US Economy

Support for Open Trade Remains Robust in Recent Polling. Trump’s Tariffs Still Remarkably Unpopular.

This is the fifth article in a series produced by NDN challenging Trump’s tariffs.

Given the conventional wisdom about how Trump won the Presidency in 2016, one would expect to find broad support for his protectionist trade policies and his tariffs in particular. A review of recent polling, however, suggests the American people are far more supportive of open trade policies and less supportive of tariffs than many would have expected. In fact, by some measures, Trump’s tariffs are among the least popular policy initiatives of his Presidency.

Using the Polling Report site as reference, let’s look at some data. The August NBC/WSJ poll asked “In general, do you think that free trade between the United States and foreign countries has helped the United States, has hurt the United States, or has not made much of a difference either way?” 50% said helped, only 23% said hurt. A July version of that poll asked about Trump’s tariffs — 25% said they would help the economy, 49% said hurt. An April Pew poll found similar numbers with 56% saying free trade was a good thing for the US and only 30% saying it was bad. A June Monmouth poll found 52% believing free trade agreements between the US and other countries were good for the US, only 14% disagreed. A March edition of the NBC/WSJ poll asked the question a slightly different way: “What do you think foreign trade means for America? Do you see foreign trade more as an opportunity for economic growth through increased U.S. exports, or a threat to the economy from foreign imports?” 66% said opportunity for growth, only 20% said threat.

Summer polls from Pew and Quinnipiac found slightly better but still net negative spreads for Trump on tariffs and free trade (39/50, 40/49). The new ABC/Washington Post poll out this week found a similar 41/50 split on Trump’s tariffs. In the Quinnipiac poll, however, a whopping 73% said a trade war would be bad for the US economy. Only 17% said good. A June Suffolk poll found only 35% support for the NAFTA renegotiation, and a June CBS poll found support for tariffs on Canada to be only 27% (62% disapprove). In a June CNN poll, 63% said it was better for the US to maintain relations with our close allies rather than impose tariffs. Only 25% said tariffs were better.

In polls which broke out the numbers by party, an overwhelming majority of Democrats come out in favor of free trade and against tariffs. Two examples. In the spring Pew poll, 67% of Democrats said free trade was a good thing, just 19% said bad. 63% opposed the tariffs, just 22% supported. In the new ABC/Washington Post poll, which found support of Trump’s tariffs to be at 41% support/50% opposed, Democrats opposed them 75% to 18%.

Recent state polls have similar findings. A series of Marist/NBC polls found support of the tariffs to be 23/42 in IL, 29/41 in MO, 28/46 in PA and 33/40 in Texas (links here and here). A recent Suffolk University poll (pp 22–23) of Wisconsin found support for the tariffs on China to be 39/47, and on “EU, Canada and Mexico” 31/57. That the popularity of a major Trump policy initiative is under 33% in states like Missouri, Pennsylvania and Texas is pretty remarkable.

While trade is obviously a complicated and tough issue, the idea that there is broad support in the US for protectionist policies, and tariffs in particular, just can’t be supported given this data. Trump has failed to persuade the American people to get behind his trade wars, and in fact, the Pew data suggests more people today are supporting the basic notion that free trade is good than a year ago. Early in his Presidency, Trump’s trade policies have generated more of a backlash than a groundswell of support.

As we’ve written elsewhere, Democrats would be smart to study this data and do some polling and market research of their own. Putting it all together suggests that an extended campaign by Democrats calling on Trump to rescind his tariffs — like the one NDN has been calling for — would not only be smart policy and good for the US economy, but smart politics too.

Update, 9/6/18 — new poll from Chicago Council found even higher levels of support for trade and NAFTA. A summary of its key findings:

  • The highest percentages ever registered in this survey (since 2004) say that trade is good for the US economy (82%), good for consumers like you (85%), and good for creating jobs in the U.S. (67%).
  • Support for NAFTA is also at its highest level yet (63%), and a majority (61%) supports US participation in the revised Pacific trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
  • Democrats express the most favorable views of these two trade agreements, while majorities of Independents now also support them. Although Republicans as a group tend to oppose them, a majority of non-Trump Republicans — those with only a somewhat favorable or an unfavorable view of the president — support them, demonstrating splits within the party faithful.
  • Seven in ten are concerned that a trade war with China will hurt their local economy; while just over half are concerned about the impact of a trade war with Mexico. In both cases, trade wars are a greater concern for Democrats.

Whatever Happens With Mexico, Trump’s Trade Policies Are Harmful And Need To Be More Aggressively Challenged

(This is the fourth essay in a series challenging Trump’s tariffs)

Trump’s trade policy has been centered on a simple trade-off for American workers – experience some hardship in the short-term in return for expanded opportunity in the long-term. So far, the President has kept his promise on the first of those items, as American farmers and manufacturers have been hit hard by retaliatory tariffs, increasingly costly production inputs, and weaker investment into the country. The promised long-term benefits, however, appear as elusive as ever. The three major trade negotiations with the EU, Canada/Mexico, and China have delivered little in the way of solid agreements, and actually serve as a retreat from the more ambitious trade liberalization of the TPP and TTIP talks. Furthermore, American workers are likely to permanently lose many of their foreign consumer bases if the trade policy remains in place, regardless of the results of the trade negotiations. While American workers are struggling today, they are likely to become internationally uncompetitive in the future if Congress doesn’t act to reject Trump’s trade policy.

Trade negotiations have produced little of consequence

Trump’s trade negotiations on three fronts have led to minimal, if any, steps towards increased trade liberalization and US access to foreign export markets. Of the three trade deals, the Trump administration has made the most “progress” in the NAFTA re-negotiations with Mexico and Canada, but even here a binding deal has not been made and the future of the preliminary agreement between Mexico and the US announced earlier this week seems in doubt. This is because Canada, despite the statements from the President, needs to ratify any deal for it to have a chance of success. First, Mexico has stated that they want Canadian involvement for any new deal to go through, and indeed, the optics of the current Mexican president (whose PRI party undoubtedly wants to remain politically competitive after he leaves office) bowing to Trump’s bullying while Canada resists would be politically devastating in a country heavily opposed to Trump. Second, a bilateral deal excluding Canada would almost certainly fail in Congress, as it would represent a significant imposition of tariffs on America’s closest ally and trade partner and would destroy millions of American jobs. As a result, the fact that Canada has not been part of the negotiations since July 1st, and would need to ratify all changes by this Friday in order to pass a deal before the December 1st inauguration of Mexico’s new president, puts a re-negotiation in doubt. Furthermore, significant differences on revisions to the trade deal still exist between Canada and the US, such as an American demand to loosen rules for enacting anti-dumping subsidies and strengthened intellectual property protections. This, combined with enormous Canadian public opposition to Trump, makes a quick concession by Canada this week unlikely, putting the entire negotiations at risk.

Even if a deal were to pass in the spirit of the Mexico-US preliminary deal, however, the long-term gains would be less than those of the TPP (which included Canada, Mexico, and the US) that Trump dismantled when he entered office. In terms of tariff liberalization, the TPP eliminated tariffs on 18,000 products worth $90 billion in US exports, whereas the Mexico-US deal does little to change tariff policy. Furthermore, the environmental, labor, and IP protections of the TPP all are stronger than those in this NAFTA deal. Indeed, the major change in the new deal from the original NAFTA agreement is a revision to the Rules of Origin provision, which under the new deal would require imported goods to have a greater amount of North American-produced content. Importantly, this provision isn’t liberalization at all, but instead acts to increase the cost of imported goods in an identical way as a tariff would. Furthermore, this provision would impose significant costs onto foreign producers, who would likely exit the NAFTA import rules and simply accept a 2.5% MFN import tariff instead. Finally, it is unclear how impactful this change in auto rules would even be for the US economy. One Bloomberg report argues that only 3 car models out of the 40 currently exported from Mexico to the US would be affected by the increase in North American content requirement, and less than one-third of cars exported from Mexico to the US would be affected by changes to wage requirements. What does this new deal, that has a questionable chance of being ratified in the first place, actually do then? It enacts liberalization that is far less ambitious than the TPP, and its major revision actually imposes additional barriers on foreign trade with the US. Further, some reports suggest that the US is requesting use of Section 232 (national security) tariffs on Mexican autos if they don’t meet the new requirements, rather than the existing 2.5% MFN rate. This arbitrary, illegal use of Presidential power would further weaken the global trading system, and our relations with Mexico, and must be knocked out as negotiations proceed.

Negotiations on NAFTA have been slow and likely counterproductive to trade liberalization, but those with the EU have been even more stagnant. After meeting with European Commission President Juncker on July 25, Trump was quick to announce that the EU had made major trade concessions and that a deal was imminent. Instead, it turned out that the EU had simply agreed to begin talks on tariff reduction, something that had already begun under the TTIP framework that Trump dismantled when he took office. Furthermore, the very next day, the EU clarified that agricultural protection would be off the table, stymieing a major goal of the negotiations. While discussions between the EU and US on trade have been intermittent since, talks have not begun and no European concessions have been made. In addition, the significant unpopularity of Trump in Europe has reduced the political capital available to European leaders to accept a deal with the US, further harming the likelihood of an agreement being enacted.

Finally, trade negotiations with China have been largely non-existent since the trade wars began. Instead, there has been a continuing tit-for-tat of increased US tariffs leading to larger Chinese retaliation over the past month, with Trump on August 2nd discussing the idea of increasing tariffs on $200 billion of Chinese goods to 25%. Furthermore, the Chinese yuan has depreciated almost 6% against the dollar in 2018 as a result of trade war fears and increasing interest rates in the US, making Chinese imports to the US even more competitive against US produced goods. For real negotiations to even begin, this escalation must stop, but both sides don’t seem willing to back down. Further, China is unlikely to take steps to either appreciate their currency or reduce domestic protection, because both steps would risk creating dangerous imbalances in the Chinese economy (for example, the depreciation of the yuan is largely a market-based reaction to tightening US interest rates rather than Chinese government intervention) and would demonstrate international political weakness unacceptable to the Chinese government.

More than two months after Trump implemented his tariffs as leverage to revise trade deals, each of his negotiations has barely begun, if at all. Indeed, for the EU, Canada, and Mexico, Trump’s negotiations have accomplished less ambitious liberalization than the TPP and TTIP that he dismantled upon coming into office. The promised long-term benefits, therefore, have failed to materialize for American farmers and manufacturers. Indeed, they face harmful long term headwinds that threaten their international competitiveness over the long term.

Damage to the economy will be long term

First, Trump’s trade policy has put the foreign consumer bases of American exporters at risk. Many US industries rely on exports to foreign markets as a key source of demand for their products. Over 36% of US agricultural revenue comes from exports, for example, and Canada, China, and Mexico are the top 3 export markets for American farmers, representing over $60 billion in US production. Maintaining access to these markets, therefore, is critical to the long term success of American workers. However, Trump’s tariffs have put this success at risk. When competing for foreign consumers, existing producers have large incumbent advantages, because the trading infrastructure is already in place and is costly to change even if other low-cost alternatives exist. The US was in a good position before the tariffs, therefore, because switching to other farmers (e.g. Canada or Brazil) had certain large start-up costs.

Trump’s trade actions have significantly changed this, however, because American supply has been cut off to their foreign consumer bases by the retaliatory tariffs, forcing foreign consumers to go to other producers and giving them incumbent advantages over American farmers. Furthermore, US trade policy has been fundamentally delegitimized, because the US President supported by Congress and the Republican Party have themselves to be willing to implement broad-based tariffs at will. As a result, foreign consumers aren’t willing to risk an export disruption from US tariffs in the future, and instead will go to other producers even if more expensive. As a result, many foreign consumers of US products have said that they will not return to US producers, even after the trade war has ended.

Second, the Trump’s trade policy threatens to significantly weaken the efficacy of the World Trade Organization, which has been a critical actor in encouraging global trade liberalization. Since Trump enacted tariffs on steel and aluminum imports, seven countries including the EU, Canada, Mexico, and India have filed challenges at the WTO to the tariffs. They claim that the US tariffs are being used as “industry safeguard restrictions”, which were ruled in 2002 (against the Bush steel tariffs) to be an illegal use of trade policy. The Trump administration has countered that the tariffs are justified under national security grounds, but this is a laughable justification that can be quickly disproved. Furthermore, the primary precedent for WTO-approved national security tariffs involved those by the EU, US, and Canada against Argentina during the Falklands War. While those involved restrictions against an authoritarian military junta at war with the UK, Trump’s tariffs are against liberal democracies closely allied with the US. As a result, it is likely that many of those challenges to Trump’s tariffs will succeed at the WTO, putting Trump on a collision course with that institution.

While Bush quickly backed down in the face of WTO sanction in 2002 and rescinded his steel tariffs, Trump is likely to not back down, and indeed creating an excuse to exit the WTO may have been a goal of these tariffs in the first place. This type of action would have grievous long-term consequences for the US economy. Firstly, the inability of the WTO to oppose US protectionism would significantly weaken its efficacy with other member states, who would use the precedent to themselves not reduce their trade barriers. The WTO has been extremely good for the US in that it has encouraged countries to reduce their import tariffs to US goods, among others, and indeed the reduction in China’s average import tariff from 32% in 1992 to 4% today was largely due to the conditions required for Chinese WTO entry. Furthermore, if the US refused to accept a WTO ruling, it would likely lead to the WTO-backed imposition of considerable retaliatory tariffs by all WTO members. Chinese retaliation has affected $34 billion in US exports so far and has already caused a significant decline in US farmer and manufacturer revenue. As a result, if each WTO member were to impose retaliation, US exports could fall by hundreds of billions of dollars, with severe impacts on the US economy.

Trump’s trade policy threatens the long-term competitiveness of US workers and the global trading system as a whole, in addition to significant short-term costs to the US economy. And what has been achieved in return – no meaningful trade agreements with Canada, Mexico, the EU, or China, let alone major liberalizing concessions. Indeed, if Trump had simply continued to negotiate the TPP and TTIP treaties that he dismantled when he took office, the US would have made more progress on trade liberalization, without any of the costs to US workers. Congress must act to reject this failed trade policy this fall, before the damage done to American farmers and manufacturers, as well as the global trading order, is made permanent.

Challenging Trump's Tariffs - An Ongoing Series

In a new series challenging Trump's tariffs, we argue that the President's trade policy is illegally justified, based upon reckless ignorance, and will cause significant harm to the US economy. Congress must step up and rescind the tariffs this fall.

Support for Open Trade Remains Robust in Recent Polling. Trump's Tariffs Still Remarkably Unpopular - 9/4/18 - In a new essay, Simon reviews a variety of recent polls which show broad public support for open trade policies and a rejection of Trump’s tariffs. This suggests that a campaign to rescind the President’s tariffs could not only be good policy, but good politics as well.

Whatever Happens With Mexico, Trump’s Trade Policies Are Harmful And Need To Be More Aggressively Challenged - 8/29/18 - In a detailed new analysis, NDN's Chris Taylor explains why Trump's trade policies are harming the US, and need to be more aggressively challenged.

Trump's Tariffs Will Do Lasting Economic Damage If Not Opposed - 8/14/18 - Trump's trade policy is enacting large costs onto average American workers that will be felt for generations. Congress must act to rescind these tariffs, before US manufacturers and farmers permanently lose out on much of global consumer demand. 

On Tariffs, Trump's Reckless Ignorance Can No Longer Go Unchallenged - 8/8/18 - To a shocking degree, Trump doesn't understand how trade and tariffs work - and they are illegal to boot. Congress should rescind them this fall.

Trump's Tariffs Are Illegal, And Should Be Rescinded - 8/3/18 - Trump’s trade war uses the false pretense of “national security” to sidestep the checks and balances of the legislative branch. Independent of their ideological position on trade, Congress must stand up to this creeping authoritarianism.

Related readings:

Democrats Need To Have A Big Conversation About Trade - 5/16/18 - Recent Pew polls show Democratic voters are overwhelmingly supportive of free trade. Simon takes a look at what this means for the Party.

Trump's Iran Deal Withdrawal is an Arrogant Rejection of the Postwar System America Built - 5/10/18 - In a new column, Simon says Congress must begin debating Trump’s sustained effort to undermine the post WWII order. 

An Enduring Legacy: The Democratic Party and Free and Open Trade - 1/21/14 - The global system created by Presidents FDR and Truman has done more to create opportunity, reduce poverty and advance democracy than perhaps any other policies in history. 

Trump’s Tariffs Will Do Lasting Economic Damage If Not Opposed

(This is the third essay in a series challenging Trump’s tariffs)

By: Chris Taylor

Much of Trump’s trade policy has been centered on his idea that trade wars are easy to win and will lead to quick re-negotiations of trade agreements. In his mind, therefore, the use of false justifications to sidestep Congressional oversight and a refusal to engage in real economic analysis would not be a problem, because the tariffs would be quickly and painlessly rescinded once the trade agreements were revised. Two months into the trade war, however, the opposite has come true. Our trading partners have not come to the table, but instead have imposed painful retaliatory tariffs on US industries already reeling from higher import prices. With no end in sight, Trump’s tariffs have done significant damage to the economic health of the country, and they threaten to permanently harm the competitiveness of American workers.

First, Trump’s tariffs have harmed industries that rely on imported products, predominately steel and aluminum, as inputs for their own products. Heavy manufacturing companies, such as equipment producers Caterpillar and John Deere, have reported a drop in earnings of almost 10% since the tariffs took effect, as steel is the industries’ largest raw material cost and Trump’s tariffs have increased its price by 25%. Small manufacturing businesses have felt the largest negative impact, because they don’t have the economies of scale to cushion a significant increase in costs. Lawn equipment producers in Indiana have been forced to cut 40% of their workers, nail manufacturers in Missouri have axed 15% of their workforce, and television-manufacturers in South Carolina have closed their plants. The construction industry, which employs over 7 million mostly blue collar workers, has in particular been harmed by Trump’s trade wars. Tariffs on steel and aluminum alone are estimated to cause the loss of 28,000 construction jobs as the raw materials and heavy equipment used in the construction process have become significantly more expensive. All told, the non-partisan Trade Partnership group estimates that Trump’s $22 billion in steel and aluminum tariffs alone will cause a loss of 179,000 jobs in manufacturing and services, far outpacing the estimated 33,000 job increase in steel and aluminum production.   

Second, Trump’s tariffs have led to the imposition of retaliatory tariffs on US exports by China, Canada, and the European Union. The agricultural industry, whose exports are heavily affected by Chinese demand, has been hit particularly hard, with the prices received by American farmers for soybeans falling over 16% to decade-long lows and prices for hogs and corn falling by 15%. In Iowa alone, farmers could lose $630 million as a result of losing export access to foreign markets if Trump’s tariffs stay in place. Trump himself has conceded that his tariffs are harming agriculture, which led him to provide a $12 billion bailout to struggling farmers. Even this significant amount (over $14 for every $100 of imports affected by the tariffs) isn’t enough to stop the damage from reciprocal tariffs, however. The US Chamber of Commerce estimates that bailouts to cover losses from retaliatory tariffs for all US industries would require an additional $27.2 billion in funding, of which $7.6 billion would affect automobile manufacturers and $9.6 billion other manufacturing industries. Rather than save US manufacturing, the trade wars are destroying jobs and creating bailout-dependent industries.

Finally, Trump’s tariffs are having a significant impact in an area often missed in the political discourse: business investment. For investors at home and abroad trying to invest their capital, the loss of export access for US industries and the extremely volatile policy environment in Washington has acted as a severe roadblock to investment in new factories and infrastructure. Net foreign direct investment (the level of investment coming into the country minus the level leaving the country) fell by 37% from the first quarter of 2017 to the first quarter of 2018. From January to May 2018, Chinese net investment in the US was actually negative $7.8 billion, meaning that more investment funds left the US than entered, in the midst of a 90% drop in Chinese investment into the US in 2018.

It is abundantly clear that Trump’s tariffs have been damaging for the US economy: fewer jobs, struggling companies that require government bailouts, and an exodus of investment spending. This lack of economic success mirrors the difficulty that the Trump administration has had in keeping its promises of an economic “revival” for the economy as a whole. In the 18 months since Trump became President, 300,000 fewer jobs were created than in President Obama’s last 18 months in office. Even worse, real average wages declined by 0.2% from July 2017 to July 2018, weakening Trump’s claim that his $1.9 trillion tax cut would help the middle class.

In particular, President Trump was elected to office on a message of creating economic opportunities for those left behind by this new age of globalization. By most metrics, however, he has failed to meaningfully improve the living standards of these “forgotten Americans”. In fact, from July 2017 to July 2018, 35.4% of counties that voted for Trump in 2016 actually lost jobs on net, compared to only 19.2% of counties that voted for Clinton. Trump’s tariffs have further harmed the economic opportunities of these people who most supported the president. In the Rust Belt, manufacturers from the auto to the household appliance industries have lost significant consumer bases and earnings, forcing them to lay off thousands of workers, while farmers across the Midwest are seeing their profit margins turn negative as prices for their crops plummet. The hardest hit groups haven’t been white-collar workers in coastal cities, but instead manufacturing, construction, and agricultural workers in states that voted for Trump.

Furthermore, the effects of the trade wars won’t go away anytime soon, even if the tariffs are rescinded. Domestic manufacturers and farmers have seen their export consumer bases eroded by cheaper foreign competition as a result of the tariffs (for example, Brazilian and Canadian soy bean exports to China that aren’t subject to reciprocal tariffs). These consumer bases take decades to build up, and their loss means that even when the tariffs are rescinded, US workers will have less access to foreign export markets for years to come, if at all. Indeed, Chinese officials have begun to say that American agricultural exports will be fully replaced by other countries’ exports, even after the tariffs are rescinded.

The first and second essays in this series argued that Trump’s tariffs were illegal and based upon utter ignorance by the President. Beyond that, the tariffs are enacting large costs onto average American workers, particularly those that were promised better economic opportunities by Trump during the 2016 election.  Congress must act to rescind these tariffs, before US manufacturers and farmers permanently lose out on the 86% of global demand that is outside of the United States.

Does Science Prove that the Modern GOP Favors the Rich?

This essay was posted originally at The Pointwww.sonecon.com

Virtually everyone outside the Trump administration agrees that the GOP tax plans passed by the House and the Senate will aggravate income inequality. In fact, the party-line votes on both plans are the latest instance of a remarkable fact: Over the last 40 years, income inequality has accelerated when Republicans held the White House, the Congress or both, and slowed when Democrats were in charge.

No one is claiming that the GOP created America’s dramatic increase in income inequality. In a recent study issued by the Center for Business and Public Policy at Georgetown University’s McDonough School of Business, our analysis showed that changes in the U.S. and global economies and technology did most of that.

Between 1977 and 2014, the average pre-tax income of the bottom 50 percent of Americans—everyone below median income – increased just 1.7 percent, inching up from $15,948 to $16,216 (2014 dollars). Over the same years, the average pre-tax income of the top one percent soared 207 percent, jumping from $424,631 to $1,305,301.

During these years, Washington stepped in with new spending and tax credits that modestly helped the bottom half of Americans: Their average post-tax income rose 22 percent, from $20,390 in 1977 to $24,047 in 2014. But tax and spending changes had little effect on the top one percent, whose average post-tax incomes still rose 196 percent, from $342,328 to $1,012,429.

Partisan politics also played a major role: The actual income paths of both groups from 1977 to 2014 depended on whether Republicans or Democrats controlled the White House and/or Congress. For example, when Republicans held the presidency, the top one percent’s rising share of all post-tax income accelerated on average by 0.4 percentage-points, while under Democratic presidents their rise correspondingly slowed by 0.4 percentage points. Similarly, the bottom 50 percent’s falling share of post-tax income accelerated under GOP Presidents by an average of 0.5 percentage-points – and again, their decline decelerated by that much under Democratic presidents. 

The story is the same with Congress. During years of GOP control, the decline of the bottom half’s share of national income accelerated, on average, by more than 0.5 percentage-points – and then slowed by about that much when Democrats were in charge of Congress. Party control of the legislative branch had the least effect on the income path of the top one percent: Their rising share of post-tax income accelerated by an average of 0.3 percentage-points during GOP Congresses, and decelerated by that much during years of Democratic control.

Finally, the results when either party controlled both the White House and Congress were the sum of the results for each branch.

This isn’t conventional wisdom dressed up as science; it is a scientific demonstration of how much elections matter. To test the limits, we also conducted a thought experiment: What would the incomes of the bottom half and the top on percent look like, if one or the other party had controlled both branches of government for the entire 37 years? We assume here that the economy’s course was unaffected by our hypothetical one-party government, and that each party maintains the distributional tendencies in tax and spending policy uncovered in our analysis.

With these assumption, we calculate that if Democrats had been in charge the entire time, the post-tax income of the bottom 50 percent, on average, would have been an estimated $526 higher per-year or a total of $19,539 more for the whole period. Moreover, the top one percent would have taken home $14,226 less per-year, on average, or $526,373 less for the whole period.

Operating on the same assumptions, we calculate that Republican control of both branches for the entire period would have increased the post-tax income of the top one percent by $28,029 per year, on average, or $1,037,086 for the whole period; while the incomes of the bottom 50 percent of Americans, on average, would have been $563 less per year, or $20,848 less for the entire period..

Helping the rich and letting those in the bottom half fend for themselves, it seems, is now part of the modern GOP’s DNA – and moderate resistance to that course seems to be embedded in the Democrats’ genes.

Will Cutting Corporate Taxes Raise Wages?

This essay was posted originally at The Pointwww.sonecon.com

Real disputes among professional economists rarely make their way into political debates. But that’s what’s happened with the issue of whether the Trump administration’s proposal to cut the corporate tax rate from 35 percent to 20 percent would mainly benefit shareholders or workers. Both sides make coherent arguments – but in the end, the evidence supports the proposal’s opponents.

Those opponents start with a traditional tenet of public finance: Taxes on assets are borne by the owners of those assets, so cutting taxes on corporations would mainly benefit their shareholders.

The proponents cite another tenet of public finance: Taxes are borne by those unable to escape them or, in more technical terms, corporate taxes fall on the least mobile factors of production. U.S. multinational companies have shifted substantial capital assets to other countries, from their patents to factories;. But American workers are stuck here. This suggests that much of the burden of U.S. corporate taxes could fall on workers – and consequently cutting corporate taxes should benefit them.

Economic researchers have found support for both tenets, but most of the economic literature has estimated that 70 percent to 85 percent of the burden of corporate taxes falls on shareholders and 15 percent to 30 percent on workers. A 2012 study by the U.S. Treasury – one recently excised from the Department’s website – calculated those proportions at 82 percent for shareholders and 18 percent for workers.

Conservatives insist that globalization has rendered those findings outdated. Citing research by Kevin Hassett, chair of the Council of Economic Advisers (and my friend) and others, they point to strong statistical associations between reductions in corporate tax rates over the last two decades and strong wage gains, especially in Eastern and Western Europe. Their logic is as follows: As U.S. and native corporations sited more production in low-tax countries, those capital investments raised both the demand for and productivity of workers in those places, driving up their wages.

I have no doubt that those findings are correct – but it does not follow that cutting U.S. corporate taxes would drive up investment and the wages of American workers.

First, the studies do not show that U.S. companies invested in those countries to avoid high U.S. corporate taxes. Certainly, the large U.S. software and pharmaceutical companies that transferred the ownership of their patents and copyrights to their Irish subsidiaries did so to elude U.S. taxes – transfers which created very few jobs in Ireland. By contrast, U.S. foreign direct investments that involve building factories and setting up new organizations in other countries occur to serve foreign customers in the regions of those investments. Lowering our corporate tax rate will not change that.

Similarly, U.S. and foreign companies invest here to serve the world’s largest national market. Moreover, taxes are not a barrier, since Congress provides a cornucopia of tax breaks to reduce corporate tax burdens well below 35 percent. According to a 2016 Treasury study, the effective corporate tax burden averaged 22 percent over the period 2007 to 2011. Some of that certainly reflected U.S. companies’ foreign earnings that remain untaxed by the United States. But some industries with few foreign operations also paid below-average rates. For example, the effective tax burden on U.S. utilities and real estate companies averaged, respectively, 10 percent and 20 percent. Right now, then, companies can operate in the United States at an effective tax rate equal to or lower than the administration’s proposal.

In the end, the only real issue is whether the tax proposal would induce U.S. or foreign companies to expand their American operations in ways that raise the demand for and productivity of U.S. workers. We cannot know for certain. Nevertheless, the 2016 Treasury study does provide on-point support for its opponents.

The Treasury found that while the effective corporate tax rate averaged 22 percent from 2007 to 2011, it actually fell substantially over those years — from 26 percent in 2007 to 20 percent in 2011. We did experience four years of strong employment gains from 2013 to 2016, which mainly restored jobs lost in the financial collapse and deep recession. Yet, alas, the falling corporate tax burden did not ignite the surge in business investment and wage gains predicted by the administration’s logic. That’s game, set and match for its opponents.

Blame the Economy for Widening Inequality – And Washington for Doing Little about It

This essay was posted originally at The Pointwww.sonecon.com

America’s widening income inequality has become a subtext across most debates in domestic policy. GOP plans to repeal and replace Obamacare failed in large part because virtually every expert warned that the changes would end coverage for millions of people with modest incomes and cut taxes for high-income people. President Donald Trump’s push to cut business taxes will likely meet a similar fate. He shouldn’t be surprised: The populist revolt that helped elect him has been fueled by popular anger over Washington’s incapacity to do anything about how the economy skews its rewards towards those at the top and away from most everyone else.

Ask the right questions, and the income data reveal a great deal about how this inequality took hold over the last 40 years. It is given that the American economy and politics both changed dramatically over this period. But how did each of those forces affect the distribution of incomes? In a new study just issued by the Center for Business and Public Policy at the McDonough School of Business at Georgetown, I used statistical analysis to explore this question. It turns out that we can track the economy’s role in growing inequality by following the changing distribution of all pre-tax income, and then track the role of politics and the government by following the changing distribution of all post-tax income.

It also turns out that the new populists, or at least their feelings, are justified: As economic changes have produced widening income inequality, the government has remained largely though not entirely on the sidelines.

To begin, the data show that rising inequality in the United States began in 1977, and the same data series ends with 2014, giving us 37 years of income information on both a pre-tax and post-tax basis. Over those years, the share of pre-tax national income going to the bottom 50 percent of Americans – that is, not taking account of changes in taxes and government transfers – slumped from 20 percent to 12.5 percent. This was the doing of a changing economy as globalization and technological advances steadily squeezed the wages and working hours of tens of millions of low, moderate and middle-income Americans.

Over the same years, the share of all pre-tax income going to the top one percent of Americans soared from 10.7 percent to 20.1 percent. The economic drivers were the same. In their case, the rapid progress of globalization and new technologies boosted both the returns on capital – think of soaring stock markets – and the compensation of millions of American business executives and professionals.

“Income shares” are economist-speak, so let’s translate them into the average incomes for each group. The results are sobering. The average pre-tax income of the bottom 50 percent of Americans, in 2014 dollars, inched up from $15,948 in 1977 to $16,216 in 2014, for a raise of $268 or 1.7 percent over 37 years. The top one percent lived in a different economy: Their average pre-tax income in 2014 dollars jumped from $424,631 in 1977 to $1,305,301 in 2014, a raise of $880,670 or more than 207 percent.

To see what the government did about all this, we shift the analysis to the two groups’ income shares and average incomes on a post-tax basis. The data show, first, that the government took some steps to soften the blow for the bottom 50 percent of the country and were modestly effective. After taking account of changing tax and spending policies since 1977, the share of all post-tax income going to the bottom half of the country fell from 25.6 percent in 1977 to 19.4 percent in 2014. So, their income share dropped 24.2 percent on a post-tax basis, compared to 37.5 percent on a pre-tax basis.

The difference tells us what the government actually accomplished: Washington managed to offset a little over one-third of the adverse impact of globalization and new technologies for the bottom 50 percent of Americans [1 – (24.2 / 37.5) = 0.355]. Their relief came mainly from government steps to expand the earned income tax credit, broaden access to Medicaid, and provide subsidies for health insurance under Obamacare. Other tax changes made the federal income tax moot for most of this group, but increases in payroll tax rates offset those gains.

Turning to actual incomes, we find that the average post-tax income of the bottom half of the country increased over this period, in 2014 dollars, from $20,390 in 1977 to $24,925 in 2014. That signifies a raise of $4,535 or 22 percent over 37 years – not much, but better than the 1.7 percent gains in average pre-tax income.

Washington has been more solicitous of the top one percent of the country. After taking account of changes in tax and spending policies, their share of all post-tax income jumped from 8.6 percent in 1977 to 15.6 percent in 2014. So, the income share going to the top one percent of Americans increased 81.4 percent on a post-tax basis, compared to 87.8 percent on a pre-tax basis.

Once again, the difference tells us what Washington did: 37 years of tax changes and spending offset about 7 percent of the fast-rising income gains claimed by the top one percent [1 - (81.4 / 87.8) = 0.073]. In more concrete terms, the average post-tax income of the top one percent of Americans increased, in 2014 dollars, from $342,328 in 1977 to $1,012,429 in 2014. That’s a sweet raise of $670,101 or 196 percent over 37 years.

Over nearly four decades, then, Washington demonstrated moderate concern about the declining position of the bottom half of the country while affirming the rising position of those already at the top.

This record tells us it is time to address the real drivers of widening inequality: Shift our focus from half-hearted redistribution to serious economic reforms – aggressive anti-trust for all concentrated industries, for example, and universal access to free retraining at community colleges – that can put average Americans in a better positions to capture the rewards of globalization and technological change. 

The Three Choices for Tax Reform

This essay was posted originally at The Point, www.sonecon.com

Trump administration officials and GOP leaders in Congress are still putting together their tax plan. Nevertheless, the early signs point to decisions that could sink the project or produce changes that would jeopardize economic growth.

Congress can approach changing the corporate tax in one of three ways. It can try to simplify the code, it can reform it, or it can cut it back. The GOP’s current approach appears to start with simplification. Simplifying the corporate tax normally means phasing out a package of tax preferences for particular industries or business activities, and using the revenues to bring down the current 35 percent tax rate to 28, 25 or even 20 percent. This model shifts the burden of the tax among industries but not among income groups, since shareholders continue to bear most of the burden. Such simplification can also attract bipartisan support and produce real economic benefits. At a minimum, it lowers tax compliance costs for most businesses; and if it’s done thoughtfully, it can increase economic efficiency. To be sure, any efficiency benefits will be marginal unless the simplifications are fairly broad and sweeping.

The record also shows that serious tax simplification is very hard to achieve. Support from President Obama and congressional GOP leaders wasn’t enough to advance it in 2014, for the simple reason that most companies prefer their tax preferences to a lower tax rate. They’re not wrong economically: The Treasury calculated in 2016 that tax preferences lower the average effective corporate tax rate to 22 percent, and companies in many industries pay substantially less. Why give up those preferences for a 28 or 25 percent rate? A 20 percent rate could solve the problem for most industries, if anyone had a plausible way to pay for it. Of course, financing a deep rate cut was the border adjustment tax promoted by Speaker Paul Ryan, and which the White House and big importers and retailers quickly squashed.

The second option is genuine reform, where Congress changes the structure of the corporate tax. Economically, the most promising reform would give U.S. companies a choice of tax treatments when they invest in equipment. They could deduct the full cost of those investments in the year they make them (“expensing”) while giving up the current deduction for interest on funds borrowed to finance the investments. Or they could stick with the current depreciation system for their investments, including the deduction for interest costs. If enough companies choose the first route, as they likely would, this reform would spur investment and sharply reduce the tax code’s nonsensical bias towards financing business growth with debt rather than equity. Such a structural reform would make sound economic sense. It also seems as unlikely as serious simplification, because it foregoes the pixie dust of marginal tax rate cuts that GOP supply-siders demand.

That leaves the Trump administration and Republican leaders with option three: Cut the corporate tax rate without paying for it. The President seems to favor this approach. He has called repeatedly for slashing the corporate rate to 15 percent, a multi-trillion dollar change, and paying for a small piece of it by limiting a few personal tax deductions for higher-income people. It’s also catnip for GOP supply-siders who continue to proclaim that a deep rate cut will boost economic growth enough to pay for itself. We’ve tried this t several times already, so we now have hard evidence to evaluate those claims. The actual record shows, beyond question, that such turbo-charged dynamic effects do not occur. The most recent example is George W. Bush’s 2001 personal income tax cuts. His “success” enacting them produced huge deficits and ultimately contributed to the financial collapse that closed down his presidency.

A largely-unfunded cut in the corporate tax rate in 2018 would boost corporate profits as well as budget deficits, but it won’t increase business investment, productivity or employment. Prime interest rates in this period have been lower than at any time since the 1950s, so companies have had easy and cheap access to funds for investment for years. At a minimum, this tells us that there’s no real economic basis to expect businesses to use their windfall profits from a big tax cut to expand investment.

Instead, they’re likely to use some of their additional profits to fund stock buy-backs. The rest will flow through as dividends and capital gains, mainly for the top one percent of Americans who hold 49.8 percent of stock in public companies, and the next nine percent who own another 41.2 percent of all shares. Those lucky shareholders will use much of their windfall gains to buy more stock; and coupled with the corporate stock buy-backs, the boost in demand for stocks will pump up the markets. To be sure, those shareholders will also spend some of their unexpected gains, which will modestly stimulate growth. Once that stimulus dissipates, as it will fairly quickly, the ballooning budget deficits will drive up interest rates and slow the economy for everyone else.

The worst scenario is that large, deficit-be-damned cuts in the corporate tax rate could produce a stock market bubble that could take down the economy when it bursts. The good news is that the current Congress would never enact it. The odds of Democrats supporting Donald Trump on a tax plan to make shareholders richer are roughly the same as winning the Powerball; and the certainty of soaring budget deficits should scare off enough conservative Republicans to sink the enterprise.

The Trump Administration is Disrupting the 2020 Census

The decennial Census is a genuinely powerful institution in American life. I didn’t understand its impact until I oversaw the Census Bureau as it prepared and carried out the 2000 decennial Census, when I was Under Secretary of Commerce for Economic Affairs. Believe me, the upcoming 2020 decennial Census will matter more than you think. Yet, Congress and now the Trump administration have set the 2020 decennial on a course that threatens its basic accuracy. In so doing, they put at risk the integrity and effectiveness of some of the national government’s basic missions.

Normally, the Census Bureau spends the first six years of each decade planning the next decennial Census. The Bureau’s funding ramps up in years seven, eight and nine of the decade, when it tests and purchases its technologies, conducts a nationwide inventory of residential addresses, orders forms, letters and advertising, and begins to lease local offices and train temporary workers. It is expensive to accurately locate and count 325 million people in 126 million households (2016). That’s why, for example, Census funding jumped 96 percent from 1997 to 1998, and more than 60 percent from 2007 to 2008.

The problems began in 2014, when the Congress decreed that the 2020 Decennial Census should cost no more than the 2010 count without adjusting for inflation, or some $12.5 billion. The Obama administration objected, but to no effect – although it’s worth recalling that Bill Clinton took a different tack in 1998, when he vetoed an omnibus budget bill and risked a government shutdown to get rid of a provision that would have barred the Census Bureau from using statistical sampling to verify the 2000 count.

The Census Bureau did what it had to do to live within its new budget constraints: it drew up new plans to cut costs by replacing thousands of temporary Census workers and hundreds of temporary offices with new technologies and online capacities. It also had to do what it shouldn’t have done: To save money, the Bureau aborted a planned Spanish-language test census and didn’t test or implement new ways to more accurately count people in remote and rural area. Census also ended its plans to test a range of local outreach and messaging strategies to get people to fill out their census forms, which are crucial to minimizing undercounts in many minority and marginalized communities.

Even so, the Census Bureau prepared to ramp up funding in 2017 and 2018, as it normally did, under the $12.5 billion cap. Enter the Trump administration, which cut the Obama administration’s 2017 budget request for the Census Bureau by 10 percent and then, this past April, flat-lined the funding for 2018. It is no coincidence that the Director of the Census Bureau, John Thompson, resigned in May, effective in June. It’s a serious loss, since Dr. Thompson directed the 2000 decennial count and is probably the most able person available to contain the coming damage to the 2020 count. For its part, the administration hasn’t even identified, much less nominated, his successor. It is no surprise that the Government Accountability Office recently designated the 2020 Census as one of a handful of federal programs at “High Risk” of failure.

The costs of starving the decennial Census could be great. It not only paints the country’s changing demographic and geographic portrait every 10 years. Its state-by-state counts determine how the 435 members of the House of Representatives are allocated among the states; and its counts by “Census block” (roughly a neighborhood) shape how members of state legislatures and many city councils are allocated in those jurisdictions. That’s just the beginning.

Consider as well that every year, the federal government distributes about $600 billion in funds to state and local governments for education, Medicaid and other health programs, highways, housing, law enforcement and much more. To do so, the government uses formulas with terms for each area’s level of education, income or poverty rate, racial and family composition, and more. The decennial Census provides the baseline for those distributions by counting the people with each of those characteristics in each state and Census block. Similarly, the Census Bureau conducts scores of additional surveys every year on behalf of most domestic departments of government, to help them assess the effectiveness of their programs. Here again, the decennial Census provides the baseline for measuring each program’s progress or lack of it.

Without an accurate Census, many states and cities will be denied the full funding they deserve and need, and the federal government will have to fly blind for a decade across a range of important areas. Moreover, many businesses also rely on decennial data, from retailers and commercial real estate developers to the banks that finance them. Data on the demographics and locations of potential customers not only inform their planning and investments. In some cases, the data actually make their projects possible, for example, when an investment qualifies for special tax treatment if it occurs in places with certain concentrations of low or moderate-income households.

The Trump administration cavalier approach to the 2020 decennial Census is evident in ways other than its funding deficit. A draft executive order, leaked but not issued so far, would direct the Census Bureau, for the first time in over 200 years, to “include questions to determine U.S. citizenship and immigration status.” The Census Bureau is legally required to protect the privacy of all Census data from requests by anyone, including government officials. Unsurprisingly, many people remain skeptical and avoid answering the Census out of fear that other government agencies will access their information. Requiring that Census 2020 probe each respondent’s citizenship and immigration status would turbo-charge those fears among Hispanics and other immigrant groups. The result would be systemic undercounting and underfunding of states, cities and towns with substantial populations of Hispanics and other immigrants.

There is still time for a course correction that could rescue the 2020 decennial Census, in next month’s negotiations over the 2018 budget. With some GOP members of Congress exhibiting a measure of newly-found independence from the Trump administration, Paul Ryan and Mitch McConnell could need Democratic support to pass a budget. A wide range of minority advocacy and business groups, along with most big city mayors, have vital interests in an accurate decennial Census. It’s up to them to pressure Nancy Pelosi and Chuck Schumer to make adequate funding for the Census one of their top priorities. Otherwise, one of the basic mechanisms for fair and competent governance could be disabled for a decade.

This post was originally published on Dr. Shapiro's blog.

It’s Still the Economy, Stupid!

Republicans know that the terrain for next year’s midterm elections could be treacherous. Off the record, they bemoan their inability to enact their agenda and mourn President Donald Trump’s unpopularity. In principle, the GOP still might get its act together and pass a tax reform with new tax breaks for middle class taxpayers. Events unforeseen and unimagined could offer Trump a platform to renew his poplar appeal. Even so, they’re ignoring the signs that a sagging economy next year will dominate the 2018 campaigns.

The current expansion is old – it turned eight years old this month – and its fundamentals are weak. Neither Trump nor Congress has done anything to perk it up. Only the 1990s expansion lasted longer, and it expired two years after its eighth birthday. Comparing the two will not cheer Republicans. At a comparable point in the expansion that defined the Clinton era, March 1999, GDP was growing at nearly a 5 percent rate; over the last year, GDP has edged up barely 2 percent.

The most important difference is what was happening then with productivity, and what’s happening now. In the three years leading up to each expansion’s eighth birthday, productivity had expanded at a 2.4 percent annual rate in the 1990s, compared to 0.7 percent this time. Without decent productivity gains to lift wages and fuel demand, incomes stall and growth slows.

The main reason we’re not in a recession today is the strong job gains of the last three years, and the current 4.4 percent unemployment rate is comparable to the 4.2 percent rate in March 1999. Full employment normally presages a slowdown in job creation. We avoided that in the late 1990s, because the strong productivity growth supported more demand by raising wages. The best measure of that is personal consumption spending, which increased at a 5.9 percent rate in the year leading up to March 1999. But our current predicament includes such weak productivity gains that personal consumption spending edged up just 2.6 percent over the last year.

It’s the same story with business investment, the other domestic source of new demand. In the year preceding the eighth birthday of the 1990s expansion, fixed business investment rose 8.5 percent; over the past year, it grew 4.2 percent or half that rate.

All of these measures presage a slowdown in the U.S. economy next year – GDP gains of 1.5 percent in 2018 is a fair guess – and we could slip into a recession if some adverse event provides the trigger.

Last October, I cautioned Hillary Clinton that she would face these same conditions if she won, but that three initiatives could breathe new life into this old expansion. The first order of business is a dose of demand stimulus, preferably through large infrastructure investments paid for down the line. Trump promised the same thing; but he and the GOP Congress moved quickly beyond it.

The second initiative would focus on energizing productivity growth. My own recommendations last October started with measures to help average Americans upgrade their skills, by giving them free access to training courses at local community colleges. The Trump and GOP budget proposals would cut the inadequate training programs already in place.

The third initiative is a companion piece to promote higher productivity: Jumpstart business investment in new technologies and equipment. That will be harder for Trump than it would have been for Secretary Clinton, because it requires setting aside the supply-siders’ faith in the power of cutting marginal corporate tax rates. Instead, we should focus for now on lowering businesses’ upfront costs to purchase the new technologies and equipment that make skilled workers even more productive.

The measure would offer businesses a choice: deduct the full cost of those new purchases in the year they buy them – it’s called “expensing” – or stick with the current system where businesses depreciate the cost and deduct the interest on funds borrowed to cover it. Expensing is a feature of the Trump and GOP tax proposals, but both plans offer more sweeping and much more expensive changes that appear headed for the same fate as Trumpcare.

The election of Trump and the GOP Congress buoyed business confidence precisely because investors believed they would follow through quickly with an infrastructure stimulus and business tax reforms. Neither seems likely today; and even if one or the other somehow passes in some form late this year, it will probably be too little and too late to revive growth and wages by November 2018. If neither happens, it will take more than tweets to explain to voters why Republican control of both branches of government has failed to improve their lives.

This post was originally published on Dr. Shapiro's blog.

Syndicate content