Paul Krugman: Tax cut turning out to be a 'nothing burger'

[DonViejo]

by Danielle Wiener-Bronner @dwbronner
May 2, 2018: 6:12 PM ET

Paul Krugman thinks the Republican tax law is failing to stimulate economic growth as promised.

"We should be seeing an investment boom or at least some indications of a planned increased investment," the Nobel Prize-winning economist told CNN correspondent Paula Newton on "Quest Means Business" on Wednesday. "We're just not seeing that."

In terms of business investment, Krugman said, it "looks like the tax cut is a nothing burger."

Republicans promised last year that lowering the corporate tax rate would encourage companies to invest more in new factories and equipment, which would create jobs and boost the economy. But so far, many companies have used the money to reward shareholders.

One recent example is Apple (AAPL), which announced Tuesday that it will spend $100 billion more on stock buybacks. The company spent $22.8 billion buying back its own stock in the first three months of this year.

more
http://money.cnn.com/2018/05/02/news/economy/paul-krugman-tax-cut-apple-buybacks/index.html

[unblock]

1. Not a nothing burger! The stimulus benefit is a nothing burger

But the cost is huge!

They picked the best time to be tackling the debt -- when the economy is doing fairly well -- to blow a bigger hole in the budget.

Not clear how we ever get our debt under control now.

[Adrahil]

2. Anyone with even a rudimentary understanding of economics is NOT surprised.

Companies, as always, respond to demand, not the availability of capital. If demand exists, companies will find investors or creditors willing to supply money. If it doesn't, excess cause is not spent for no reason. Businesses do not randomly raise salaries or provide bonuses as a general rule, and when they do, it represents a small portion of any windfall. The rest goes to supply what corporations exist for: profit for its owners.

Just to reiterate. That's WHY corporations exist.... to create profit for their owners. Not to employ people. Other things an get involved in the process, of course, like passion for a product or service. And some businesses do care about their employees, but int he end, it's about money. For the owners.

The GOP never seems to remember that most basic of economic lessons.

[zipplewrath]

6. Sorta

I agree that in the absence of "need" (or demand) there is nothing for companies to invest in. It is true that the cost of capital can influence a companies decision to expand or invest. So of you make capital easier (well cheaper) to obtain, it can influence investment decisions. The real problem right now is there is no real reason to invest. In the US, the middle class is shrinking and getting poorer in general.

Interesting story on Planet Money the other day, some economists tried to come up with ways to achieve a 3% GDP. Top three were to 1)significantly increase immigration over the next 10 years. More people = more customers.
2) Increasing worker productivity significantly (like by whole integer multiples). 3) Major infrastructure change that alters the economic landscape (past examples were things like railroads or rural electrification).

I don't think Trump and the GOP are interested in pursuing any of those.

[tableturner]

14. The GOP tax plan will make the cost of capital HIGHER, not lower.

You wrote:

"So of you make capital easier (well cheaper) to obtain, it can influence investment decisions."

The tax cut will rev up inflationary pressures, which will cause an increase in interest rates.

[zipplewrath]

16. Yes, in the future

Trust me, this tax cut was a bad idea about 7 ways from Sunday. The only benefit it potentially had was to make cheap capital available in the short term. VERY short term. And it caused little to no investment activity. (Actually, our company did re-invest a neglible portion, but the vast majority of the savings went to paying down debt.)

[Adrahil]

17. agree completely. NT

[tableturner]

15. I agree 100%!

Businesses invest when demand requires or favors more investment. If taxes are cut, but the demand is not there, there will be no or negligible extra business investments. If taxes are stagnant, or even if raised, if demand IS there, business investments will increase.

The entire thing is a scam, especially the one time minimal raises or bonuses, which were mere political PR moves to “justify’’ the tax cuts FOR BUSINESSES THAT ALREADY WERE FLUSH WITH MONEY.

[underpants]

3. The fiduciary responsibility of a CEO is stock price

if they don't do it the board finds another CEO.

Yes expanding the business could increase the stock value but more directly stock buybacks do that more immediately.

[zipplewrath]

7. Technically no

It is often asserted that a CEO has to pursue an increasing stock price, but it is not really true. Mostly he just has to answer to the stock holders. He is required to act in the best interest of the business, but he is fairly free to define what that is.

That doesn't stop most of them from declaring that they are required to pursue a higher stock price. In the old days, they tended to work to increase dividends. Of course, in the old days, a company buying it's own stock was illegal.

[JHB]

8. Also in the old days, stock options weren't as big a part of their compensation.

That certainly has an influence on the CEO's thinking on what qualifies as the best interests of the company.

[zipplewrath]

11. Yup

There have been suggestions over the years that it be outlawed. Or at the very least that they can't be exercised for some (long) period of time to ensure that his decisions affect the LONG TERM health of the company. Not sure how workable it really is.

[Freethinker65]

4. In terms of business investment, yep

In terms of redistributing wealth to the already wealthy and corporations, the tax cuts are working as planned. As the deficit explodes from the tax cuts, those safety nets that many "average" Americans rely on will be cut back or eliminated altogether.

The wealthy will get to dine on Wagyu/Kobe beef, the rest will be lucky to afford nothing burgers.

[Takket]

5. Trickle down

Didn’t work fir Reagan

Didn’t work for Bush

Doesn’t work for drumpf

Won’t work for the next rethug president when we all try to explain to the deplorable FOR THE FOURTH TIME!!!

[Freddie]

9. My Dad grew up in the Depression

Apparently Herbert Hoover was a big fan of "trickle down" too. See how well that worked.

I read somewhere that "trickle down" and tax cuts actually worked briefly under St. Ronnie, due to a one-time confluence of factors that will never happen again. The GOP has spent the past 35 years looking to recapture that moment. Please give it the fuck up already.

[Caliman73]

13. They didn't work for Reagan.

It wasn't the cuts that stimulated the economy, it was the increase in spending and allowing more speculation on Wall Street that created more revenue. The problem with Reagan (for the rest of us) was that when it was apparent that the cuts did not work, they raised taxes 11 times, but not on the wealthy. They began taxing Social Security benefits and other middle class revenue to make up for the lack of stimulative effect from giving the rich more money.

[Adrahil]

18. Also, the end of the oil embargo that damaged....

the economy through most of the 70's.

[Azathoth]

10. The tax cuts are working perfectly. They are doing exactly what the GOP intended

The donor class are getting richer, Obamacare marketplaces are taking a hit, and white working class males are now energized and screaming "tax cuts, suck it libs!" as we head into the midterms.

There wasn't a single Republican who, deep down, thought this bill would have positive economic impact.

[Caliman73]

12. Economics 101.

Demand creates economic activity. Companies can stimulate demand by making new and innovative products and many do. However, most for profit corporations are obligated to ensure profit for their shareholders and as such, have focused on short term, quarterly gains to keep stock prices up, rather than on sustainable economic activity through production.

If people are not buying products over the capacity at which you can effectively produce those products, there is NO reason to increase staff or production capacity beyond existing capacity. In fact, it looks better on the financials if you trim staff and remain at or around the same capacity because you have less liabilities, which is what workers are called in financial documents.

Tax cuts can have a stimulative effect. However, tax cuts targeted to middle income and working class people have a much more stimulative effect than those targeted at the top of the income scale and at corporations. Like I said, corporations will find the use for any new revenue that is beneficial for their shareholders in the short term. Stock buy back is a way to do that. Capital investment or workforce expansion is not, unless there is a true growth strategy, but even then, economic benefit is not realized for at least a while. That is why when companies buy each other out, the buyer's stock prices almost always fall for awhile. They have just taken on more liabilities in terms of staff and facilities, while the sales are still uncertain.

I am sure that everyone who pushed these tax cuts understands the fundamentals above. They also understand that more money to them in the short term is better and that they can seek to make money in other parts of the world, where the average citizen is stuck making money within their geographic area. They don't care about whether their plan tanks the economy in the long run because they have other revenue streams other than American consumers.