Share the windfall

President Donald Trump and congressional Republicans gifted U.S. corporations a massive financial windfall last year.  The Tax Cut and Jobs Act of 2017 slashed the top tax rate on corporations from 34 percent to 21 percent, handing big businesses a pile of extra cash to spend as they saw fit.

Trump claimed that the tax cut would be “rocket fuel” for the American economy.  But that fuel has largely fizzled out before reaching workers’ pockets.  Real wages have barely budged over the last two years despite steadily declining unemployment.  Aside from a handful of one-off bonuses, the tax bill has had no noticeable effect on workers’ wages.

So where is the cash left over from the corporate tax cut going?  Increasingly, into the pockets and portfolios of executives and shareholders.  According to Politico:

Some of the biggest winners from President Donald Trump’s new tax law are corporate executives who have reaped gains as their companies buy back a record amount of stock, a practice that rewards shareholders by boosting the value of existing shares.

A POLITICO review of data disclosed in Securities and Exchange Commission filings shows the executives, who often receive most of their compensation in stock, have been profiting handsomely by selling shares since Trump signed the law on Dec. 22 and slashed corporate tax rates to 21 percent. That trend is likely to increase, as Wall Street analysts expect buyback activity to accelerate in the coming weeks.

Stock buybacks (which were illegal until 1982) are when corporations use their stockpiles of cash to repurchase their own stock.  This inflates the value of their stock, juicing the compensation of their executives, too.

This is great for the shareholder class, but does next to nothing for workers.  It’s a symptom of a larger trend where record-shattering corporate profitability increasingly fails to produce higher pay for workers.  More and more, the corporate bounty has been hoarded the benefit of executives and shareholders, with barely a trickle for employees.

How do we combat this?  Senators Cory Booker and Bob Casey have proposed a “Worker Dividend Act.”  Under their bill, corporations pursuing massive stock buybacks would have to share the wealth with their employees.  Here’s how it would work:

The total value of a company’s obligation would be calculated as the lesser between the total amount of that year’s stock buybacks and 50 percent of the company’s profits above $250 million. That total obligation would then be distributed equally to each of the company’s employees.

To see how this would play out, consider the example of Oracle, which announced it would repurchase $12 billion worth of its own shares.  That’s nearly 75 percent of its total earnings last year, which totaled over $16 billion.  (And that’s just about par for the course, as Sen. Booker notes: “[C]ompanies on the S&P 500 dedicated 91 percent of their total earnings to stock buybacks and corporate dividends, leaving just nine percent for things like raises for workers[.]”)

Under the Booker-Casey bill, Oracle would have owed its U.S. employees around $8 billion (the lesser of its $12 billion buyback and 50 percent of earnings over $250 million).  That pool of money would then be split equally among the company’s American employees.  Oracle had about 138,000 total employees around the world.  That means its U.S. employees would be in line to receive $60,000 or more each.

Ideas like the Worker Divided Act would help correct the absurd power imbalance between corporations and workers in the twenty-first century economy.  Workers deserve their fair share of the massive wealth sloshing around corporate coffers, not mere pennies on the dollar.  Only government policy can make sure they get it.

Trump, Clinton, and the fate of the economy

As Hillary Clinton and Donald Trump duke it out on the campaign trail, the economy hangs in the balance.  Contrary to Trump’s doom and gloom non-reset speech yesterday, the economy continues to gain steam and add jobs.  But the fate of the recovery may rest on the outcome of the November election.

A team of respected economists at Moody’s Analytics attempted to forecast the economic implications of each presidential candidate’s policy agenda, and the difference couldn’t be more stark.  Put simply, a Clinton presidency would strengthen our economy’s steady growth, while a Trump presidency would be an all-out economic calamity.

Clinton’s policy platform is carefully crafted to build up the economy.  The Moody’s team looked at the suite of Clinton’s major policy proposals, including increased spending on education and infrastructure, higher taxes on the rich, guaranteed paid family leave, and a higher minimum wage.

Moody’s found that if Clinton’s agenda were fully enacted, it would boost economic growth and create 3.2 million new jobs by the end of her first term.  The biggest benefits would flow to low- and middle-income families, and the average household’s after-tax income would rise by some $2,000.

Unemployment would fall as low as 3.7 percent—a level of full employment not seen since 2000.  With a new paid leave program and subsidies for child care, more parents would join the labor force.

These staggering employment figures are all the more remarkable because Moody’s expects Clinton’s new $12 minimum wage to eliminate 650,000 jobs.  This is somewhat controversial, and economists are largely split on how the minimum wage affects employment.  Some think a higher minimum wage makes workers more expensive and costs jobs; others think it gives workers more spending money and grows the economy to generate new jobs.  Regardless, Moody’s still sees a higher minimum wage as a net win for the economy, because the pay raise for low-wage workers substantially outweighs the lost income for those who might lose their jobs.

Importantly, Clinton’s tax plans wouldn’t drag down the economy either, even though she intends to impose new taxes on the rich.  This is because the economy can stomach these kinds of taxes, and so can the wealthy.  “[A]ffluent taxpayers,” the analysts explain, “are much less likely to change their spending behavior due to a tax increase than lower- and middle-income consumers.”  Because individual spending isn’t harmed, taxing the rich doesn’t inhibit economic activity.

All told, Clinton’s economy would build off of the steady growth and 70 months (and counting) of job creation of the Obama economy—the longest streak in American history.

And what of President Trump?  Batten down the hatches and stock up on canned goods.  According to Moody’s, the only thing “great” that Trump will make for America is another Great Recession.

Moody’s found that Trump’s major campaign promises—mass deportations and curtailed immigration; tearing up and rewriting trade deals; and slashing taxes on the rich—would cause economic catastrophe.  “By the end of his presidency, there are close to 3.5 million fewer jobs and the unemployment rate rises to as high as 7%,” Moody’s calculated.  The economy would plunge into recession for two years starting in 2018 and would shrink by 2.4 percent.

It gets worse.  Trump’s agenda would produce no income gains for the typical American family.  Stock prices would plummet, and the federal budget deficit would balloon by an additional $1 trillion.  As Trump rounds up and exiles undocumented immigrants, the economy would struggle from the loss of workers.  Not to mention, Trump’s overt hostility (in both rhetoric and policy) to Mexico and China would spark a retaliatory trade war, costing the United States $85 billion in exports.

A Trump administration would be an abject economic disaster, quickly collapsing the fragile momentum the economy has painstakingly gained since digging out of the last recession.  As Moody’s puts it, under Trump, “the U.S. economy will be more isolated and diminished.”

Now it’s true that this analysis fancifully assumes that either candidate will be able to swiftly enact their entire agenda upon taking office.  This is exceedingly unlikely, as Clinton may find herself stymied by a Republican Congress, and Trump could get bogged down in the courts.

Be that as it may, the White House under President Hillary Clinton would be an active aid to the economy.  Under President Trump, it would be a constant drag and an unprecedented risk.

The economy is perpetually the foremost issue on Americans’ minds.  As they go to the polls in November, voters face an unparalleled choice—a choice between growth or recession, between 3 million new jobs or 3 million lost.  The candidates’ agendas present a vast chasm in economic fortunes for the next four years.  Voters must decide which side they want to be on.


Trump and the cult of the job creators

Donald Trump’s back and forth over taxing the rich continues. Shifting by the day, Trump has vacillated between promising to raise taxes on the rich and proposing to cut their taxes. However, his latest pronouncement on the issue (if it sticks) suggests that he’s coming around to the ill-conceived conservative dogma glorifying the rich as the engines of our economy — even though the evidence points toward the middle-class as the real source of growth in the United States.

Trump began his insurgent primary campaign by arguing that taxes on the rich should rise. He bemoaned the under-taxation of financiers, saying, “The hedge fund people make a lot of money and they pay very little tax.” He even claimed to agree that he himself ought to pay more in taxes, saying, “You’ve seen my statements. I do very well. I don’t mind paying a little more in taxes. The middle class is getting clobbered in this country.”

In a reversal, however, he proceeded to roll out a tax plan that offered massive tax cuts to the highest earners. Under his plan, the top tax rate would fall from 39.6 percent to 25 percent. Over the next decade, this would redistribute some $4.4 trillion in lost federal revenue to the top 1 percent of earners, who would reap more than a third of the tax benefits in his plan.

Within days of clinching the GOP nomination, Trump appeared to revert back to his initial tax-the-rich position, saying he is “not necessarily a huge fan” of his own proposal to shower the rich with tax relief. This left some believing that Trump was abandoning his supply-side tax plan to pivot back toward populism in the general election campaign.

Now, Trump seems to have changed course again. When the New York Times asked Trump about taxing the rich at higher rates, Trump responded, “I really want to keep taxes for everybody as low as possible. When you start making them too high, you are going to lose people from the country, and oftentimes these are the people who create the jobs.”

Let’s set aside the extremely dubious notion that rich people are fleeing the United States in droves over a 15 percentage point difference in the top marginal tax rate. What’s more interesting is that Trump is regurgitating the conservative myth of the rich as job creators.

Last week, I sifted through the delusional provocations of Trump’s campaign statements and found that on policy matters, he appeared to be repudiating much of the accepted GOP policy platform. This schism accounts for much of the distance between Trump and establishmentarians like Paul Ryan. “The philosophy underlying the Ryan budget is supply-side faith in the wealthy as job-creating economic generators,” I wrote. “The only job creator that Trump glorifies is himself.”

Now Trump is buying into the job creator myth. The idea that the rich are job creators is a sloganeering summation of conservative supply-side economic philosophy: make life good for the rich, and the gains will reverberate down from their beefed-up wallets to the rest of the country. Treat the ownership class well, the thinking goes, and they will expand the economy and grow new jobs.

To sell this philosophy to the public, conservatives leaned on the job creator framing quite extensively following the Great Recession. With millions unemployed and the financial elite widely reviled, conservatives tied their preexisting economic beliefs to the public’s worry about jobs. In 2011, Paul Ryan blasted President Obama’s proposal to increase the capital gains tax as “class warfare” that “will attack job creators, divide people, and it doesn’t grow the economy.” Before being felled by the Tea Party, then-House Majority Leader Eric Cantor took to Twitter on Labor Day in 2012 not to praise working Americans, but to thank the supposed job creators, saying: “Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success.”

Meanwhile, liberals were pushing back against the conservative trickle-down prescription for the economy. They called their theory of the economy “middle-out economics,” arguing that the engine for economic prosperity was not the wealthy, but rather the purchasing strength of a broad middle-class.

The liberal theory held that “a prosperous economy revolves not around a tiny number of the very rich but around a great and growing number of middle-class consumers and small businesspeople,” as Nick Hanauer and Eric Liu put it. “Rich businesspeople are not the primary job creators; middle-class customers are. The more the middle class can buy, the more jobs we’ll create.”

Similarly, David Matland of the Center for American Progress argued, “it isn’t the rich that lead the way to growth and prosperity. Instead, it is a thriving and vibrant middle class that shows us the path.” CAP backed up this theory with a compelling review of the research demonstrating that the middle-class is at the heart of American economic growth.

President Obama began espousing this theory, too. “We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class,” he asserted. He explained that “growing inequality isn’t just morally wrong; it’s bad economics. When middle-class families have less to spend, businesses have fewer customers.”

That’s the guts of the theory in a nutshell: that when middle-class families have more disposable income, they will spend that money and grow the economy. When consumers spend more, business does well and employs more workers. This sparks a virtuous cycle of economic growth throughout the income distribution.

As I’ve written, middle-out economics is both good economics and a tried and true prescription for growth in recent American history. Policies that raise the disposable incomes for the poor and middle-class—higher minimum wages; targeted tax cuts; subsidies for health insurance, childcare, and college tuition; greater social insurance protections—are more likely to generate economic growth because average Americans are simply more likely to spend this freed up money than the rich are. Indeed, during the era of prosperity following World War II through the 1970s, the American economy grew on the back of an ascendant middle class.

Middle-out economics has always been a safe bet for American prosperity. The ahistorical alternative offered by conservatives for the past four decades has simply stuffed the pockets of the rich without ever yielding the promised glories of raining growth upon the rest of the country. In fact, the decades of ascendant trickle-down thinking since 1980 correspond with a marked period of sluggish growth and economic stagnation in the United States.

As Trump waffles between tax positions, he’s debating (whether he knows it or not) about whether the source of growth in the United States is the middle-class or the fortunate elite. Trump seems to believe that the key to growth is using public funds to reward the supposed business savvy of himself and those like him. But the evidence suggests that real prosperity grows from the people buying his ties, eating his steaks, and visiting his hotels.

The Advantage of a Middle-Out Economy

In advance of the State of the Union address on Tuesday, President Obama has unveiled a number of aggressive policy proposals to combat the wage stagnation that is squeezing the middle-class.

This includes a series of proposed tax cuts for the middle-class that would be funded by new tax revenue from the wealthy. Obama would eliminate a pair of tax preferences that have long subsidized the wealthy through the tax code, closing a loophole that has shielded trust funds from taxation and raising the top marginal tax rate on capital gains to 28 percent (up from 23.8 percent).

This proposal has obvious political appeal for Obama and his fellow Democrats: it’s a populist initiative that forces the GOP to choose between absolutist protection of capital gains and lowering taxes for average Americans.

But it also reflects a deeper debate between the two parties over the core of our macroeconomic policy. Namely, who spurs economic growth in the United States: the wealthy, or the middle-class?

The conservative prescription for accelerating growth has long been to create a business-friendly environment by slashing taxes and relaxing regulations on high earners, who will then invest their savings, expand their businesses, and grow the economy. That’s why conservatives like Sen. Orrin Hatch (R-Utah) were quick to denounce the revenue side of Obama’s tax plan. “Slapping American small businesses, savers and investors with more tax hikes only negates the benefits of the tax policies that have been successful in helping to expand the economy, promote savings, and create jobs,” Hatch claimed.

In response the to top-down growth favored by conservatives, liberals have begun championing “middle-out” economic growth. This budding liberal alternative would have us ease the strain on middle-class budgets on both ends of the balance sheet. It would boost their assets by cutting their taxes and increasing their take-home pay. And it would chip in for their liabilities by making modern-day necessities like health insurance, education, and childcare more affordable.

So which model is more effective for bringing about growth? This largely depends on a pair of economic effects — each of which indicates that liberals have the better path to robust shared prosperity.

There are two different responses that individuals might have to a change in their tax rates. If my tax rates go down, the amount of time I put in working becomes more valuable, which ought to make me work harder and work more, generating more economic activity. Economists call this the substitution effect, because I’d substitute more work hours in place of leisure time.

Alternatively, if my tax rates decline, I might instead realize that I can maintain the same income while working fewer hours. With an unexpected windfall from a new tax cut, I could keep my take-home income constant while working less than I had been. Economists call this the income effect, because I elect to use my new income from the tax cut to “consume” more leisure and thus work less.

So the debate over targeted tax cuts depends on which effect wins out: whether tax cuts make us work more or work less. But there’s reason to think that these effects vary when we look up and down the income scale.

High-income individuals may very well respond to greater disposable income by consuming more leisure. Because they already enjoy economic security, a newfound lower tax burden might incentivize these individuals to work less while taking home the same amount of money. If so, tax cuts for the wealthy are an economic windfall, not a stimulant.

Further down the income scale, middle- and working-class Americans might make the opposite choice and work more hours in the wake of a tax cut. With less of a financial cushion to rely on, making work more valuable ought to encourage more working hours among these individuals. When work becomes more lucrative, leisure time correspondingly becomes more expensive and harder to justify. This generates higher incomes and more economic growth.

So we might expect to get more economic growth out of cutting taxes — and thereby expanding disposable income — for middle-class and low-income Americans than we would by making things easier on the wealthy. This makes intuitive sense: The poor and middle-class simply need new income more than high-earners do for basic survival and security. They therefore respond to policy changes by maximizing their incomes rather than their leisure.

If the wealthy respond to a tax cut by pocketing more leisure time, we’d expect the inverse to be true, too. That is, the wealthy might consume less leisure — and work more — when their taxes go up. This expectation is backed up by behavioral studies demonstrating that individuals tend to react more strongly to prospective asset losses than they do to opportunities for asset gains — a phenomenon known as the “endowment effect.” In the face of a tax hike, then, the wealthy might work more in order to sustain the same after-tax income level.

To promote growth, then, we ought to raise taxes on the wealthy and cut them on the middle-class — precisely what Obama proposes to do. We’d expect this to generate more economic activity than relying on tax cuts for the wealthy. Indeed, this is borne out in the data. Lower income groups have a highermarginal propensity to consume” than the well-off do. That means that they spend a higher percentage of each additional dollar received than the wealthy would, providing greater stimulus for economic growth.

For much of the twentieth century, the United States grew its economy on the back of an ascendant and secure middle-class. It’s not coincidental that rising income inequality corresponded with a shift toward top-down economic policies implemented by conservatives in the 1980s. For the better part of three decades, average Americans have been waiting for a trickle-down that never happened.

As an alternative to the doldrums of supply-side inequality, “middle-out economics” isn’t just some populist platitude. It’s a serious and persuasive prescription for promoting economic growth. It returns the United States to its roots as a society of egalitarian growth and shared prosperity. And best of all, it’s very likely a more effective and pragmatic plan for the economy than the the top-down alternative offered by conservatives.

The data prove Boehner’s “idea” about the unemployed wrong, wrong, wrong

John Boehner thinks we’ve made it too easy for the unemployed to go without work. Addressing the conservative American Enterprise Institute last week, the Speaker of the House criticized “this idea” among the jobless that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.” To Boehner, our policy has corrosively enabled those inclined toward sloth to give way to that temptation.

This theorizing has been roundly blasted in liberal circles. Paul Krugman characterized it is a revealing gaffe, exposing conservative disdain for the unemployed. Simon Maloy at Salon said that Boehner had gone off the reservation, drifting off-message from efforts by those like Rep. Paul Ryan to move away from (or at least better conceal) makers/takers rhetoric and knee-jerk distaste for the jobless.

But few have discussed the absolute wrongheadedness of Boehner’s policy diagnosis here. He believes that it’s too easy to stay unemployed. The implication is that public policy should make it harder to be unemployed by, say, cutting off unemployment insurance benefits earlier and making benefits stingier to begin with. This, it’s thought, would give these slackers the kick they need to go out and work.

Never mind that unemployment benefits are already unavailable to the vast majority of the unemployed and already historically stingy. As Krugman explains, “Only 26 percent of jobless Americans are receiving any kind of unemployment benefit, the lowest level in many decades. The total value of unemployment benefits is less than 0.25 percent of G.D.P., half what it was in 2003, when the unemployment rate was roughly the same as it is now.”

Yet the idea that our lavish unemployment benefits drive up unemployment rates persists among conservatives. And it persists in the face of clear evidence to the contrary.

For one thing, unemployment benefits vary drastically from state to state. States aim to replace some portion of an unemployed person’s lost wages. Maximum benefits range from Mississippi’s $235 per week to Massachusetts’s $1,019.

If the Boehner Hypothesis had something to it, we might expect to see lower unemployment rates in states providing the stingiest unemployment benefits. But in fact, Mississippi has 7.9 percent unemployment, one of the highest in the country. And Massachusetts has 5.8 percent unemployment, lower than the national rate.

The Federal Reserve recently studied whether extending unemployment benefits had any effect on the unemployment rate. During the recession, the federal government extended funds for state unemployment benefits. These emergency measures made benefits available to those without jobs past the usual 26 weeks of unemployment to as many as 99 weeks. Conservatives regularly fretted that this weakened the incentive to find work, frequently obstructing extensions to provide more help to the jobless.

The Fed, however, found that these extensions had a minimal impact on the unemployment rate and virtually no impact on the number of people participating in the workforce. “[T]he overall effect of EEB [emergency extended benefits] on the unemployment rate is fairly modest; at its peak (in terms of the average number of benefit weeks provided) EEB boosted the unemployment rate by one-third percentage point.” Moreover, “the effect of EEB on the [labor force] participation rate is estimated to have been quite small.”

This is just the latest piece of evidence refuting the Boehner’s Bootstraps Hypothesis. James Pethokoukis at the American Enterprise Institute helpfully summarized a series of studies that found similar results. One study by the Boston Fed found that cutting off unemployment benefits didn’t nudge people to find work, but rather made them “more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions.”

Another study compared the tellingly similar results in North and South Carolina. Last summer, North Carolina slashed its unemployment benefits so severely that it made itself ineligible for federal emergency unemployment extensions. Mirroring the Red State rejection of ObamaCare’s free Medicaid expansion, North Carolina effectively spurned free federal support for its own long-term unemployed.

Economist Justin Wolfers found that since North Carolina cut its benefits, its economy has fared no better than neighboring states with similar economies that didn’t slash benefits for the unemployed. South Carolina, for instance, has seen slightly faster employment growth that North Carolina has. Contrary to the conservative bootstraps theory, North Carolina doesn’t stand out at all from similar states despite its experiment in inflicting hardship on the long-term jobless. “The bottom line,” Wolfers concluded, “is that North Carolina looks quite similar to its peers, and certainly not better.”

The irony is that Pethokoukis’s work comes from the very think tank before which Boehner continued to cling to his disproven theory of what ails the unemployed. The lesson, I suppose, is that Boehner would do well to survey the work from the forums he speaks at.

And he’d do well to heed Pethokoukis’s conclusion that the “safety net supported American incomes during the recession and its aftermath” — jobless benefits included. It’s time we lay to rest the conservative notion that the jobless need constant work incentives, and maybe instead just need some financial support to help them afford things like Internet, new suits, dry-cleaning, resumes — you know, things that cost money that help people find a job.

Instead of moralizing against the unemployed, we should understand that unemployment insurance plays an important role in helping people through hard economic times. The unemployed don’t need a kick in the pants to help them find work, they need a stronger economy. And that comes when everyone — the jobless included — has a little more spending money in their pockets.