With straight faces, the salesmen for the Trump tax cut have promised a miracle: increased corporate profits, a surge of investment in CAPX, more and better jobs with higher pay, all to be paid for by accelerated economic growth. In fact, the all-white, all male finance committees of both Houses of Congress, with Treasury Secretary Mnuchin and Chief Economic Advisor Hassett say that the US will grow at 3% p.a. or more for the next ten years – no recessions – and that the tax cuts will actually generate a profit for the government of $300 billion in that time. Sadly (and no irony intended) this combination of goodies is a pipe dream. In the next few paragraphs I will explain why, and why Trump and the Republicans are selling snake oil to the suckers. What is surprising is how many financial professionals are buying it.
Tax cuts, wages and salaries: Will lower taxes help workers? And the economy?
For several weeks, the guest experts on CNBC and Bloomberg News have been talking about the coming tax cut legislation (for corporations) that the Republicans finally seem to have in their grasp. The Bill, as it is currently proposed, will eliminate the insurance mandate for health care and may leave quite a lot of upper middle class salaried people, worse off, especially in high tax states.
The sure winners will be the shareholders of multinational corporations and “pass through” enterprises, especially real estate partnerships. The “supply-side” cheerleaders for the plan, both in Congress and the White House (Mnuchin, Cohen, Mulvaney, et al) argue that economic growth be much faster, that it will pay for the cuts, and that wages and salaries will rise, thanks to a burst of new investment.
By contrast, virtually all top economists say that the cuts won’t pay for themselves, that the deficit and the national debt will increase, and that growth will not accelerate.
Where will the money go and what will it do?
By Robert U. Ayres and Michael Olenick
For several weeks, the guys and gals at CNBC and Bloomberg News, and their guests, have been talking about the coming tax reform (cut) legislation that the Republicans finally seem to have in their grasp. Well, maybe not exactly reform, maybe not revenue-neutral, but at least tax cuts for the corporations that give them campaign money. All the cheerleaders, both in Congress and the White House, assert confidently that faster growth will pay for the cost of the tax cut, even though virtually all top economists, starting with Paul Krugman and Larry Summers, say that it won’t.
The continued decline in GE share prices (now below $20 per share) have been a major topic in the financial press (and TV) during the past few weeks. Jeffrey Immelt (Jack Welch’s protegé) is gone, no doubt with a sizeable “golden parachute” to comfort his golden years. Yet in GE’s peak year, under Welch, in August 2000 (just before the “dot.com” crash) GE was worth more than $600 billion. Recently it fell to $190 billion.
Hmm. Let’s have a look.
Robert Ayres and Michael Olenick, INSEAD
INSEAD WORKING PAPER
We advanced the null hypothesis that stock buybacks will have a positive impact on the market value of a business over a five-year horizon. We find that there is a negligible chance for this to be true (with a two tail heteroscedastic p=.000023).
We find that the more capital a business invests in buying its own stock, expressed as a ratio of capital invested in buybacks to current market capitalization, the less likely that company is to experience long-term growth in overall market value.
Our findings, for US firms worth more than $100 million, suggest that long-term investors, such as pension funds, should be wary of investing businesses that have engaged in significant cumulative stock repurchases (i.e. 50% or more of current market cap.)
We find that excessive buybacks in the past decades are a significant cause of secular stagnation, inasmuch as they effectively reduce corporate R&D while contributing, instead, to an asset bubble that creates no value.
Report from China: Robert Ayres
In my last post I explained why (private) investment the automobile industry was a huge win-win for the US in the early years of the 20th century, for reasons that do not apply to 21st century China. In fact, there are strong arguments that the overall impact of still more cars (and highways) in China will be more nearly a lose-lose proposition, the only winners being the foreign auto manufacturers.
However, I think there is another investment opportunity, still in its infancy, that – if pursued intelligently – can be a true “win-win”.
Report from China: Robert Ayres
In December I travelled to the city of Kunming, in Yunnan province, China. The occasion of the trip was to attend a conference on planning and give a talk on economics at that conference. The host was the newly appointed provincial Governor, who is also the Communist Party Chairman for Yunnan. The organizer was the former chief planner for Singapore, and the attendees were academics and civil servants in the urban planning departments from all of the major cities of organizer was the former chief planner for Singapore, and the Yunnan province. I was invited on short notice (only two weeks) and I was asked to provide a copy of my talk in advance, without much detailed information about the actual situation. What I did know about China was more applicable to Beijing and Shanghai than to Kunming. So, I had to “punt”, as they say.