Thursday, December 1, 2016

Financial Promises

It's been a tremendously busy week at work and I haven't touched on the many, many articles that are worth touching on.  It's relatively calm right now so I'm going to focus on this nice little rundown from the NYT on the incoming Trump administration's tax plans and economic growth, and their public statements concerning same.  Let's cruise through it:

In [the Trump campaign's tax proposal] plan, middle-class families would see a 0.8 percent increase in their after-tax income, according to an analysis by the Tax Foundation, while the top 1 percent of taxpayers would see a 10.2 to 16 percent gain. Another group, the Tax Policy Center, calculated middle-class families would get a 1.8 percent boost in after-tax income, while the top 0.1 percent of earners would see a 14 percent gain and a tax cut worth an average of $1.1 million.

1.8 boost to a household isn't nothing.  My wife is an optometrist and I'm a legal secretary in Midtown Manhattan.  Our household income by New York standards is fine and by national standards places us in the upper class.  For our household, a 1.8 percent tax cut would net us around $3,500 extra per year, which is absolutely nothing to sneeze at.  Median income of the average American household is around $56,000 annually, and a 1.8 percent tax cut for that household amounts to around $1,000.  So such a tax cut is not nothing, although either of those sums could be gone pretty quick if you're paying medical fees whose cost increase outpaces your salary, for instance.

There's also, of course, the moral and economic questions raised by the much larger tax cuts being awarded the top 1 percent of taxpayers.  What will they do with that newly-freed wealth?  If they create jobs with it, great.  If they use it on financial speculation, in an era when it appears that the people who largely were responsible for the last financial crisis are going to be writing the rule book, then, perhaps: not great.

Even many reform-minded conservatives wanted Trump to pick a different Treasury Secretary, someone like House Financial Services Chairman Jeb Hensarling or former BB&T CEO John Allison for the job. Both have strong views on increasing bank capital requirements and fighting so-called “Too Big to Fail” institutions. It’s much less clear that [incoming Treasury Secretary Steven Mnuchin] will do anything to make life difficult for large banks.

It appears that the Trump administration may be relying a good deal, as Republicans are wont to do, on "dynamic scoring".  Acquaint yourself with "dynamic scoring":

Mr. Mnuchin and Mr. Ross suggested that the plans would not widen the budget deficit thanks to “dynamic scoring,” or forecasts that assume tax cuts will release much faster economic growth and therefore pay for themselves.

This is similar in some ways to the old Laffer curve, an idea which, apparently, will never die.  It originated during the Reagan era.  A lot of claims are made about the Reagan era that happen to be false.  Reagan era GDP growth looks fantastic, real China-like numbers, until you adjust for inflation:

Real GDP increased at an annualized rate of 3.4% from Q1 1981 to Q1 1989, under President Reagan, and at a 3.4% rate under President Carter from Q1 1977 to Q1 1981.

Paul Krugman has a little more on "dynamic scoring" here.  Dean Baker discusses it here.  If it sounds like a spurious turn of phrase, it might in fact be a spurious concept.

Trump may face demographic challenges in meeting his promise of 3-4 percent economic growth annually:

The speedy growth of the last century was helped along by the enormous baby boom generation entering the work force, and more women joining the ranks of the working. Now, the baby boom is retiring and the proportion of women working is stable.

For those reasons, the Congressional Budget Office projects that the United States labor force will grow by 0.6 percent a year over the next decade. By contrast, from 1949 to 2000 it rose by an average of 1.7 percent a year.

Another complication to the Trump team’s predictions? Mr. Trump has promised tight controls on immigration, the one lever that could increase work force growth.

Now there's always the "underemployed," who are not accounted for in the official employment rate.  However, underemployment has come down from its 2010 peak, to a rate of 9.5 percent of he labor force.  So how much slack does Trump really have to achieve 3-4 percent economic growth?  Demographics are not necessarily destiny, but if Trump is relying on regressive tax cuts generally to get the job done; well, his administration will be a big test of that sort of taxation, won't it?  

As made clear by this article, tax cuts skewed toward the rich worked - in terms of raising the median income - for Reagan, as did reversing those cuts, in part, for Bill Clinton.  In fact, it worked even better for Clinton than Reagan.  Big tax cuts did not work for George W. Bush and though Obama's legacy is mixed, he did let certain tax cuts expire, and that didn't seem to work either (again, with regard to median income growth.  Employment growth: Clinton #1, Reagan #2, Obama #3, and a huge drop off to George W. Bush in last place.).

We'll see how it goes.

A lot more to come tomorrow!

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