As Wall Street parties and the Dow Jones hits record highs, economists and others wonder what the lasting effects of the GOP tax cuts will really be.
Will raising taxes and cutting programs for poor and middle-class people — who tend to spend most of every dollar they receive — while giving money to wealthy people — who tend to save most of any additional income — increase overall spending in the economy? Or will it lead to increased saving in the economy?
{mosads}In short, will this “job boosting” tax cut actually turn out to be a “job killer,” as its immediate spending cuts and the pessimism that accompanies economic contraction begin to percolate through the economy?
The Smoot-Hawley tariffs in 1930 come to mind. Billed as a measure to protect jobs and the economy, Smoot-Hawley went down in history as one of the factors in tipping the world economy into the Great Depression.
The GOP’s economists argue that the additional money saved by rich people will eventually find its way into the stock market and into other job-creating activities and trickle down in the form of expanded job opportunities, higher wages and other broad economic benefits.
But one can just as easily argue that all that additional savings will only increase liquidity in the financial markets, keeping interest rates low or driving them lower. Since companies can already borrow money at historically low rates to do all the expanding they want, why will additional liquidity make them want to do more?
Meanwhile, if many poor and middle-class people are actually paying higher effective taxes than ever — because of the loss of itemized deductions and cutback in other government services — won’t that lead to an immediate, real drop in spending that will drag down the economy before the projected benefits have a chance to begin trickling down?
That’s certainly the way most Americans see it, which explains why the tax cut itself and the GOP congressional contingent are so low in popularity.
The second big question is why the heck would the Republican party want to do something that everyone (including itself) can see will be a political disaster in the years to come as its effects on ordinary citizens and taxpayers become increasingly obvious?
Suppose Republican leaders (and especially their donors) already know that the party is doomed in the next couple election cycles. They know that Trump’s victory was a “perfect storm” of backlash to the Obama presidency combined with a populist movement of voters who felt the global economy had passed them by.
The first group is as delighted with Trump the president as they were with Trump the candidate. But the second group, observing that nothing is being done to help them, that we seem to be rudderless in a world of national security threats and that waking up with Trump as president isn’t as exciting as it once seemed, is likely to take out their buyers’ remorse on the entire GOP (as we saw in recent elections in Virginia and New Jersey.)
Facing this reality, any smart multi-millionaire Republican donor will say:
“I have a once-in-a-lifetime opportunity to get all the goodies my family and I have ever wished for — lower taxes, estate tax repeal and whittling away social programs. Let’s go for it. Our party is going to lose its majority anyway.”
It makes perfect sense for a rich donor, but why would the GOP establishment go for it? This will make their job of getting re-elected and keeping their majority even harder.
The answer is that they have no choice. If the donors walk and take their checkbooks with them, the GOP politicians have no chance at all. So, they have no option except to take the money, run the best race they can and put the best face they can on the horribly unpopular tax deal they have orchestrated.
They know they are making every one of their members’ races more difficult and making each one of them more vulnerable to defeat, but the alternative is no donor money for any of them. In which case even more of them would be defeated.
Steven Bavaria is a former executive with the Bank of Boston and Standard & Poor’s. He is the author of, “Too Greedy for Adam Smith: CEO Pay and the Demise of Capitalism” (CreateSpace Publishing).