Analysis

Why the Trump boomlet may soon fade

A consumer splurge is masking big problems in the Republican tax cuts

"Why aren't the Trump tax cuts working?"

That question might seem ridiculous to Republicans. After all, President Trump promised the 2017 Tax Cuts and Jobs Act would be "rocket fuel" for the American economy — and in a way, that's what appears to have happened. U.S. economic growth has accelerated since the tax cut passed last December. And the past two quarters have shown the strongest half year of growth in four years despite rising interest rates, Trump's trade tariffs, and an economic expansion that's pretty old by historical standards.

I mean, #winning, amirite?

Here's the problem: The tax cuts aren't working the way Republicans promised they would. And that means the Trump boomlet may soon fade, as many economists on Wall Street and in Washington expect.

The president's biggest policy victory looks a lot like what Republicans in the past would have derided as "Keynesian stimulus." More money in people's pockets from the personal tax cuts has meant more disposable income, more consumer spending, and faster economic growth. Which is nice. But that splurge doesn't change the underlying "supply-side" fundamentals of labor supply and productivity.

And anyway, all that is just supposed to be icing on the cake. The real and lasting benefit from the tax cuts — the one that really gets GOP hearts racing — is meant to come from the business side of the law. The new tax law slashed the federal corporate tax rate to 21 percent from 35 percent and temporarily allows companies to fully and immediately deduct the cost of some kinds of capital investment. The expected result: a business investment boom eventually leading to higher productivity growth and wages as workers are equipped with more and better capital equipment. (This is not a controversial theory.) If the economic upturn is going to be more than passing — and expensive, given much higher budget deficits — this mechanism has to kick in.

So far it hasn't. The third-quarter GDP report out last Friday showed business investment decelerating, not strengthening. "Capital expenditures, the component of spending most purposefully targeted by policy, softened notably last quarter," noted JPMorgan Chase. Barclays said, "the weak spot in today's report was business fixed investment," which "suggests that the corporate tax cuts have not induced much capital accumulation." So, like, the opposite of what the GOP promised would be happening.

Now Republicans should have a reasonable comeback at the ready: We never said the tax cuts would immediately alter the growth path of the $21 trillion economy. We never said corporate America would immediately start massively investing. Let's give the tax cuts time to work, please.

Except Republicans pretty much promised the business tax cuts would have a sudden impact because the new tax law would encourage companies to bring back and invest trillions in foreign earnings held overseas to avoid the formerly sky-high U.S. corporate tax rate. "Over $4 [trillion], but close to $5 trillion, will be brought back into our country," Trump said last August. (The actual amount of overseas cash was closer to $3 trillion, and even that overstated what could realistically return, but, you know, Trump.)

Instead, as many Democrats have been pointing out, companies have been mostly using that dough for stock buybacks or dividends rather than fresh investment. But the repatriation argument was always a politician's argument, not an economist's. Despite what many GOP pols and pundits predicted, moving money from a foreign subsidiary's bank account to a parent company's bank account was never going to be how the tax cut eventually boosted growth. Again, the lower tax rate and the expensing provision were supposed to be the real juice.

Of course, we could still see an investment boom. Totally possible. But Trump's other big economic policy "achievement" — trade wars both threatened and actualized — may be working against it. A new survey of business economists found that nearly 80 percent of economists surveyed cut their growth forecasts because of trade concerns. In a September report, Goldman Sachs warned that in the short term, the main impact of the U.S.-China trade conflict would be "increased uncertainty … potentially causing firms to defer investment in manufacturing capacity."

And don't forget about those higher budget deficits from the tax cut, which economists on the left and right alike worry will drive up interest rates and crowd out private investment. If the tax cuts are perceived to be failing both politically and economically, Republicans have only themselves to blame.

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