Be patient. That's the message from economists defending the Republican tax cut package against charges it has already failed on one of its core ambitions to boost wages.
The right-leaning Tax Foundation argues in a new report that the slashed corporate tax rate at the heart of the law will take years to yield a pay bump for workers. That’s because rather than sharing in the immediate windfall that shareholders and executives are seeing from stock buybacks and dividend payments, employees will only see their benefit fully realized once businesses complete a lengthy cycle of investment.
Even then, the think tank calculates, workers will collect a 1.5 percent wage gain over the long run — or a bump of $1,247 for a household earning $83,143 a year, the average income in 2016. That is a fraction of the $4,000 to $9,000 boost that Trump administration economists touted when they were selling the tax cuts last fall.
The analysis won’t cheer congressional Republicans who hoped to run for reelection on the tax cut, their only major legislative achievement. It also shouldn’t come as a surprise: GOP candidates running in special elections have stopped highlighting the issue after finding it falls flat with voters, and polls show its popularity has sagged.
But the argument that chopping the corporate tax rate by 40 percent will provide some lift to workers in the long run at least rests on notionally sound economics. And it rebuts the claim some critics are lodging that the early experience of the law proves only the wealthiest will benefit.
The Tax Foundation plots a chain of events that ultimately produces wage gains:
In short, the thinking goes, the tax cut makes it more attractive for companies to invest in the sort of big expenses, such as upgraded equipment, that will squeeze more efficiency out of each worker. Standard economic theory says higher worker productivity should goose wages.
“We definitely think it’s going to take a few years for this to obviously manifest,” Nicole Kaeding, director of federal projects for the Tax Foundation, tells me, adding it’s too early to draw judgments about the tax law’s impact. “The short-term data is quite noisy.”
Other economists endorse the premise. “I don't think any reasonable person would expect it to have a short term effect on wages. So their argument that this should only happen over time isn't wrong,” says Eric Toder, co-director of the left-leaning Urban-Brookings Tax Policy Center. “Where I might differ with them is on magnitudes.”
Toder also points to factors he argues will step on the virtuous cycle that the Tax Foundation describes. Chiefly, the federal government needs to borrow heavily to fund the tax cut, and that deficit spending could drive up interest rates, discouraging the investment that’s key to boosting wages. Or, as Marc Goldwein, policy director for the Committee for a Responsible Federal Budget, put it in a tweet:
This is a helpful flow chart. Though it misses the parts where the lower rate also provides a windfall for returns on existing investments, and the part where it reduces revenue, expands deficits, and thus crowds out private investment the same time it is promoting it. https://t.co/narnvpYtBu— Marc Goldwein (@MarcGoldwein) August 14, 2018
Michael Linden, a fellow at the liberal Roosevelt Institute, lodged some more critiques:
1. No evidence that cost of capital was a real constraint on corporate investment before the latest massive tax cut.— Michael Linden (@MichaelSLinden) August 14, 2018
3. Lower marginal tax rates incentivizes executives and shareholders to grab a larger portion of corporate profits rather than invest them, so the money doesn't even make it to step 2.— Michael Linden (@MichaelSLinden) August 14, 2018
5. In heavily concentrated corporate sectors (which is a lot of them), giant multi-national corporations have tons of ways to turn a corporate tax cut into a windfall for shareholders instead of investing without fear of pressure from competitors.— Michael Linden (@MichaelSLinden) August 14, 2018
Advocates on either side of the debate have argued the early performance of the tax package is enough to render a verdict on its impact for workers. The New York Times editorial board over the weekend marshaled data from the first half of the year to lay out the case that the measure is little more than a giveaway to the rich. “The idea that the tax cuts were going to line workers’ pockets was always a mirage,” the paper wrote.
Defenders highlighted the bonuses and other benefits that firms handed out in the weeks after the law’s enactment as evidence that the gains for employees were immediate. And Republicans continue to point to wage gains they say supports their case. “This thing is working!” Sen. Rob Portman (R-Ohio) said in a video released Tuesday promoting the benefits of the tax package. “People are seeing higher wages, they’re seeing bonuses, they’re seeing higher 401(k)s, they’re seeing better health care.”
The reality is more muddled. Inflation has wiped out what few gains workers have seen in their paychecks over the last year, as my colleague Heather Long reported Friday. “The average U.S. ‘real wage,’ a federal measure of pay that takes inflation into account, fell to $10.76 an hour last month, 2 cents down from where it was a year ago,” she wrote. “The stagnation in pay defies U.S. growth, which has increased in the past year and topped 4 percent in the second quarter of 2018 — the highest rate since mid-2014.”
And while economists say they need more time to judge the tax cut’s effect on wages, they acknowledge a longer window will introduce other factors that complicate the picture. “The further out we go, the more evidence we have to judge whether we’re really higher than we might otherwise have been,” Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan, tells me. “But it gets harder to separate tax reform” from other economic forces — namely, at the moment, Trump’s trade offensive.
Indeed, Kaeding says the Tax Foundation estimates if the administration moves ahead with all of the tariffs it has threatened, it will eliminate the job gains from the tax cuts and then some. In the meantime, she questioned the wisdom of the tax cut’s champions cheerleading the bonuses earlier this year as proof of the law’s benefit to workers. “I’m not sure that was the best approach,” she said.
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— U.S.-Turkey feud escalates. The Washington Post's Kareem Fahim: “Turkey on Wednesday raised tariffs on a number products imported from the United States, including passenger cars, tobacco and spirits, retaliating for President Trump’s decision last week to double tariffs on Turkish metals. The tit-for-tat measures are part of a broader dispute between the two countries over the fate of an American citizen, Andrew Brunson, who is being prosecuted by Turkish authorities on terrorism-related charges. ... President Recep Tayyip Erdogan, who has accused the United States of bullying behavior and economic sabotage, vowed on Tuesday to boycott U.S.-made electronic goods, including Apple’s signature iPhone. A list published in Turkey’s official Gazette on Wednesday raised tariffs on tobacco products to 60 percent, spirits to 140 percent and passenger cars to 120 percent. Tariffs were also boosted for cosmetics, rice and coal. In 2017, the United States exported $9.7 billion dollars in goods to Turkey.”
Fears of a ripple effect. The Wall Street Journal's Mike Bird: “Sharp declines in the Turkish lira, Indian rupee and other currencies have raised the prospect of a self-reinforcing flight from riskier emerging markets. While the lira recovered slightly on Tuesday, and so did many peers, India’s currency tumbled past 70 per dollar, a historic low. Across the world, the Argentine peso fell another 2.1%, even after an emergency increase in interest rates to 45% from 40%. The unexpected price action has sparked questions over how contagious the selloff might be, even for far-flung markets. That has driven a widespread selloff as portfolio managers rush for safety, or are forced into selling less risky assets to offset losses. In recent days, world equity markets have traded down, and currencies from Mexico, South Africa and Indonesia sold off, despite minimal economic links to Ankara.”
Russian Foreign Minister Sergei Lavrov predicts dollar's “demise.” Reuters's Andrey Ostroukh, Tuvan Gumrukcu: “Russia backs using national currencies, not the U.S. dollar, in its trade with Turkey, Russian Foreign Minister Sergei Lavrov said on Tuesday, but he made no firm commitments that would immediately help Ankara to weather its currency crisis. Lavrov held talks in Ankara with Turkish Foreign Minister Mevlut Cavusoglu days after the Turkish lira plummeted to an all-time low versus the U.S. dollar, while the Russian rouble lost nearly 10 percent in just several days of August. ... ‘I am confident that the grave abuse of the role of the U.S. dollar as a global reserve currency will result over time in the weakening and demise of its role,’ Lavrov said, echoing statements made by President Vladimir Putin.”
Merkel praises the euro. Bloomberg News's Arne Delfs: “German Chancellor Angela Merkel pointed to the euro as a valuable defense against the type of currency speculation riling Turkey. ‘These days, I’ve been happy that every country doesn’t act on its own, but that we have a common European cause,’ Merkel said Tuesday in a town-hall meeting in the eastern city of Jena. ‘I am happy that we have a common currency, against which it is not so easy to speculate’ in contrast to what’s happening in Turkey, she said.”
— Crop export prices crater. The Hill's Sylvan Lane: “U.S. agricultural export prices fell by 5.3 percent in July as retaliatory tariffs on American crops kicked into effect, according to Labor Department data released Tuesday. Prices for U.S. crops sold abroad fell last month at the fastest rate since October 2011, led by a 14.1 percent decrease in soybean prices. Export prices for corn, nuts, wheat and fruits also fell in July, likely due to tariffs imposed by nations including China, Canada and Mexico, as well as the European Union. Export prices for all U.S. goods minus agriculture stayed even in July as falling prices for non-farm industrial supplies, materials and autos were offset by rising costs for nonagricultural foods.”
But import prices stay flat. Reuters's Lucia Mutikani: “U.S. import prices were unchanged in July as a surge in the cost of fuels was offset by weak prices elsewhere, suggesting that a strong dollar was keeping imported inflation in check. The Labor Department said on Tuesday the flat reading in import prices last month followed an upwardly revised 0.1 percent drop in June.”
— Worries grow in China. The New York Times's Keith Bradsher and Steven Lee Myers: “China’s leaders have sought to project confidence in the face of [Trump’s] tariffs and trade threats. But as it becomes clear that a protracted trade war with the United States may be unavoidable, there are growing signs of unease inside the Communist political establishment. In recent days, officials from the Commerce Ministry, the police and other agencies have summoned exporters to ask about plans to lay off workers or shift supply chains to other countries. With stocks slumping into bear territory and the currency dropping 9 percent against the dollar since mid-April, censors have been deleting a torrent of criticism online, some of it directed at President Xi Jinping’s leadership. State news outlets, by contrast, have sought to promote the official line, with the authorities restricting the use of the phrase ‘trade war.’ ”
China shuns U.S. oil. Reuters: "Chinese oil importers are shying away from buying U.S. crude as they fear Beijing’s decision to exclude the commodity from its tariff list in a trade dispute between the world’s biggest economies may only be temporary. Not a single tanker has loaded crude oil from the United States bound for China since the start of August, Thomson Reuters Eikon ship tracking data showed, compared with about 300,000 barrels per day in June and July."
And challenges solar panel tariffs at WTO. AP's Joe McDonald: "China says it is challenging a U.S. tariff hike on solar panels before the World Trade Organization, adding to its sprawling conflicts with [Trump] over trade and technology. The 30 percent tariffs announced in January improperly help U.S. producers in violation of WTO rules, the Commerce Ministry said. It said a formal complaint was filed Tuesday with the WTO in Geneva."
— Canada considers protecting its steel. Reuters: “Canada said on Tuesday it will consider a safeguard action on seven steel products to protect domestic producers from imports since the United States imposed tariffs against its major trade partner in March. Finance Minister Bill Morneau said a 15-day consultation period will be used to look at the harm or threat of harm to seven steel categories, including steel plate, rebar, energy tubular product, hot rolled sheet, pre-painted steel, stainless steel wire and wire rod. ‘Our government believes the tariffs levied by the United States represent an exceptional circumstance, and that’s why provisional safeguards are being considered,’ Morneau told a news conference at steelmaker ArcelorMittal’s Dofasco plant in Hamilton, Ontario.”
- “Manafort defense rests without calling witnesses in tax- and bank-fraud trial.” The Post's Rachel Weiner, Matt Zapotosky, Lynh Bui and Devlin Barrett.
- “Trump campaign files arbitration action against Omarosa Manigault Newman.” The Post's John Wagner.
— Huckabee Sanders apologizes over false claim. The Post's Jeff Stein: “White House press secretary Sarah Huckabee Sanders apologized late Tuesday for wrongly stating that [Trump] has created three times as many jobs for black workers as President Barack Obama did. At a news conference Tuesday, Sanders said Obama created 195,000 jobs for African Americans during his eight years in office. ‘When President Obama left after eight years in office — eight years in office — he had only created 195,000 jobs for African Americans,’ Sanders told reporters. ‘President Trump in his first year and a half has already tripled what President Obama did in eight years.’ Sanders’s statement was false. According to official statistics, black employment in the United States increased by nearly 3 million jobs from January 2009 through January 2017. From January 2017 through July of this year, black employment has increased by about 700,000 jobs.”
— New report suggests another Ross breach. Forbes's Dan Alexander: "On May 18, 2017, Secretary of Commerce Wilbur Ross met with Bill Furman, the CEO of railcar manufacturer Greenbrier Companies, according to Ross’ calendar. At the time, Ross had a financial stake in Greenbrier and, therefore, a potential conflict of interest. When asked about the meeting, a spokesperson for Ross brushed aside any concerns... [A spokesman said]: 'Secretary Ross and [his chief of staff] Wendy Teramoto have not taken any action with a direct and predictable effect on their financial holdings.'
"But that is not true, according to a 115-page report from the Campaign Legal Center, a government watchdog organization. Instead, the report alleges, Ross took several actions with direct and predictable effects on his holdings, and he may have broken the law by doing so. A new document unearthed in the report shows that Greenbrier Companies did in fact come before the commerce department during Ross’ tenure as secretary."
— Pro investors turn bullish. CNBC's Jeff Cox: “Professional investors have suddenly turned optimistic about U.S. stocks again, with bullish sentiment fed by an especially buoyant earnings season that is offsetting other concerns. Domestic equities are holding the biggest portfolio weight since January 2015, according to the August Bank of America Merrill Lynch Fund Managers Survey, a look at where 243 pros who manage $735 billion are putting their money. The shift in position away from global equities comes even though U.S. stock returns in 2018 have been relatively meager — the Dow Jones industrial average is up just 1.9 percent year to date though the broader S&P 500 has gained 5.6 percent.”
And bond investors are less bearish. Reuters: “Bond investors were less bearish on longer-dated U.S. government debt on Monday than the same day last week as Turkey’s economic problems sent the lira to an all-time low, spurring safe-haven demand for Treasurys, a J.P. Morgan survey showed on Tuesday. The share of investors who said on Monday they were short, or holding fewer longer-dated U.S. government debt than their portfolio benchmarks, fell to 30 percent from 34 percent the week before, according to the bank’s latest Treasury client survey.”
How long will it last? WSJ's Riva Gold: "U.S. foreign policy has driven sharp swings in European and Asian markets this summer, drawing investors into the safety of the U.S. It is also raising questions about how long U.S. markets can continue to outpace the rest of the world. The White House’s recent actions on trade and international sanctions have amplified steep declines across markets in Turkey, Russia and China at a time emerging economies were already grappling with a stronger dollar and decelerating global growth... Fund investors have pushed their allocations of U.S. stocks and bonds near postelection highs, according to data from the Institute of International Finance. The U.S. has also regained its crown as the most favored region for stocks for the first time in five years."
It will last a while, says Bespoke Investment Group. “As long as the relative performance of the U.S. market versus global stocks has strong momentum, outperformance typically continues,” Bespoke analysts wrote in a Monday note, per Bloomberg. “Simply buying international stocks because they’ve lagged U.S. stocks is a poor strategy.”
— Consumers keep borrowing. WSJ's Josh Zumbrun: "Gradually rising interest rates have yet to dent Americans’ appetite for borrowing, with the total stock of new debt climbing to $13.3 trillion in the second quarter, continuing a gradual rise in household borrowing over the past four years. Debts rose by $82 billion in the second quarter, driven by rising mortgage, credit-card and auto-loan balances, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. Total debt is now higher than before the financial crisis, when widespread defaults, especially on mortgages, contributed to the longest and deepest recession since the Great Depression. After paying down debt through 2013, in aggregate, consumers gradually began to borrow again, and household debt is now nearly 20% higher than five years ago.”
— Tesla appoints special committee. The Post's Hamza Shaban: “Tesla announced on Tuesday that the board of directors has created a three-person special committee to consider taking the all-electric car company private. Chief executive Elon Musk has not yet presented a formal proposal to go private, the company said, and the special committee has not come to a decision on whether such a transaction is feasible or if it should proceed. The company appears to be playing catch-up with Musk’s assertions about the momentum behind a deal, highlighting the speed at which the proposed transaction is unfolding. Musk has spoken with confidence about the deal’s certainty, announcing last week that investor support was ‘confirmed’ and funding was ‘secured.’ But Tesla’s announcement appears to contradict Musk’s Aug. 7 tweet in which he said the ‘only reason why’ the deal is not certain ‘is that it’s contingent on a shareholder vote.’”
Investors should brace for an extended Musk-SEC fight. Bloomberg: "As the bizarre Tesla Inc. go-private saga enters its ninth day, many investors are wondering when regulators will decide whether Elon Musk broke the rules by dripping out details so haphazardly. History suggests it might take a while... The SEC’s average inquiry takes about two years. That kind of time frame would understandably frustrate traders who are reading Musk’s tweets and trying to assess in real-time whether he’s actually lined up bankers and lawyers to advise on a deal. But even though Wall Street might want a quick ruling on whether he’s violated securities laws, Washington regulators may disappoint."
— Ford CEO baffles execs. WSJ's Christina Rogers: "Senior executives at Ford Motor Co. have come to expect emails from their new boss, Chief Executive Jim Hackett, that include links to TED Talks and articles from Science Daily. They often come around 11 p.m., when he catches up on his reading. The former chief of an office-furniture maker, Mr. Hackett frequently references the work of theoretical physicist Geoffrey West and uses terms such as 'think phase' (a concept from his design background) and 'clock speed' (a phrase from computing)... In a company long ruled by a rigid operational structure, Mr. Hackett’s cerebral, free-flowing management style has won some fans and mystified others. For investors, the question remains: What exactly is he thinking?... A number of top Ford executives have left within the past year, and many longtime employees and managers have struggled to adjust to his approach, say current and former workers. Some executives have turned to Mr. Hackett’s 28-year-old chief of staff for translations."
— Einhorn scales back holdings. Reuters's Svea Herbst-Bayliss: “Billionaire investor David Einhorn, whose Greenlight Capital is posting some of the hedge fund industry’s worst returns, cut back several long-term holdings, including Apple Inc, Voya Financial Inc and Consol Energy Inc, a filing made on Tuesday shows. Einhorn sliced his bet on Apple, which had become a smaller holding for him in the five years since he called on the iPhone maker to issue perpetual preferred stock, by 77 percent to 142,100 shares. Greenlight cut the bet before Apple earlier this month became the first publicly traded U.S. company to be worth more than $1 trillion. In the past month, Apple shares have climbed 9 percent.”
— T-Paw loses comeback bid. The Post's Michael Scherer: "Minnesota Republicans decisively rejected the comeback bid of former governor Tim Pawlenty, a onetime kingmaker in state politics who proved unable to overcome his 2016 description of Donald Trump as “unhinged and unfit” for once boasting of grabbing women. The surprise result was just the latest evidence of the president’s rising control over the Republican Party electorate and the waning power of veteran lawmakers, coming just a week after Trump’s endorsement helped Kansas Secretary of State Kris Kobach topple incumbent Gov. Jeff Colyer, who conceded the race Tuesday. After conceding the race at a campaign rally Tuesday and throwing his support behind Johnson, Pawlenty spoke briefly with reporters. 'The Republican Party has shifted,' he said, according to a reporter for the Minneapolis Star Tribune, who was in attendance. 'It is the era of Trump, and I’m just not a Trump-like politician.'”
Pawlenty had been earning more than $2.7 million as head of the Financial Services Roundtable, which has since merged with The Clearing House Association to form the Bank Policy Institute. Via CNN's Eric Bradner:
— Senate to start on minibus. The Hill's Niv Ellis: "The Senate on Thursday is set to begin debate on a bill combining the two largest appropriations measures, testing a bipartisan agreement by leaders of both parties to keep the process free of controversial policy riders. The bill will include appropriations for both Defense and for Labor, Health and Human Services and Education. The combined bills amount to roughly 60 percent of the entire 2019 appropriations, which is expected to total over $1.3 trillion. It will be the first time the Senate has even taken up the Labor bill on the floor since 2007."
— From The Post's Tom Toles:
Rescuers work to free bridge collapse victims in Italy:
Defense officials discuss identifying Korean War POW remains:
Colorado parents fear their adopted daughter could be deported: