Robert Ayres, INSEAD
with Michael Olenick and Lu Hao

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.

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A Dangerous Crack in Economic Theory:

Why growth is slow and world trade is not always win-win.

robert-ayresAs Larry Summers and many other economists have lamented (and even Donald Trump has said in several campaign speeches), it is true that the global recovery from the financial collapse of 2008 has been extraordinarily slow. Explanations vary widely. My own explanation up to now has focused on the shift from growth based on the exploitation of natural resources (especially oil and gas) to growth based on ICT technologies incubated in Silicon Valley but employing very few people. Another explanation centers on the working class reaction (in the US) to globalization and “free trade deals” favoring the export of manufacturing jobs to low wage countries.

A related explanation centers on the rise of the financial industry, along with its preference for moving money into the creation of asset bubbles rather than investment in small businesses in the “real” economy. A cousin of this explanation is that the money available for investment by the richest few is increasingly devoted to increasing the power of money in the political process. There is probably some truth in each of them.

The end of the era of increasing debt, with near zero interest rates is coming very soon. When it does, the cost of those deficits will explode, and the pressures for a major revolution in economics, capitalism and democracy, will also explode.

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