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Looking at an unfair attack on the Trump tax cuts
I realize that a busy day of “winning” or “owning” this or that group doesn’t leave much time for reflection. But sometimes one needs to hit the pause button. Take the social media hullabaloo about this piece from CBS Moneywatch: “Worker wages drop while companies spend billions to boost stocks.”
From the story:
Six months after the Tax Cut and Jobs Act became law, there’s still little evidence that the average job holder is feeling the benefit. Worker pay in the second quarter dropped nearly one percent below its first-quarter level, according to the PayScale Index, one measure of worker pay. When accounting for inflation, the drop is even steeper. Year-over-year, rising prices have eaten up still-modest pay gains for many workers, with the result that real wages fell 1.4 percent from the prior year, according to PayScale. The drop was broad, with 80 percent of industries and two-thirds of metro areas affected.
“Now, economic confidence has been good, we’re in a strong economy, GDP is growing, but the question has been, where’s the paycheck?” said Katie Bardaro, vice president of data analytics at PayScale.
The answer is, largely, in the companies’ coffers. Businesses are spending nearly $700 billion on repurchasing their own stock so far this year, according to research from TrimTabs. Corporations set a record in Q2, announcing $433 billion worth of buybacks — nearly doubling the previous record, which was set in Q1.
Look, the buybacks issue is beside the point. (See: “The Buyback Fallacy.”) And to focus on it misunderstands the economic mechanism by which the business tax cuts are supposed to eventuallyboost worker wages. From my AEI colleague Alan Viard:
According to economic theory, a corporate tax rate reduction raises wages by boosting investment and productivity. Here’s how it works. Reducing the tax rate on a company’s taxable income gives it an incentive to earn more taxable income by expanding their factories, equipment, and other business capital in the United States. It is in a company’s self-interest to expand their U.S. investments because the rate cut lets them keep more of the profits of those investments.
With more capital augmenting their output, American workers become more productive and therefore more valuable to employers. Companies throughout the economy then compete against each other to hire more workers, bidding up their wages. These dynamics — the expansion of the capital stock and the resulting increases in productivity and wages — are likely to play out over a number of years after the rate cut takes effect.
And all that will take time — which, by the way, is why Republicans were wrong to point to those one-time bonuses months ago as a sign the tax cuts were already working. Again Viard: “The one-time bonuses give workers extra money now, although it is too soon for the tax cut to have increased investment and raised productivity, but offer workers nothing in upcoming years, when the tax cut would have had time to push up productivity.”
Also, as the piece itself notes, the PayScale Index is one measure of worker pay, though not one I regularly — if at all — track. Another measure, much valued by economists, is the Employment Cost Index from the Bureau of Labor Statistics. It shows wages and salaries increased 2.9 percent for the 12-month period through the first quarter of this year. And inflation? Well, it’s up 1.8 percent over that period according to the Fed’s preferred measure — the price index for personal consumption expenditures — rather than PayScale’s preferred consumer price index. Both the PCE and CPI have risen in recent months, but the CPI has risen faster. It’s up 2.7 percent from a year ago through May vs. 2.3 percent for the PCE. I think it is reasonable to suggest real wages have been rising.
And why have wages not been rising even faster given low unemployment? Well — and I know this won’t be a satisfying explanation for those who want a monocausal explanation that neatly fits their politics — it’s complicated.
Published in General
See also:
Income Tax Revenues Are Up 9% This Year — Is Trump Tax Cut Paying For Itself?
I don’t agree. Of course those bonuses were not the result of the growth that comes from corporate tax cuts. But they were, in many cases, a response to the tax cuts. A vote of confidence, if you will.
I step out my door and the future looks rosey. I don’t know why everyone is whining. I might even buy a Keep America Great hat…
Much of the decline in the average wage has been overwrought. Creation of new jobs at the margin is likely to lower the average wage when those new jobs are at starter wages. Simple arithmetic.
To me, it is not at all unsurprising that average wages are falling in this employment expansion.
Classic dilemma. What to believe? The public’s description of how they think things are versus how people interpret someone’s data.
I remember a story from a few years ago where some prole accosted a Fed governor complaining government reports of low inflation didn’t match his lived experience. The Fed guy said something perfectly rational about how inflation was low because goods like IPads were better each year but still selling for the same price. Not surprisingly the prole responded by saying, in effect, “Dude, we don’t eat IPads.”
Its not just that we don’t know why this particular set of numbers doesn’t reflect what others are reporting, it’s whether or not these numbers have any general application to a $20 trillion dollar economy of 320 million people?
Just last week here was an article in Barrons titled ‘Wage Gains Threaten Investors.’ The author pointed out that worker wages as a % of nonfinancial corporation value-added had been running at a 73% average from 1970-2003, and fell to about 68% from 2011-2014. It is now up to about 70%.
I’ve been assuming all along that some degree of reversion to the mean would occur in this ratio…if one wants to project revenue growth due to economic improvement, it is very likely that higher worker wages as a result of better negotiating position will occur at the same time.
I’ve no patience with any of the language surrounding tax cuts, whether they’re fiscal stimulus, or reward the rich or increase bonuses, or stimulate growth somewhere of something, is irrelevant. There are only a couple of relevant questions. Does the tax raise revenue that the government needs to do essential government things? If so, then is the revenue raised in ways that distort the economy as little as possible? Since there are billions that do not meet these requirements and all taxes on income, savings, or work distort perniciously we should always cut taxes and raise marginal revenue by cutting spending at all levels of government.
Will’s Law: The American people are philosophically conservative and operationally liberal.
Companies have a duty to shareholders to take actions to boost the stock price. Those on the left–or authoring columns from that perspective such as at Marketwatch–have a very hard time understanding that. In this case (assuming the article is correct in its assumptions, which is also in question), the allocation of resources (savings from the tax cuts) is up to corporate leadership in service of the stock price.
Thank you for bringing about this discussion. No time to read it now, but will amke sure I get ‘er done by Monday morning.
One thing I know: as far as the Trump tax cuts, the Dem Leadership failed to utilize one of their own scholarly articles on basic economics – that when X amount of dollars in food stamps hit an area, the local economy sees a 2 percent gain. If it applies to food stamps, it applies to a middle class household getting that tax break.
Our small business got that tax break.-So it is happening. The fact that millions of other households can go out and buy something, and for once not put it on a credit card, is causing Big Banker’s hysteria.