As I mentioned a few days ago, benefits have risen a little faster than cash wages lately: U.S. employers are boosting benefits—including bonuses and vacation time—at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%, the Labor Department said Tuesday. Call me cynical, but without bothering to check this out I think it’s safe to say that bonuses and retirement pay are heavily skewed in favor of the affluent and the rich. For ordinary working-class and middle-class workers, total compensation has probably risen a hair faster than cash wages, but that’s all. What this means is that when you see the annual earnings reported by the Census Bureau—which is what all of us rely on for basic wage data—it’s pretty close to total compensation data. Total comp for the middle class may be growing faster than wages alone, but only by a tiny bit.
Across the country, there are more jobs available than there are workers looking for them, as the unemployment rate has dropped to a nearly two-decade low. Businesses are complaining of worker shortages, arguing they could do more and sell more and build more if they could just find the labor. Yet wages remain strikingly flat, with much of the raises that workers are making getting eaten up by inflation. Employees still somehow lack the power to cajole businesses into paying them more, nearly a decade into the recovery. The central paradox of the Trump economy is that widespread concerns about labor shortages coexist with widespread complaints about low wages. But economists do not see it as much of a paradox—instead seeing it as a sign of dimming business dynamism and diminished worker power.
Whatever its causes, the change is striking. The last time that the unemployment rate was this low, during the late Clinton presidency, year-on-year wage growth was roughly 5 percent. It is now just above 3 percent. Moreover, wage growth has not picked up much for the past three years, even as the jobless rate has dropped down to historically low levels. This may reflect the inherent limitations of the unemployment rate as an economic indicator. During and after the Great Recession, millions of Americans dropped out of the labor force, unable to find a good job or any job at all. They went to school. They retired. They became unpaid caretakers. If they had a disability, they applied for insurance coverage. The share of prime-age adults with a job dropped from 80 percent to 75 percent. Now, even with the unemployment rate in the low single digits, it has not recovered to where it was before this recession or the prior one. There is still slack in the labor market, with hundreds of thousands of workers sitting on the sidelines.
Economists point to another indicator to help explain the persistence of low wages in a climate of low unemployment: sluggish productivity. American businesses and workers are not getting more dynamic, more innovative, and more efficient—at least not like they were in the 1990s or the 1960s. That has the effect of smothering wage growth. “Wage growth feels low by historical standards and that’s largely because productivity growth is low relative to historical standards,” said Mark Zandi, the chief economist at Moody’s Analytics. “Productivity growth between World War II and up through the Great Recession was, on average, 2 percent per annum. Since the recession 10 years ago, it’s been 1 percent.” Given those statistics, the sluggish pace of wage growth makes more sense, he said. Still, that analysis assumes that productivity gains translate into higher wages—and there are reasons to think that might be less true now than it has been in the past, as Zandi noted. Economists point to the long-term decline in worker bargaining power as part of the reason that employees’ paychecks are not rising right now. The share of employed workers who are members of a union has fallen in half since the 1980s. States have eroded labor standards and hampered collective bargaining. As a result, it is harder for workers to demand higher paychecks, year after year after year.
“Bargaining powers are additive,” said Heidi Shierholz, an economist at the Economic Policy Institute, a Washington-based think tank. “You get them not just from the tight labor market, but also from your union, and also from binding labor standards. When you have this big erosion in this set of things that give you bargaining power, it takes a tighter and tighter labor market and a lower and lower unemployment rate to translate into strong wage growth.” She added: “I don’t think that link is broken. I just think the unemployment rate has to be that much lower to spur strong wage growth, given that all of these other forms of worker leverage have been decimated.” Increasing market concentration is another sweeping factor. In a huge number of business sectors, from manufacturing to retail trade to finance, the top four firms have a bigger share of revenue now than they did in the late 1990s. Measures of aggregate business concentration have increased too. Walmart dominates bricks-and-mortar retail; Google dominates web search; Amazon dominates e-commerce; Uber and Lyft dominate rideshare. Growing monopoly power is present everywhere from hospital systems to rental car companies. This raises profits, slows economic growth, increases inequality, and, yes, suppresses wages. Workers, in effect, have fewer employers to choose from. Employers have more power to set workers’ wages at a low level.
“We should be concerned about this agglomeration of market power not just because of its economic consequences, but also because of its political consequences,” Joseph Stiglitz, the Nobel laureate in economics, has argued. “An increase in economic inequality leads to an increase in political inequality, which can and has been used to create rules of the game that perpetuate economic inequality.” More marginal causes are likely at work too. Roughly one in five workers are bound by a non-compete clause, which serves as an “intertemporal conduit of monopsony power” in the words of researchers. Such clauses can prevent workers from bargaining for a higher-paying job at a competing firm. Drug testing seems to stand in the way of some uncounted number of workers finding a job. And companies’ credential standards—which they inflated in the recession and just after, when there were millions of unemployed and underemployed workers with advanced degrees—might also be having an effect. Still, the tighter labor market should lead to widespread and stronger wage gains at some point, economists think, and hopefully soon. That is already true in communities and industries with very low unemployment rates. When companies cannot fill positions even after raising wages significantly—that will indicate real labor shortages. And for workers? It will feel like a very good thing.
The Trump tax cuts are a lot like Trump University: nowhere near what he promised, for very obvious reasons. In this case, President Trump has said that his recently passed plan to allow companies to move any future foreign profits back to the United States without being subject to U.S. taxes, and move back any past profits while facing only a nominal tax, will unleash a flood of money into the country. “We expect to have in excess of $4 trillion brought back very shortly,” he told a group of business leaders in August, and in all likelihood something “close to $5 trillion.” The only problem is that Trump’s claim shouldn’t be true, and so far, it hasn’t been. The Wall Street Journal estimates that the nation’s biggest publicly traded companies have repatriated $143 billion this year, while the Federal Reserve puts the number at a slightly more than $300 billion. Whichever number is accurate, it’s 94 percent to 97 percent less than Trump predicted. There’s a simple reason the Trump tax cuts haven’t inspired companies to move that much money to the United States: The money was already here. How is that possible when American companies were allegedly stashing $2.6 trillion overseas to avoid taxes?
The important thing to understand is that foreign profits were taxed when companies brought them back to the United States to put into their businesses but not when they brought them back to put into other things — which, of course, is exactly what cash-rich companies such as Apple did. Of the roughly $250 billion that the tech giant was supposedly holding overseas last year, about $208 billion was in U.S. Treasury bonds, corporate bonds, or Federal National Mortgage Association and Federal Home Loan Mortgage Corp. debt. And that’s pretty low, compared with Apple’s peers. The Brookings Institution estimates that the 15 American companies with the most cash on hand already held 95 percent of it within the United States even before the Trump tax cuts took effect. The tax cuts aren’t likely to prompt companies to invest more in their own businesses, either. Again, this has already been happening — companies were using borrowed money rather than their overseas earnings to invest. This saved on taxes in two ways: Companies could deduct the interest they were paying on their borrowing, and if they could persuade Washington to give them another tax repatriation holiday, like the one in 2004, they would not owe Uncle Sam much on their foreign profits, either. This was more than worth the minimal amount they had to pay to borrow money in the first place. And so, they’ve been making the investments in their businesses without needing a tax break on their overseas earnings to do so.
Which is to say that as beneficial as the tax cuts may be for investors, they’re not significant for the U.S. economy. Under the new tax law, companies will just take the money they had been putting into U.S. Treasury and corporate bonds and use it to either pay down their debt, buy back their shares or pay out bigger dividends. But, in any case, the growth in American jobs and investment that is “supposed to follow” will “not occur.” That is what the Senate Permanent Subcommittee on Investigations said when it looked at what happened after the 2004 tax repatriation holiday. In all, the 15 companies that “brought back” the most money to the United States back then cut their workforces and research and development spending. But they did increase their stock buybacks and boost executive pay. In fact, a group of researchers from the Massachusetts Institute of Technology, Harvard University and the University of Illinois found that for every $1 that was repatriated during that time, shareholder payouts went up 60 to 92 cents.
So although Shakespeare may not have been thinking about trickle-down economics when he wrote that past is prologue, it’s particularly apt here. The Fed, you see, hasn’t found any evidence that repatriation has made companies invest any more in their businesses right now, but there’s plenty of evidence that the repatriation has motivated them to buy back more stock. Buybacks, after all, are at a record high. It turns out, then, that Trump left out a word when he said that he wants to put “America first.” What he really meant is that he wants to put corporate America first. What else would you call giving companies a tax cut that, if history is any guide, won’t help the U.S. economy at all other than to make wealthy investors even better off — and at a time when profits were already at all-time highs as a share of the economy? I guess you could call it a fairly standard Republican policy. That just doesn’t have quite the same ring to it.
A tax cut has a big first-order effect: the people whose taxes are reduced have more money, and the government has less. Since both of these — more inequality and higher deficits — are generally regarded as bad things, Republicans habitually dismiss them, and instead focus on second-order effects they predict will happen. The supply-side economic theory favored by most Republicans holds that rich people are exquisitely sensitive to tax rates, and their willingness to work or invest rises and falls dramatically in response even to small changes in tax rates. This is why Republicans predicted upper-bracket tax hikes, like those passed under Bill Clinton and Barack Obama, would massively depress economic activity and raise less revenue than standard forecasts predicted. (It didn’t.) It is also why they predicted tax cuts passed by George W. Bush, and Republican governments in states like Kansas, Oklahoma, and Louisiana would yield far more revenue than predicted. (It didn’t.) They maintained the same belief about President Trump’s corporate tax cuts. The conviction is so strong that even the most moderate Republicans insist higher growth would cause revenue to rise rather than fall is response to the tax cuts.
In the ten months that have passed since Trump signed the tax cuts into law, the second-order effects have been undetectable. Nothing bad has happened to the economy; on the other hand, nothing especially good has happened, either. Growth and wages have tracked at about the same pace as before Trump took office. Republicans built a messaging campaign around one quarter of 4 percent growth, which they treated as unprecedented and now permanent development, ignoring the fact that the economy produced several such quarters under the Obama administration. The Trump administration’s favorite rationale for cutting corporate tax cuts held that a lower rate would encourage American companies to bring back trillions of dollars in cash that they had stashed overseas. “Over $4 [trillion], but close to $5 trillion, will be brought back into our country,” promised Trump last month. There is no sign of any such thing happening. The Wall Street Journal has conducted a review of the public filings of “108 publicly traded companies accounting for the vast majority of an estimated $2.7 trillion in profits parked abroad,” and asked each company what it was doing with the funds. The total amount of repatriation so far? $143 billion.
What has been very evident so far is the first-order effect. Just as critics of the tax cuts predicted, reducing the amount of tax corporations must pay the federal government has resulted in the government having much less revenue. Tax revenue tends to be highly sensitive to the business cycle, rising when the economy expands and collapsing during recessions. And yet, even as the economy has continued to grow in 2018, corporate tax revenue has dropped 30 percent over the last year. What has happened to the extra money corporations got to keep due to lower taxes? First, corporations are enjoying much higher profit. Corporate profits soared 16 percent in the last quarter. What else is happening to all that money? Just as critics predicted, corporations are engaging in a massive binge of stock buybacks. Share repurchases rose 50 percent in the first half of 2018. “For the first time in 10 years, buybacks are garnering the largest share of cash spending by S&P 500 firms,” writes Goldman Sachs analyst David Kostin. Are corporations investing more? Yes, but mainly they are using their windfall to increase their own holdings. If you believe the main problem with the economy President Trump inherited was an excess of redistribution, then the Trump tax cut was a helpful course correction. Its main measurable impact is a large lump-sum wealth transfer to business owners.
Trickle Down Nonsense
A major proponent of outdated supply-side trickle down is Trump economic adviser Larry Kudlow, who consistently way overestimates the amount of economic growth spurred on by tax cuts. The next link below reveals his blind optimism plus the administration’s intent to slash entitlements in 2019.
A top economic adviser to President Donald Trump said on Monday he expects U.S. budget deficits of about 4 percent to 5 percent of the country’s economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs. “We have to be tougher on spending,” White House economic adviser Larry Kudlow said in remarks to the Economic Club of New York, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year.
In recently released numbers, the Treasury Department announced the government, after accounting for some scheduling quirks, ran a $152 billion deficit in August. The budget deficit was $107.7 billion in August 2017, 41-percent less than the newest data. These numbers are startling, but the reality is that the nation’s debt load is actually much, much worse. Washington uses an outdated, inaccurate accounting system that contributes greatly to America’s fiscal irresponsibility. The quality of financial reporting practiced by the U.S. would make Enron blush. The U.S. government is using accounting practices that I would not allow in a first-year business school class. Washington’s cash-based accounting system records revenues when money is received and records expenses when they are paid. This method produces a highly inaccurate budget number that doesn’t acknowledge bills that we know we must pay in the future like tax cuts, increases in benefits payable to federal employees or new obligations incurred due to promised Social Security, Medicare and Medicaid.
If the federal government was honest with the public and followed accrual accounting in its annual budget, which would recognize the increase in future obligations, there is little doubt that politicians would have found a way to deal with the looming financial crisis on our hands. To put this another way, the Treasury bills owed by the U.S. — or the debt number often referred to in casual conversations — stands at around $20 trillion. But if you look at what the nation really owes, especially related to Social Security, Medicare and Medicaid, that liability number is pushed closer to $80 trillion. No publicly traded firm would survive if it reported or acknowledged anything resembling a 300-percent increase in its public debt holdings. If we wouldn’t accept this from leading companies in the business world, why do we let our government get away with it? The unrecorded debt — about $60 trillion — works out to roughly $25,000 for every adult living in the United States, but the country’s median wealth is a mere $44,900 per adult. That means that if the U.S. were to one day recognize the unrecorded federal debt, a stunning 56 percent of the median wealth of the average American could be wiped out in future taxes to cover costs. Yet, that $80 trillion figure doesn’t even take into account unfunded obligations of state and local governments.
It has long been an accepted axiom in the United States — and also in many other advanced democracies — that the future would be better than the past. People took it for granted that living standards would rise and that life would be more comfortable and stable. Well, kiss that optimism goodbye. A new survey of 27 countries finds that confidence in the future is weak, especially in the richest societies. One question asked whether “children will be better off financially” than their parents when they’re adults. Only 33 percent of respondents in the United States answered yes; the comparable figures were 37 percent for Germany, 19 percent for Italy, and 15 percent for Japan and France. Among the 18 advanced countries surveyed, only Poland (59 percent) and Russia (51 percent) had majorities who felt the future would be better than the present. What’s curious about the survey, conducted by the Pew Research Center, is that the expectations for the future are much more downbeat than views of the present.
How is Trump going to explain to his supporters in 2020 how he failed to fulfill the central promise of his 2016 campaign? The border wall was the central promise, make no mistake. It was the thing that most distinguished him from his primary opponents, and it carried enormous symbolic weight for what he called “the forgotten men and women” as they flocked to the polls that November. It wasn’t just about stopping illegal immigration, either. It was about stopping cultural change, as well as healing the sense of diminishment so many people felt. Perhaps most important, it was about seizing back a sense of agency and power. When Trump told them that not only would we build a wall, but that we would force Mexico to pay for it, they cheered. The United States, Trump said, was constantly being laughed at, ridiculed and taken advantage of by the rest of the world. Well, now, we would make Mexico kneel before us and suffer the humiliation of opening its wallet to pay for a wall it would hate. If life has made you feel small and weak, here was a chance for us all to feel big and strong.
So what will Trump do? One option would be to simply proclaim that in fact, the wall is well underway. He does this regularly, whenever he’s at one of his rallies. “A lot of people don’t know it but we’ve already started the wall,” he said at one last month in Tampa. “We’ve started large portions of the wall, but we’re going to need, even the way we negotiate, we’re going to need more and we’re going to get more, and we may have to do some pretty drastic things, but we’re going to get it.” Those “drastic things” would presumably include forcing a shutdown, which is, of course, not going to happen. As for the claim that Trump has already started building the wall, that’s false. There has been some money spent on shoring up existing fencing at various points along the border, but nothing like Trump’s vision of a wall stretching from the Pacific Ocean to the Gulf of Mexico. When he was running scams like Trump University, he could keep going because the world provided an inexhaustible of suckers. By the time one group realized they’d been conned, he could just move on to another group, who only knew that he was that rich guy from TV. But when you’re president, you have to go back to the same voters you made those elaborate promises to four years before. And if you failed, they’re going to remember.
We Won’t Get Fooled Again!
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