Friday, October 27, 2017

Tax Cuts And The Velocity Of Money

To borrow one of Ronald Reagan's most legendary phrases, there they go again.

A Republican Congress, and a Republican President, hell-bent on enacting major tax cuts without regard to their short-term (and long-term) effect on the national debt, to address a crisis in economic growth that, in point of fact, doesn't even exist.

How do I know it doesn't exist?  Donald Trump says so himself.  If you have the stomach to look at his Twitter feed--and it's OK if you don't, since doing so successfully requires a strong stomach--he'll tell you over and over again about the greatness of the country's current economic numbers.  He'll also make the mistake of taking credit for them, even though, for the first nine months of his Presidency, we've basically been living in the economic world Barack Obama helped to create.

But then, there's the problem of the legislative achievements of this new era of all-Republican government.  To wit:  there haven't been any.  That's one of the main reasons that Trump and his congressional cronies are now doing everything they can to ram a tax-cutting bill through the legislative and executive branches and into the lives--and the pockets--of the American people.  More about the "pockets" part later.

The other main reason, however, is even more nakedly political.  The Republican Party, to paraphrase Voltaire on the subject of the Holy Roman Empire, is neither Republican, nor a party.  It is a collection of angry vested interests representing different forms of conservatism (fiscal, social and military), all of whom agree (just barely) on one thing:  tax cuts.

But let's give them the benefit of the doubt anyway, at least for a little bit.  Wage growth has been, as it always is in an economic recovery, the most lagging number to pick up any steam.  The heart of the GOP argument for current tax cuts is that they will magically change all of that.

There's a big hole in that argument, and it has to do with what is called, in Wall Street parlance, the "velocity of money"--that is, the speed at which dollars are turned over in multiple transactions throughout the economy.  Despite the government flooding of money into the nation's banking system after the 2008 economic crisis, which was supposed to put the velocity of money into warp speed, the velocity of U.S. dollars has remained incredibly slow.  "Lazy," in the word of one author.  But tax rates are not the reason; debt is.  Not just government debt, but corporate and consumer debt, which has accrued over decades as a result of conservative economic policies based on--wait for it--tax cutting.

Frankly, it would be better for both the national and international economy to work out some sort of debt-forgiveness program, one that would free everyone from the burden of past debt transactions that no longer make any sense, and give everyone--individuals, companies, and nations--the proverbial "fresh start."  Even somewhat conservative, in the strictly Biblical sense.  But that's not what we're going to be getting, folks.  We're going to be getting tax cuts.

This, despite the fact that conservative voices outside of government disagree on the value of these cuts.  (See here, and here, joining liberal voices in the process.)

This, despite the fact that many of the tax-cut advocates are having to eat their words about Obama-era deficits, or discuss paying for the current round of tax cuts with tax hikes on constituencies they hate, or budget cuts that hurt society's most vulnerable members.  These methods of payment, incidentally, will not help the velocity of money at all; they will simply pull more consumer spending out of the economy, thereby lowering tax revenues even further.

This, despite the fact that past tax cuts have been largely a boon primarily to offshore tax shelters (again, reducing the velocity of money) and foreign investors (and are very likely to benefit the latter group again).

And this, despite the fact that even the Trump Administration admits that one key portion of the tax-cut bill--elimination of the estate tax--will only benefit the wealthy.  Historically, that has been the point of having the estate tax in the first place:  to prevent the development of a permanent economic aristocracy.  Once again, a blow against the velocity of money, especially since the estate tax serves as a powerful incentive for charitable contributions.

It appears, then, that the only way to reverse this latest round of tax-cutting insanity is to let it come to pass, and then suffer through the inevitable recession--or worse--that will come about as a result.  Go ahead and laugh (especially if, pun intended, you're Arthur Laffer, the supply-side "guru").  It's only happened twice before after a big round of Republican tax cuts:  in 2008 and 1982.  No one should be fooled into thinking that the third time will somehow be the charm.  But many will be, despite the fact that it was actually tax hikes--under Reagan (yes, Reagan), Bush I, Clinton and Obama--that set the stage for economic recoveries in each case.

As counter-intuitive as it may seem, it is tax hikes, and not cuts, that promote the velocity of money, by forcing those who have it to put it to work in the economy.  Wait under after the next recession/depression, and after Trump is thrown out of office (one way or the other), and you'll get another chance to see how it works.

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