WASHINGTON, March 3, 2018: It seems rather peculiar that a Nobel Prize-winning economist who is also a columnist for the New York Times simply does not understand the effects of President Trump tax cuts. “Taxpayers, you’ve been scammed,” a delusional Paul Krugman claims in his March 2, 2018, column.
The main purpose of GOP tax cut is to stimulate economic growth, something the U.S. economy lacked during the eight-year reign of the business-hostile Obama administration.
America has not had a 3% growth rate in 12 years
In fact, the American economy hasn’t experienced an annual 3% growth rate in 12 years. It has been 17 years since America’s GDP grew at an annual rate of 4%. That is the longest period of economic stagnation in U.S. history. The result of this stagnation was the millions of workers who are underemployed plus millions more who have become so discouraged, they have simply stopped looking for work.
This situation, in turn, has led to an increase in social problems, like unrest, crime and drug abuse. It has also contributed to the notion that the U.S. has a severe income inequality problem, which simply isn’t true. The U.S. has a problem with higher rates of poverty and a lack of opportunity for low skilled workers to become gainfully employed.
Economic growth and prosperity will reduce income inequality.
When the economy experiences slow growth, those with skills may still find opportunities, but often for jobs that do not require the skills they have. Forced by circumstances to take such jobs, their income is predictably lower leading to higher frustration. Because the skilled workers have found lower-skilled jobs, however, those with lower skills find no opportunities at all. They become so discouraged they drop out of the labor market entirely.
Higher economic growth will fix that situation.
As the economy expands, highly skilled workers find better opportunities, and at higher salaries. Low skilled workers find opportunities as well, as those lower-skilled jobs open back up to them. So they re-enter the job market and their income increases. If President Trump can help create a return to true American prosperity – where the economy grows at a 4% or even a 5% rate – incomes of workers rise. That will reduce income inequality.
President Trump wants a high growth economy that provides an opportunity for nearly everyone and at higher income levels for all. The delusional Paul Krugman simply wants more government revenue, regardless of whether or not that strong growth supports more revenue. He says he would raise tax rates instead. “We need more (tax) revenue, not less.” Krugman wrote in the Times.
Lower tax rates will increase tax revenue.
Delusional Paul Krugman says higher tax rates are necessary, especially for corporations. But if the higher tax rates slow economic growth – which they will – tax revenue will fall. Isn’t 35% of $1000 ($350), less than 20% of $2000 ($400)? After the tax cuts in 1964, 1982, 1986 and 1997, tax revenue increased and eventually grew at a faster rate.
Krugman says that the theory behind lower tax rates leading to increased economic growth is “that the lower corporate tax rates will draw lots of money from overseas.” It doesn’t appear that Krugman understands the real theory.
Lower corporate tax rates are designed to create new capital, which is desperately needed for expansion in a capital-intensive economy.
Whether the corporation invests the new capital itself or gives it to stockholders as dividends or repurchases shares of stock, the new capital becomes an investment into the economy one way or the other.
Shareholders will reinvest their increased dividends. Former shareholders who have sold their stock back to the corporation will have funds that they too invest back into the economy.
Regardless of who does the investing, lower corporate tax rates create capital that is invested into the economy, which in turn creates expansion and economic growth.
Krugman claims, “money spent on buybacks is money that isn’t being invested” back into the economy. What does Krugman think the former stockholders will do with the $170 billion they have received from buybacks? The truth is that they reinvest their profits back into the economy.
Delusional Paul Krugman and his “monopoly power” mirage.
Krugman says, corporations with monopoly power won’t see lower tax rates as a reason to invest more: they’ll “just take the money.” Well, Mr. Krugman, what do stockholders expect the corporation to do with the money after they just “take the money?”
Stockholders, who are the owners of the corporations, will expect reinvestment by the corporation or given to them individually to reinvest.
In addition, Krugman doesn’t seem to understand basic corporate finance. Suppose a corporation has a cost of capital of 12%. They have an investment opportunity that with a 35% tax rate yields a 10% return. They won’t make that investment and they won’t contribute to economic growth.
But if the tax rate decreases to 21%, as Trump has done, the investment may return 14%. Since the 14% return exceeds the 12% cost of capital, the corporation invests and the economy grows. It is really very simple.
Krugman also seems not to understand the way markets work.
Monopoly power – monopoly money
Monopoly power means that a corporation has such a large share of the market, that they can set prices and generally control the market. Unless the government has set up a monopoly, there are really no markets where monopoly power exists in the long term.
Microsoft with its Windows product may have had monopoly power 15 years ago. But then Apple and Google can along. Intel may have had monopoly power in making chips, but that changed too. Years ago, Xerox had monopoly power in the copy market. That is certainly not true today.
Krugman believes the goal of economic policy is to cure perceived social injustices. But the goal of economic policy is to grow the economy to provide full employment while keeping prices stable.
I think the extraordinarily delusional Paul Krugman actually knows that. If he weren’t so ideologically biased, leading to his firm “belief” that the GOP/Trump tax cuts are just “scamming” the American taxpayer, he might have a decidedly different view.