TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, July 11, 2018

Krugman: Trump, Tariffs, Tofu And Tax Cuts

New York Times op-ed:  Trump, Tariffs, Tofu and Tax Cuts, by Paul Krugman:

According to early indications, recent U.S. economic growth was full of beans.

No, seriously. More than half of America’s soybean exports typically go to China, but Chinese tariffs will shift much of that demand to Brazil, and countries that normally get their soybeans from Brazil have raced to replace them with U.S. beans. The perverse result is that the prospect of tariffs has temporarily led to a remarkably large surge in U.S. exports, which independent estimates suggest will add around 0.6 percentage points to the U.S. economy’s growth rate in the second quarter.

Unfortunately, we’ll give all that growth back and more in the months ahead. Thanks to the looming trade war, U.S. soybean prices have plummeted, and the farmers of Iowa are facing a rude awakening.

Why am I telling you this story? Partly as a reminder of the unintended consequences of Donald Trump’s trade war, which is going to hurt a lot of people, like Iowa farmers, who supported him in 2016. In fact, it looks as if the trade war is in general going to hurt Trump’s supporters more than his opponents. ...

Let me damn the 2017 tax cut with some faint praise: While the logic of the Trump trade war is completely muddled — never mind how it’s supposed to work, it’s not even clear what it’s supposed to achieve — the drafters of the tax bill did have a theory of the case. The story went like this: Lower taxes on corporations would lead to a huge surge of investment, which would raise productivity, which would eventually be passed on to workers in higher wages.

By the way, the idea that workers would see an immediate benefit was always obvious nonsense, and sure enough, they didn’t. In fact, adjusted for inflation, the hourly wages of ordinary workers were slightly lower in May than they were a year earlier.

Anyway, when I say a huge surge in investment, I mean huge. Last year I looked at estimates from the Tax Foundation, the only independent institution (well, supposedly independent, anyway) willing to endorse highly optimistic assessments of the tax cut. Those estimates, it turned out, implied a boost in business investment of around $600 billion a year, or 3 percent of G.D.P.

Nothing like that is happening, and leading indicators of business investment, like orders of capital goods, show no sign of an investment boom ahead. Corporations have gotten a really big tax cut: The tax take on corporate profits has fallen off a cliff since the tax cut was enacted. But they’re using the extra money for stock buybacks and higher dividends, not investment.

As a result, there’s no reason to believe that the U.S. economy’s potential growth — the rate of growth it can achieve on a sustained basis — will rise from the 2 percent or less expected by most analysts. The tax cut has been good for stockholders — about a third of whom are foreigners, by the way. Working Americans, not so much.

So how is the Trump economic policy doing? The tax cut is utterly failing to deliver on its advocates’ promises. It’s early days in the trade war, but the administration’s strategy seems designed to inflict maximum self-harm, and first reports suggest that trade conflict is leading to reduced, not increased, investment.

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