Wider And Deeper

On Wednesday, the Federal Reserve cut interest rates because, according to Fed Chair Jay Powell, there were clear signs that the economy was slowing. There was, Paul Krugman writes, another clear sign. Trumponomics has been a failure:

Why has Trumponomics failed to deliver much besides trillion-dollar budget deficits? The answer is that both the tax cuts and the trade war were based on false views about how the world works.

Republican faith in the magic of tax cuts — and, correspondingly, belief that tax increases will doom the economy — is the ultimate policy zombie, a view that should have been killed by evidence decades ago but keeps shambling along, eating G.O.P. brains.

The record is actually awesomely consistent. Bill Clinton’s tax hike didn’t cause a depression, George W. Bush’s tax cuts didn’t deliver a boom, Jerry Brown’s California tax increase wasn’t “economic suicide,” Sam Brownback’s Kansas tax-cut “experiment” (his term) was a failure.

Nevertheless, Republicans persist. This time around, the centerpiece of the tax cut was a huge break for corporations, which was supposed to induce companies to bring back the money they’ve invested overseas and put the money to work here. Instead, they basically used the tax savings to buy back their own stock.

What went wrong? Business investment depends on many factors, with tax rates way down the list. While a casual look at the facts might suggest that corporations invest a lot in countries with low taxes, like Ireland, this is mainly an illusion: Companies use accounting tricks to report huge profits and hence big investments in tax havens, but these don’t correspond to anything real.

There was never any reason to believe that cutting corporate taxes here would lead to a surge in capital spending and jobs, and sure enough, it didn’t.

What about the trade war? The evidence is overwhelming: Tariffs don’t have much effect on the overall trade balance. At most they just shift the deficit around: We’re importing less from China, but we’re importing more from other places, like Vietnam.

And there’s a good case to be made that Trump’s tariffs have actually hurt U.S. manufacturing. For one thing, many of them have hit “intermediate goods,” that is, stuff American companies use in their production processes, so the tariffs have raised costs.

There has always been an international market for horse manure. But, with Mr. Trump, the market keeps getting wider and deeper.

Image: ABI Attachments AU