Part Three – Unstable Economy Rocks Stocks

Economy Section

As I’ve been saying, Trump economic policies focus on short-term gain without regard to the long-term pain.  His reckless approach has turned this into an unstable economy.  Trump got desperate over his pathetic approval ratings, so he artificially juiced the economy with his tax cuts, not to create a sustained growing economy (since in all likelihood it won’t), but to prop up his image among his base with a temporary sugar-high.  That shortsighted tax policy will come with a price offsetting the benefits, as the stock market got spooked about interest rates rising from inflationary pressures, & what’s worse is the way revenue shortfalls are spiking deficits.  We see with this new budget deal which does make important investments, but it will cost money, & that’s money already being spent from the huge corporate tax cuts.  And what are those big corporations doing with their added windfall?  After passing along a few scraps to workers as a goodwill gesture, mostly in the form of one-time bonuses instead of permanent higher wages, with the evidence suggesting most of the profits are going toward stock buybacks.  So shareholders are the big winners, not workers.  As I’ve been saying all along, trickle down ain’t going to trickle down much, since corporations have other priorities & being stingy on pay raises has mostly become ingrained in the system.

To give away all that tax revenue at the same time that budget bill was just passed creating all new spending, it might be considered economic malfeasance.  At this point in time with much of the economic data being strong & we’re not in recession, in DC they are exploding our deficits.  Only $1 Trillion annually might turn out optimistic.  I’m no fan of libertarian Rand Paul & that midnight stunt he pulled on the Senate floor was pure political theatre, but he does make a point about rising spending & deficits, & how the conservative mindset has done a 180 since the early Obama years.  But the spending back then was needed to lift us out of that severe recession.  And it’s become irrefutable tracking the party holding the White House the past 2 or 3 decades, the GOP is now the party of ballooning deficits.  The budget just passed this morning did contain some needed initiatives, such as beefing up the military, infrastructure & battling opioids.  It also offered encouraging signs bipartisanship can still work to pass important legislation.  But the timing right after the tax cuts shows DC has little regard for restraining deficits, which may be at the heart of the market decline.  Plus exposed again were the huge divides between the fringes of both parties & the irreconcilable partisan polarization over in the House, with the Freedom Caucus going ballistic over the additional spending & Pelosi doing a record 8-hour speech on behalf of immigrants.  It’s always going to take shifting to the center to govern & get things done.  The extremes seem entrenched & immovable.

In the related articles below, the categories involve lost jobs, wages which still won’t rise much, stock market struggles, health care, budget deal, trade & gerrymandering.  Admittedly, many of the articles in the budget deal group were stories leading up to the short overnight shutdown.  Overall, deliberate steps which contribute to overheating the economy can make for an unstable economy, especially when deficits spin out of control.  And top-down trickle down was a backward approach for these times, when tax policy should have been more bottoms-up.  Here’s an excerpt from the first link how-trump-harms-the-workers-he-promised-to-protect:

These moves aren’t a surprise. From the start, the Trump administration has been solicitous of employers and business interests and indifferent to the concerns of workers and other ordinary Americans. But that doesn’t mean we shouldn’t note the extreme discrepancy between the president’s rhetoric on the trail and his actions in office. If populism in the American sense means an interest in the well-being of the public at large, then the Republican Party under Trump isn’t a populist party. It is a party of upward redistribution, further concentrating wealth and power into the hands of a small minority. Whatever “populism” exists in the Trump era has been cultural—the racist resentment of the people considered his “base,” stoked by the president’s attacks on Hispanic immigrants and black celebrities. 

Also read the article, dont-let-pay-increases-coming-out-of-tax-reform-fool-you which provides us with this warning:

Egged on by the White House, corporate America has spent the past few weeks touting how it is sharing its big Trump tax cut with employees in the form of bonuses and pay increases — an apparent validation of the trickle-down approach to economics espoused by the president and his Republican allies. But when we look at the numbers, we see the opposite: The nation’s workers are getting woefully little, at least relatively speaking. Peeking beyond the PR, our analysis finds that major corporations are planning to spend more than 30 times what they are putting in the wallets of employees on buying back their own stock — a practice solely meant to lift the fortunes of shareholders. Not that we’re surprised. Favoring stockholders over workers continues a decades-long trend that has contributed to wage stagnation, exacerbated income inequality and slowed economic growth across the country.

 

To get a sense of how the pie is being divided, we collaborated with Emre Gomec of the Academic-Industry Research Network to tally the sums of commitments from the 44 companies in the S&P 500 stock index that, according to Americans for Tax Reform, are giving their employees a bonus or a raise because of the new law. When you add it all up, you get about $5.2 billion — $3.7 billion in one-time bonuses and an estimated $1.5 billion in annual wage increases. But that total pales in comparison with the $157.6 billion in stock buybacks announced by 34 S&P 500 companies since early December, when the tax bill passed the Senate. Companies typically purchase their own shares in a bid to bump up the price — a move that tends to please Wall Street and swells the compensation of chief executives, who are paid largely in stock.

Whatever increased economic growth we may be now experiencing, it’s more likely coming from the long slow slog to hitting full employment as opposed to tax cuts.  Among the shortsighted thinking behind the tax cuts are seen in trump-tax-cuts-looking-hollow-right-now, where this excerpt shows one of the concerns:

It’s a myth, in fact, that tax cuts automatically stimulate the economy. That certainly can happen, but the effect would be most potent in a weak economy in need of help. The Trump tax cuts came with the economy strong. And if they don’t significantly boost growth—which few economists expect to happen—they will mostly amount to a transfer of wealth from future taxpayers, who will have to deal with all that extra debt, to current taxpayers.

The link congress-can-turn-the-republican-tax-cuts-into-new-middle-class-jobs has one idea which could help the corporate tax cuts get to the right places (middle-class workers) instead of where they’re inevitably going towards (stock buybacks) as seen here:

Many more of the nation’s lawmakers must join this fight for America’s future by putting an end to the predatory corporate behavior of which buybacks are a significant part. A ban on stock buybacks would be a giant step in resurrecting corporate employment as a foundation for a prosperous and expanding middle class.

Similar concerns about workers being shortchanged come from Rubin in the link inconvenient-facts-about-the-tax-cut with this excerpt:

Each employee who gets a bonus check is grateful, but one does get a glimpse from these figures as to how poorly this supposed “middle-class tax cut” was designed. If nearly $100 billion go for stock buybacks and $2.5 billion go for bonuses, then workers are not — as the White House has repeatedly claimed — going to get the majority of the money flowing from the corporate tax cut. Not even close. The corporate tax cuts, at least so far, have overwhelmingly rewarded shareholders (including senior executives who own stock). Multinational corporations’ announcements intended to ingratiate themselves with Trump (and perhaps distract from the enormous stock buybacks) don’t tell us about the big-picture impact of the tax cut. For one thing, as the Associated Press reports: “It’s worth noting that many of the big corporations gave one-time bonuses, not permanent raises. So if the tax cut turns out to be less of a boon than expected, or the companies have a bad year, they’re not committed to higher compensation going forward.”

 

In short, the administration’s obsession with temporary bonuses is a political tactic that tells us little about the effectiveness of the tax cuts. For now, the vast percentage of the corporate tax cuts are flowing to shareholders. Moreover, we will continue to face challenges from low labor participation rates, a rising debt and inflation fears. All of that is to say, giving rich people and corporations big tax cuts isn’t going to solve our economic challenges. It will however use up an awful lot of borrowing and reduce the tools at our disposal if we tip back into a recession.

How about this excerpt taken from thom-hartmann-gop-is-wrecking-your-retirement-savings_partner, offering food for thought on why we’ve become a nation buried in debt as laborers have been losing ground for decades:

First, America is hugely in debt (known as “overleveraged” in econ wonkspeak). There’s over $1.4 trillion in student debt, a number never, ever before seen in the US, and nonexistent in the rest of the world because we’re the only developed country in the world that makes students pay so much for college that they can’t attend without taking out loans. Consumer credit card debt is over $1 trillion (the highest in history), because people have been using household debt (including low-interest of mortgages and car loans for a total of $13 trillion, a record) to maintain what was once a middle-class lifestyle, once easy with a union job. This trend has been going on ever since Reagan declared war on working people in 1981 and began the process of destroying good union jobs. As a result, wages have been flat or declining for over 30 years.

This excerpt from is-trumps-stock-market-honeymoon-headed-to-chernobyl suggests concerns over the stock market are small potatoes compared to the menace now occupying the White House:

The bigger worry is Donald Trump. There is no telling what destructive behavior he might be willing to engage in, in order to stop Mueller’s investigation, or to try to shore up his own fading virility with a military strike on North Korea. He is Mr. High Beta, and that’s a fact that has proven to be very difficult for the bond and stock markets to value. There’s little point, after all, to pricing in the risk of a constitutional crisis or nuclear war. If the United States experiences either, Wall Street will have bigger problems on its hands than a much-needed market correction.