Wednesday, December 20, 2017

A Big Day for the President, A Big Day for Ryan/McConnell, A Big Day for the GOP Establishment

Today is a truly great day for the President, the GOP leadership, and America. Putting aside for a moment my conservative concerns about adding $1.5T to the national debt, this bill is a solid, establishment GOP approach to cutting taxes (there is little in the way of reform here---too hard), and the fact that 80% of Americans will see their taxes fall is a good thing. A very good thing.  A couple of more thoughts?

It has been amusing to watch the histrionics on the left about this bill.  My favorites are those who are all of a sudden concerned with the national debt. You know, the ones who cheered as President Obama added $7.9 Trillion to it. It seems that when debt is added to fuel spending, it is good, but when debt is added to allow you to keep more of your money, it is bad.

It is also amusing to watch the preening of TrumpNation. This is--as I said earlier--a generic, GOPe, Paul Ryan-envisioned tax cut. To the extent that the President is enjoying any success, it is when he governs as an establishment Republican--you remember those people, right? The ones Trumpkins carried the pitchforks for in 2016?

Although the average person won't see the full benefit of the tax cut until they file their 2018 return in the spring of 2019, there will likely be an almost immediate decrease in withholding after the turn of the new year. It is difficult to see the growth impact of the corporate tax cut doing much in 2018 (as I think it is already priced into the market), but the extra dollars in pockets are going to be noticed. At least the GOP prays that it is noticed.

Because things are looking very, very, grim for Republicans. If this difference in the generic ballot is any indication of the future, the GOP will lose both chambers in November. Those of us on the right had one very important trend to hang our hats on during the Obama era--and that was, that his Administration was devoted solely to his success, and that its policy choices created a slow wave that resulted in the the GOP in control of two-thirds of the governorships, the White House, Congress, and 69/99 state legislative bodies.

Could we be seeing the "equal and opposite reaction" that the laws of thermodynamics dictate? Will D's in four years look longingly on the Trump years as the time the nation turned on the Republican Party, like many in the GOP now do vis-a-vis the Obama years?

Time will tell.


Anonymous said...

Glad you can put aside your concerns about the $1.5T added to the national debt (which seems kind of a big concern to sideline). And the deficits are likely to be larger than predicted (see

This tax bill is Macroeconomic Malpractice of the first order:

1. It's just bad macroeconomic policy to increase the deficit in good economic times.
2. A fiscal stimulus during an economic expansion will be met by the Fed with a monetary tightening.
3. Most middle class Americans won't notice the few extra dollars in their pay packet due to changes in withholding. Neither will they be impressed with their reduced tax burden when they file their 2018 taxes in April 2019.
4. There will be little growth impact from the corporate tax cut. Corporations will not increase Investment due to a tax cut windfall.
a. Companies decide on investments based on the Net Present Value of future cash flows from their investments. If NPV is positive (or the investment clears some internally defined hurdle rate), the company makes (or should make) the investment. If it doesn't, they shouldn't make the investment. NPV depends only on future cash flow projections and the relevant cost of capital.
b. Future Cash flows are calculated pre tax for this calculation.
c. The cost of capital is affected by the tax rate. But as the effective tax rate goes down, the cost of capital (if financed by debt) approaches that of the cost of capital financed by equity (eliminating this distortion was one of my hopes in this tax bill, but the business lobby killed that).
d. The cost of capital is also affected by the risk free rate (in the US, the 30 year Treasury bond rate). A fiscal stimulus is likely to be met by a monetary tightening which is likely to raise the risk free rate and the cost of capital calculation it feeds into.
e. Overall, the effect on the relevant corporate investment decisions is likely a wash.
f. BTW, corporations are awash in cash on their balance sheets and have had access to oodles of cheap debt for years. And yet, they haven't been making significant investments. Not sure why shoveling more money their way will change this behavior.
g. What they will do (as everyone predicts, including the staff of the Joint Committee on Taxation) is to return money to stockholders, most likely through stock buybacks. Given that most individual owners of stock are fairly wealthy folks (whose marginal propensity to consume is low), this won't translate into increased GDP through individual Consumption (i.e., nothing to trickle down).

So this tax bill is bad policy. Whether it's bad politics remains to be seen. Taxes aren't high on the list of American voters' concerns. I suspect the political effect will be to energize the Democratic base and leave the Republican base at "meh." But I could be wrong.

Finally, big debt is bad for a Big Navy. It resulted in sequestration under Obama and will likely cause similar ructions in the current House Republican caucus.

Be careful what you wish for.

Macroeconomically yours,


The Conservative Wahoo said...


It is a pleasure for the blog to once again have a reader comment who disagrees with something I've written, but who doesn't do so from beneath a red MAGA hat.

I don't have much to say about your superb macroeconomic analysis, except that I agree with some of it, and I disagree with some of it.

Statement #1 is I think, the best and most pertinent point you make. As an economic matter, I think the economy is in a steady recovery. As a political matter however, there are a lot of Trump and Bernie voters who think that the system has left them behind and that the recovery isn't doing much for them. I don't necessarily think this tax bill is an effective policy palliative for them, I mention them only because while you and I see the economy in recovery, there are others who disagree.

Statement #2 strikes me as odd, as what would cause such tightening would be supercharged growth induced inflation---something that the rest of your analysis discounts.

Statement #3 is not an economic criticism, but a socio/political one, and it is the weakest of your points (and those of the Democrat machine). Fifty or 60 bucks less taken out in taxes every paycheck--while a rounding error for some--is real money to others, especially many Trump/Sanders voters. So while I am not sure as a political matter that this changes much for the 2018 election, the "no one will notice" argument is not only wrong, but tone deaf.

Statement #4(a-g) strikes me as reasonable, but not necessarily correct. And is weakened by your statement #2. There are international instances of cuts to the corporate rate being correlated to growth, so while there is clearly some solid economic theory in your view, it isn't necessarily determinative.

All that said, I have some other thoughts.

1. My totem conservative on tax matters is Kevin Williamson, and I react to this bill much as he did. and to some extent as you did in #1 above.

2. As a political matter, I am amused by the clamor from D's all of a sudden about debts and deficits after the spending spree of the Obama years. It seems that debt is fine as long as it goes to spending our money (or more properly--obligating future generations), but when it comes to allowing us to keep a bit more of our money, no way Jose.

3. As for our dear Navy, you might check out the work I recently contributed to at The Hudson Institute for a clearer understanding of my macro-economic views on seapower ( ). To summarize--if we were taking on debt to BUILD the great Navy, I'm all for it. I'd also be for a tax INCREASE if it were targeted at building the Navy.

To conclude, I see some of your view as wise and likely, some of it as contradictory, and some of it as dependent on what comes next. But all of it welcome. Thank you.

Mark Gorenflo said...


Thanks for your thoughtful comments. A few thoughts in reply.

1. Let me be more specific about fiscal stimulus and interest rates.
a.The tax bill elements that reduce taxes on lower income folks will inject a fiscal stimulus by increasing their Consumption (their marginal propensity to consume - MPC - is ~90%) in the near term. Let's say that's $300B over 10 years or ~$30B a year. That's some stimulus (if you believe in the Keynesian multiplier - Williamson doesn't though he doesn't show much mastery of macroeconomics in the screed you cited) but not very much.
b. Little of the tax relief for rich folks will stimulate the economy through increased Consumption since their MPC is much lower (probably ~10%).
c. Very little of the Corporate tax relief will stimulate the economy through Investment since companies plan to pass this windfall to their stockholders.
d. All of this would tend, marginally, to reinforce the growing desire of the Federal Reserve to increase interest rates. The Fed will do this to get some leeway to respond to a future recession, because of the overhang of Qualitative Easing on the money supply, because Trump appointees to the Fed are, weirdly, hawkish on interest rates, and because the regional Fed Presidents rotating onto the FOMC are more hawkish than the folks they replace.
2. There are good and bad uses of debt. Investment in infrastructure is a great use of debt. Building a bigger Navy may be a good use of debt. Using debt during economic downturns to support aggregate demand is orthodox economics (so is paying off debt during economic recoveries). Using debt to cover current expenses (because you've rewarded your political donors with lavish tax breaks) is a horrible use of debt all around. At least some of the debt of the Obama years was designed to support aggregate demand in the face of the worst financial crisis since the Great Depression. Your point about "keeping more of our money" is a nice talking point but not a serious policy prescription (why not let us keep all of our money? So what if life is solitary, nasty, brutish and short as a result?)
3. I agree $50 or $60 more in each biweekly paycheck would be welcome and noticed by lower class and middle class families. My non-tone deaf point is that I am not sure Joe the Plumber will see this amount in his pay packet. It would be that much if the average tax break cited by the Republicans (~$2000) equals the median tax break. I'm willing to bet that the average tax break is skewed high by the tax relief that will be seen by high income folks and that Joe the Plumber's pay packet won't change very much. I could be wrong since who knows what's really in this tax bill yet.
4. Please cite for me those countries in which corporate tax cuts are correlated with economic growth. Then we can discuss whether those countries are valid analogs for the United States (spoiler alert - Ireland isn't a valid analog).

Pedantically yours,


P.S. Sorry (not really) about the whipping the Cavaliers got from the Midshipmen. I guess the New Model Navy was too much for the poor Hoos.

The Conservative Wahoo said...

4. By your logic, we cannot discuss any country because there are no analogues appropriate.

Mark Gorenflo said...

4. Lame. That is not my logic.

As a first order approximation, large, mature economies whose GDPs are driven by Consumption are appropriate analogs.

This makes fun reading:

I invite your attention to Table 2, which lists the countries with the lowest nominal corporate tax rates. Hardly a list of countries to emulate economically.

My hypothesis is that low corporate tax rates, when employed by a country with decent infrastructure, a reliable legal system, and an educated populace, can be a factor in boosting economic growth by attracting foreign businesses to set up shop there. These factors likely account for much of the economic successes of Ireland, Hong Kong and Singapore. Low corporate rates, by themselves, are not especially correlated with economic growth.

Picayunishly yours,


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