by Michael Roberts
The US stock market continues to jump and has now reached a record high.
Finance capital is getting very positive about Trumponomics with its
plans for cutting taxes (both corporate and personal), reducing the
regulation of the banks and implementing range of infrastructure
projects to create jobs and boost investment. But even assuming all
this would happen under a Trump presidency, will it really get the US
economy out of its depressingly slow crawl? In my last post, I doubted it. Now JP Morgan economists have taken a similar sceptical line.
They reckon Trump’s agenda will likely yield little impact on US
employment and inflation in the next two years, while tax cuts will
boost growth by only a modest 0.4 percentage points by the end of 2018
(i.e. over two years) at most.
JP Morgan thinks that Trump will introduce tax cuts worth
around $200 billion per year, evenly split between personal and
corporate taxes. Interestingly, they agree with me that the so-called
Keynesian ‘multiplier’ (how much rise in real GDP growth from tax cuts)
is low: just 0.6 for personal taxes and 0.4 for corporate taxes —
meaning for every $1 in tax breaks received by individuals and by
businesses, that will likely boost aggregate demand to the tune of 60
cents and 40 cents in a given fiscal year, respectively.
As a result, JPMorgan reckons US economic growth will hardly pick up
at all from its current 2% a year average and will be nowhere near the
4% annual that Trump claims he can get. I would argue that faster
growth would depend not on more spending in the shops or more house
purchases but on higher business investment and that is what is missing
from the equation.
Part of the Trump plan (again I hasten to add if it happens) is to
cut the tax rate for companies that hold huge cash reserves overseas if
they return these funds to invest at home. Unlike other developed
nations, the US taxes corporate income globally, but it allows companies
to defer paying tax on offshore earnings until they decide to
repatriate that income. As a result, US companies have avoided U.S.
taxes by stashing roughly $2.6trn offshore, a figure cited by Congress’s
Joint Committee on Taxation. The top five in order of overseas cash
holdings as of Sept. 30, are Apple ($216 billion), Microsoft ($111
Billion), Cisco ($60 billion), Oracle Corp. ($51 billion) and Alphabet
Inc. ($48 billion).
Such an idea was tried back in 2004 under George Bush. But the
result was not a rise in productive investment but a new bout of
financial speculation. Companies got a tax ‘amnesty’ but used the cash
they brought home on buying back their own shares or pay out dividends
to shareholders, driving up the stock price and then borrowing on the
enhanced ‘market value’ of the company at very low rates.
In 2004, when
US firms brought back $300bn in cash, S&P 500 buybacks rose by 84%.
Goldman Sachs economists reckon that this will happen again with the
Trump plan. Indeed GS reckon that next year could see buybacks take the
largest share of company profits for 20 years. They estimate that
$150bn (or 20 percent of total buybacks) will be driven by repatriated
overseas cash. They predict buybacks 30 percent higher than last year,
compared to just 5 percent higher without the repatriation impact, while
productive investment’s share will be little changed.
Asked what he would do with repatriated cash should the Trump
administration slash taxes on foreign profits, Cisco Systems Inc. Chief
Executive Officer Chuck Robbins said “We do have various scenarios
in terms of what we’d do but you can assume we’ll focus on the obvious
ones — buy-backs, dividends and M&A activities.”
Now it is argued by some that the hoard of overseas cash shows that
the problem American capital has is not that its profitability is too
low. On the contrary, it is awash with profits (and profits not counted
in the official stats). But here is an interesting observation by
Morgan Stanley economists. Of the $2.6trn cash held abroad by American
companies, only 40%, or roughly $1 trillion, is available in the form of
cash and marketable securities. The other $1.5 trillion has been
reinvested to support foreign operations and exists in the form of other
operating assets, such as inventory, property, equipment, intangibles
and goodwill. So it has been invested not held in cash after all.
And the cash is not so awash.
It’s also highly unlikely that companies with factories overseas will
shift meaningful production to the US. After all, labour remains
significantly cheaper in nations like China. Hourly compensation costs
were $36.49 per employee in the US in 2013, according to The Conference
Board. The comparable cost in China was just $4.12 that year (the most
recent figure), even after having increased more than six-fold over the
preceding ten years.
Besides, many companies that do still make products in the US are
automating production. Consider Intel Corp. The chipmaker has giant
fabrication plants in Oregon, Arizona and New Mexico that employ just a
handful of people to keep the machines running. Nothing the Trump
administration does will stop robots from taking over large swathes of
manufacturing in the long run.
Another part of Trumponomics is to implement an infrastructure
program of building roads and communications. His plan to fund this
from private money in return for ownership and revenues from the
projects. This has made Keynesian economic guru, Paul Krugman apoplectic, and rightly so.
As Krugman explains “imagine a private consortium building a toll
road for $1 billion. Under the Trump plan, the consortium might borrow
$800 billion while putting up $200 million in equity — but it would get a
tax credit of 82 percent of that sum, so that its actual outlays would
only be $36 million. And any future revenue from tolls would go to the
people who put up that $36 million. Crucially, it’s not a plan to borrow
$1 trillion and spend it on much-needed projects — which would be the
straightforward, obvious thing to do. Instead “If the
government builds it, it ends up paying interest but gets the future
revenue from the tolls. But if it turns the project over to private
investors, it avoids the interest cost — but also loses the future toll
revenue. The government’s future cash flow is no better than it would
have been if it borrowed directly, and worse if it strikes a bad deal,
say because the investors have political connections.”
Second, Krugman goes on, “how is this kind of scheme supposed to
finance investment that doesn’t produce a revenue stream? Toll roads are
not the main thing we need right now; what about sewage systems, making
up for deferred maintenance, and so on? Third, how much of the
investment thus financed would actually be investment that wouldn’t have
taken place anyway? That is, how much “additionality” is there?”
Suppose that there’s a planned tunnel, which is clearly going to
be built; but now it’s renamed the Trump Tunnel, the building and
financing are carried out by private firms, and the future tolls and/or
rent paid by the government go to those private interests. In that case
we haven’t promoted investment at all, we’ve just in effect privatized a
public asset — and given the buyers 82 percent of the purchase price in
the form of a tax credit.”
So the Trump plans will be ineffective in getting US economic growth
rates up, in delivering more jobs, real incomes and better transport;
but it will boost financial markets and a speculative boom.
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