise wages. There was going to be lots and lots of winning.
In reality, though, the game turned out quite differently. Of the $100 billion given to companies, about $2.5 billion will be passed on to employees in the form of one-off bonuses and wage increases (more on this below). Most of the rest will go to stock buybacks, raising share prices and creating a huge gain in paper wealth for top executives who receive most of their compensation in the form of “at-risk” share grants, options, and Restricted Stock Units.
Much of the 2.5% bound for “hard-working” and “forgotten” Americans is being distributed in the form of bonuses, not pay increases. And that’s a problem on a number of levels. For starters, while a one-off bonus helps pay the bills this December, it doesn’t make life any easier come January. If past government handouts are any indication, most people will use most of that money to pay off bills, and not invest in new cars or kitchen remodels (sorry, Gary Cohn) that would help drive the economy.
Also, bonuses are an indication that companies remain uncertain about the future. A pay raise is a commitment; a bonus keeps the corporate options open. (Smart consumers will look at that cautious behavior, and decide the time isn’t right to start spending like a drunken sailor.)
Moreover bonuses make for good PR, especially when the president is acting as Cheerleader In Chief. Hand out $1,000 checks and you get praised on Twitter to Trump’s 140 million followers, only some of which are bots. That’s a good marketing investment for companies looking to retain and add new workers in a tight labor market.
Which brings us to places like Walmart, which have announced they’re raising wages, and giving credit to the tax cut. The reality is that when unemployment is low, hourly jobs are hard to fill. The unemployment rate is currently 4.1%, which is considered “full employment.” The last time we got close to the 4% floor, fast food joints were advertising on TV in their desperation to find enough bodies — despite having raised wages to something approaching the liveable level. Consequently what Walmart is doing is bowing to economic reality, while crediting the tax cuts in the knowledge that will make POTUS a happy but delusional autocrat.
But while there are obviously a lot of games being played, none of this is really bad, right? That’s because we haven’t looked at the costs. While there is some debate about the math, the deficit is now forecast to increase by 84% this year — to $1 trillion. And that’s BEFORE the $400 billion in spending Congress agreed last week to avoid a shutdown.
That agreement was necessary because it was becoming apparent the government would run out of money a month earlier than expected, as the tax cuts had reduced government revenues more than expected. We probably should have seen that one coming, but our Xmas present was wrapped in secret, at the last minute, largely by lobbyists, with no expert witnesses or public hearings. Let’s just say it got put under the tree before it was fully assembled.
That slipshod approach means we’ll need to borrow $441 billion this quarter just to pay the interest on the national debt. That will mean an increase in interest rates, which means mortgages, car payments, etc. etc. will all get more expensive.
Which bring us back to those hard-working, forgotten, middle-class Americans. They got a one-off bonus, but it could easily be overwhelmed by the increased cost of money resulting from all this profligacy. Sure, share prices are — correction, were — going up. But just 20% of Americans own 92% of stocks.
In other words, for corporations and the rich, this was a yooge Christmas present. For everyone else, though, it was a lump of none-too-clean coal.
Let’s exchange it for something we really need, like infrastructure.🔷
(This piece was first published on Medium.)