Crushing it for whom, Mr. Kudlow?
Last week, one of President Trump’s top economic advisers, Larry Kudlow, argued that the U.S. economy is “crushing it,” posting boom-like numbers in key areas, all thanks to the leadership of the president.
Evaluating such claims usually begins with assessing whether the president should get credit for an economy he inherited in year eight of a solid expansion. But the fact that Trump is claiming credit for trends that were largely ongoing before he took office is one of the few ways in which he’s not much different from former presidents.
Instead, we’d like to drill down on the evidence for this “crushing it” claim. Who’s actually getting ahead in the Trump economy?
To telegraph our punchline, while the tight labor market is highly welcomed, real hourly pay for most workers remains flat. In contrast, corporate profits and equity markets truly are crushing it, both on a pre- and especially, given the large business tax cuts, a post-tax basis. There’s also no evidence of an investment boom, suggesting the recent, above-trend growth in GDP is Keynes, not Laffer — meaning the deficit spending is providing a temporary boost but will not have lasting, positive impacts for long-term economic growth.
Starting with wages, since Trump took office, the real hourly wage for the 82 percent of the workforce that’s blue collar in factories and non-managers in services is up half-a-percent, an extra 11 cents per hour. In nominal terms—before accounting for inflation—the growth of mid-level pay has picked up a bit, as we’d expect with such low unemployment. But inflation, largely driven by higher energy costs, has also sped up, cancelling out any real gains.
If energy prices come down and unemployment continues to fall, real wage growth for mid-wage workers will improve. But the magnitude of their gains will likely be nothing close to the administration’s claim that the tax cut would add at least $4,000 to annual earnings within a few years of the legislation.
Remember, its promise was for $4,000 above whatever baseline gains in wages would be expected without the tax cut. In President Barack Obama’s second term, real annual wage growth for mid-wage workers was about 1 percent, so call that the baseline. Meeting the administration’s goal requires another 2 percent real growth on top of that, or 3 percent per year. They are not even in the ballpark to achieve that.
Sticking with the tax cut, its proponents main claim was that the big corporate cuts would generate more business investment, which would lead to faster productivity growth, which would position us for higher paying jobs. So far, every link in that chain is broken.
Business investment is growing, as we’d expect in an economy operating close to full capacity. But its growth rate is not faster now than at various points earlier in the expansion. There’s been a modest uptick in investment in structures (such as plants, offices, wells, mine shafts, warehouses) in the first half of 2018, but, as economist Dean Baker has shown, the growth in such investment was due to higher energy prices generating increased investment in mining for oil and natural gas. While mining investment has increased by 36.7 percent over the last year, it rose by 47.3 percent from the second quarter of 2009 to the second quarter of 2010, when the Obama administration was still enforcing environmental laws. In both cases ,the key factor was rising world oil prices.
It takes time to plan investments, so it’s too soon to conclude the tax cuts haven’t made a difference. But none of the surveys of companies’ investment plans show any plans to ratchet up capital spending, including the Commerce Department’s monthly data on orders for capital equipment, the National Federation of Independent Businesses’ survey on plans for capital expenditures, and investment surveys by regional Federal Reserve Banks.
What is clear is that firms are using their tax windfalls to boost share prices through buybacks, which, along with strong corporate profits, are fueling a historical bull market for stocks. But equity markets are decidedly not a source of trickle-down: 80 percent of the value of the stock market is held by the wealthiest 10 percent of households. The bottom half own no stock at all, including retirement plans.
In other words, it’s clear who’s crushing it and who isn’t. What is sad is that instead of borrowing $2 trillion to finance the regressive tax cut, Congress could have put more money in the pockets of working Americans and made investments for our economic future. Here is what we should have done—and should still do—to crush it for all Americans.
First, we should have expanded the Earned Income Tax Credit to compensate for decades of stagnant wage growth. The Brown-Khanna plan, calling for a $1.4 trillion EITC expansion, would have provided working families making up to $75,000 with up to $8,000 more in take home pay. As we often say, the best way to raise pay for ordinary Americans is to do so directly as opposed to pretending it will come through the largess of executives and shareholders.
Second, we should have put billions to expand the National Science Foundation’s Advanced Technological Education program, linking employers to technical schools to develop credentials that respond to the needs of our cutting-edge industries. This is one of the most successful programs in the federal government, and we could have made sure that every American, whether rural or urban, would have access to credentialing for the jobs of the future. This program could be the land grant of the 21st century.
Third, we should have provided hiring incentives for anchor companies to create jobs in places left behind such as Paintsville, Ky. or Flint, Michigan. If a company is willing to hire in places where people don’t have enough access to high-wage jobs, then they should get support for doing so.
Fourth, we should have invested in bringing high speed Internet to every corner of America. Providing fiber broadband to every corner of the United States is the modern equivalent of rural electrification. Ask the mayors of places like Huntington, W.Va., or Akron, Ohio what would help them grow business in their cities. They will undoubtedly ask for investments in broadband instead of tax cuts for the wealthy.
Larry Kudlow’s right: The Trump administration is crushing it for its donor base, which is in turn handsomely rewarding them. But it has done nothing for the forgotten Americans and nothing to make sure America is a winner in the 21st century. We don’t need more sugar highs for those already doing well. We need to give lasting pay raises to those struggling to pay the bills and then focus on the forward-looking investments that will finally reconnect GDP growth to broadly shared prosperity.