You know, I’m reasonably sure nobody is going to be particularly interested in hearing this, but I’m going to post something here on it anyway because it’s obviously important.
A lot of Americans are pretty enamored with Donald Trump’s decision to pile deficit-funded stimulus atop a late-cycle dynamic, and the reason so many Trump voters support this is because they’ve been spoon fed a pipin’ hot helping of misinformation.
The tax cuts overwhelming benefited the wealthy and corporations, something that has apparently dawned on voters of late, prompting a mad scramble by the President and the GOP to propose a farcical “symbolic” vote on a “proposition” for a 10% tax cut aimed at middle income Americans.
The numbers, as they say, do not (and did not) lie. The benefits of the tax cuts (both by percentages and total dollars) accrue disproportionately to the wealthy. Period.
(Tax Policy Center, NPR)
The President is effectively mortgaging the country’s future in the interest of perpetuating the idea that he’s presiding over an economic miracle. The U.S. economy was already doing well and unemployment was already low when he took office. There was no reason to add fiscal stimulus. We’re ballooning the deficit with unemployment at a 48-year nadir. To say this is historically anomalous is an understatement.
Trump’s tax cuts were the worst kind of nonsense. They were specifically designed to benefit wealthy Americans and corporations and the latter used the windfall from the tax break to buy back stock, which inflated share prices. Because financial assets (like stocks) are disproportionately concentrated in the hands of the wealthy, the benefits from rising stock prices do not accrue in a linear fashion. Rather, they accrue exponentially. And when it comes to the concentration of these assets, the juxtaposition is incredibly stark:
See how this works? Tax cuts beget stock buybacks, stock buybacks beget higher stock prices and because the top 1% of households own the stocks, what you end up with is a multiplier effect. The only thing missing in this equation is a way for wealthy individuals and families to avoid paying a bunch of capital gains taxes, and there are rumors that Steve Mnuchin and Trump might attempt to “correct” that problem by executive decree.
So the rich got richer, and what did America itself get? Well, America got the largest deficit since 2012.
And Trump is now the proud owner of the all-time record for most interest paid in a single year.
Again, I would ask you to consider if this was necessary. Why was it necessary to put the U.S. on this kind of fiscal trajectory if the only thing it was going to accomplish was lowering taxes for the wealthy and turbocharging the stock market? And you know what? It’s even worse than that, because the sheer magnitude of it means that the market likely overshot, along with consumer and small business sentiment, which means the stage is set for a nauseating fall once the sugar high wears off.
Well, one person who isn’t particularly enamored with this is Janet Yellen. And yes, I buried the lede here, but I hope it’s clear from the above that you really need the context to appreciate her comments.
“If I had a magic wand, I would raise taxes and cut retirement spending,” Yellen told CNBC’s Steve Liesman on Tuesday, at the Charles Schwab Impact conference in Washington. She went on to call the U.S. debt path “unsustainable.”
Yellen also expressed concerns about the impact of the tariffs on investment spending and said she saw a risk that the Fed could tighten too much by 2020. Here’s a recap of the details from CNBC (and pardon the end that features the Fast Money traders – there was no way to lop it off).
Yellen did express confidence in Powell and her former colleagues on Tuesday, but the following quote shows why Yellen was so beloved by markets:
Nothing is ever set in stone and I would watch developments very carefully. But at this point it seems to be that at least a couple of more interest rate increases are going to be necessary to stabilize growth at a sustainable pace [and ensure the labor market doesn’t overheat].
That is classic obfuscation and it underscores why Yellen was so effective. You’ve got the nod to the relative desirability of rate hikes amid an overheating economy, but that comes last. First is a reminder that she could change her mind at any time (“nothing set in stone”) and the “at least a couple more” characterization when it comes to what’s necessary sounds pretty dovish considering what the dots tip over the next year/year and a half. Further, the “watch developments very carefully” bit is clearly a nod to the equity market turmoil. So if you were wondering what Yellen would be saying right now were she still in charge, there it is and it’s infinitely more effective from a communication standpoint than Powell’s efforts which, you’re reminded, have served to wipe trillions off equities this year (although obviously you can’t definitively attribute down days to his rhetoric).
Getting back to the “magic wand” soundbite, Twitter is predictably irritated, and you’ll invariably get all manner of tomato throwing from the buy gold/hoard canned goods/anti-Obama blog crowd about how Yellen monetized deficits and helped keep America’s debt service payments manageable with her policies. Of course that’s just another example of “whataboutism“. It does not in any way, shape or form address the reality of this situation, which is that the deficit is exploding thanks at least in part to Trump’s tax cuts, nor does it address the rising cost of servicing the debt issued to fund those cuts.
Additionally, a lot of those same commentators and bloggers spent the past decade complaining that a side effect of QE was rising inequality. That was a valid criticism. QE inflated the value of assets concentrated in the hands of the wealthy and the “wealth effect” did not bring about commensurate benefits for the real economy.
But please – please – don’t let it be lost on you that at least in the case of QE, the Fed could plausibly argue that the policies were necessary to ward off a deflationary spiral and a depression. There is no similar plausible deniability when it comes to the Trump tax cuts. Implicit in QE was trickle down economics. With the GOP tax cuts, there’s nothing “implicit” about it – it’s explicit. Trump deliberately instituted policies that enrich himself, other millionaires and billionaires, and corporations, and there was no economic rationale for it whatsoever.
Now, feel free to go right back to telling yourself that Janet Yellen is the scourge of the middle class, while this guy (who has apparently been cheating the government out of taxes since he was in diapers) is flyover America’s “savior”…