Policy Defies Economy

August 8, 2018

The U.S. economic expansion is the second longest since WWII, rivaled only by the 1990s. With the U.S. economy doing so well, one should question President Trump’s economic policy, especially the tax cuts and the tariffs. Experts and economists say that the administration is using tariffs as leverage to renegotiate international trade agreements without mentioning domestic economic policymaking. When the economy is recessionary, confidence is instilled by increasing spending, cutting taxes, or both. However, research recommends against using the same policy during expansionary times, when raising taxes, keeping spending in check or both are preferred options. To constantly decrease taxes is to divert future money away from services and projects worth federal attention. Tax cuts are only as effective as the ability to create less future debt today and into the future. From years of spending but not taxing, the federal government and thus many state governments will have accumulated budget and structural deficits. One thing will be left to do: raise taxes — or in today’s political parlance allow for “tax cuts to expire”. This tax cut policy was not necessary. Remember that economic times were devastating 10 years ago, and lots of spending was arguably necessary and occurred. However, our federal budget deficits and long-term debt are not yet under control. During the Obama years our federal budget deficits shrank after 2010. Therefore, our long-term debt was growing at a slower rate. So, a tax break instead of an increase or no change in the rate of taxation during expansionary times means someone else will pay. We have seen this before. Enter the tariffs. It appears that the sum of all current proposed tariffs would blunt the impact of higher domestic taxes in the future. If this is a motive of the administration’s economic policy, then consider it a potentially dangerous gamble with our nation’s short-term and long-term economic health. The tariffs would help to make U.S. companies more competitive, thus helping to create more U.S. jobs. But what about that part of U.S. productivity which comes from trading? Consumers like paying for cheaper imports. What about, that if some U.S. workers end up getting paid due to tariffs, then the cost of all goods and services will increase? A strong argument can be made that inflation will become high. The Trump administration is betting that large and some medium-sized companies, who had money overseas, will create many good-paying jobs here. Are we ready to pay higher prices for goods and services made mostly in the U.S. when we know that there is a less costly alternative? Will new jobs created with tariff support lead to wage and salary increases for all workers? Will small businesses generate higher earnings to create sustainable jobs beyond just present employment? After all, small businesses employ more than large businesses. For this economic policy to succeed, medium to large business owners must be benevolent enough to want to pass on tax savings in the form of higher wages and salaries, not just one-time bonuses. But publicly traded U.S. companies completed the largest-ever stock repurchase program for one quarter, and $1 trillion in tax savings was passed on to shareholders as of March 2018. A vote in support of how things are going today, both in November and 2020, will send the message that this high risk economic philosophy is fine. Or, a vote against this level of policy risk would support elected officials who value economic stability and long-term growth. The only things that can create and sustain incredible rates of economic growth are technological change and research and development. Everything else is just maintenance.

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