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119 Politics Has Trumped Over Economics

The US stock market in 2017 delivered extraordinary gains, which continue to hold through the first half of 2018.  At the same time the US debt attained unprecedented high levels while unemployment levels were kept at historically low levels. These indicators keep supporting high investor confidence. The apparent prosperity, since Donald Trump assumed presidency appears to be receiving widespread support in high approval ratings of the President as well as persistent support from the Congress.

Do the economic indicators support the current euphoria about the promising prospects of the US economy? Is Trump making America great again?

A rising stock market is used to support investor optimism. That is evident from the following chart:

What keeps driving a +$12 Trillion premium in the market averages above the  long term trends of the GNP which represents the underlying earning capacity of the economy?

Market prices appear to be responding to gains in corporate profits which are then translated into rising stock prices.  Though the US budget is running at a huge deficit seven months after Trump's inauguration these deficits have been converted into rising debt instead of improving US competitiveness according to the Department of Treasury: 
(See www.treasurydirect.gov/NP/debt/current)




Immediately after the inauguration Trump raised private US debt by over $750 Billion to fund a negative funds balance in the Treasury. At the same time Trump secured Congressional passage of lower corporate taxes. That happened during a rise in government spending and while there was a rising deficit which was immediately written off as more debt. The impact of the tax reductions can be seen best in the following table:

The $7.5 Trillion tax reduction, even though it is stretched over eight years, was then reflected as anticipated increases in corporate earnings. The valuation of shares is always reflected as a discount in anticipated profitability.

In effect, the 3/4 Trillion the rise in debt plus a large discounting of the gains from tax reductions has resulted in a +$2 Trillion "gift" to shareholders who then translated these gains into increased dividends, into executive bonuses and into capital now available for mergers and acquisitions.

Why was the corporate tax - the relatively smallest share from the Federal tax income - used to generate savings in the budget when the Treasury was already running large deficits?  The rationale was certainly not economic, but political as illustrated in the following:


Corporate taxes account for only 9% of tax revenue, but politically offer an attractive approach to the tax cuts promised during the election campaign. Corporate tax cutting is relatively simple and can be justified by claims that new capital would become available for making worthwhile investments, such as in the infrastructure, in innovation and in upgrading the US production capacity. Congressional votes that would favor corporate tax cutting could be obtained, whereas cuts in payroll taxes or individual taxes would not pass.

Payroll taxes cannot be cut because more than half of the voters depend on social security and medicare. Cutting individual income taxes would require selective reductions of taxes of the wealthy families which would be difficult because such taxation would have to deal with a complexity in the calculation of any liability.  Consequently, politics dictated cutting corporate taxes even though economically that made no sense because corporate capital was the only source available to fund the modernization of an increasingly obsolete manufacturing and infrastructure plant.  

The value of this "gift" from Trump is difficult to measure. The benefits of the changes in the budget and in the taxation police would be then concentrated in favor of the top 5% of US families. Meanwhile, the inflation adjusted median household income did not change: 



Summary:

The first five months (Jan 20 through July 3) of the Trump administration can be characterized by a shift from sound economics (e.g.  placing budget deficits into debt) and from investing in productive capacity (e.g. using savings from corporate taxes to improve competitiveness).

So far, Trump's first months in steering the US economy have upheld the President's political position ahead of actions that would benefit the USA.  It will be the purpose of these blogs to see how the interests of economics will prevail.

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LABELS: Stock market gains in 2017; Increase in US debt; Stock market exceeds GNP
Rising debt in 2017; Increased debt and tax reduction; Corporate tax percent of total
2017 tax cuts; Capital for modernization; Inflation adjusted median income
Politics replaces economics





  




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