This Is No “Sugar High” for the U.S. Economy

Mar. 29, 2019
by Bob Adelmann

Last August the supposedly non-partisan Joint Committee on Taxation expected the benefits of President Trump’s tax cuts to peter out after a year or so. It argued, said Kevin Brady, writing in the Wall Street Journal, that the tax law (the Tax Cuts and Jobs Act, or TCJA), “would stoke inflation and force the Federal Reserve to raise rates, counterbalancing the pro-growth effects of the tax cut.”

The committee got it half right: the Fed did intervene, raising rates by the most in any calendar year since 2005. It claimed that it was fighting inflation, except that there wasn’t any. Or not enough to justify this massive intervention. Wrote Brady, the ranking Republican on the House Ways and Means Committee: “In addition the Fed shrank its monetary base by nearly $400 billion during 2018 … the fastest calendar year drop in history.”

Wall Street saw it coming, and, in anticipation of the predictable if unnecessary economic slowdown, dropped stocks nearly 20 percent in a month. This forced the Fed to back off, nearly issuing an apology by saying it would now take a “wait and see” attitude about further rate hikes. Trump’s nominee to fill one of the Fed’s Board of Governors vacancies, Stephen Moore, has already publicly announced that he will push for a rate decrease once he’s on the board.    

Wall Street rebounded, with stock indexes notching double-digit gains so far this year, with more to come.

More to come? How can this be?

Because of another failure by forecasters to see the real world, this time from the renowned and highly respected people at the Penn Wharton School at the University of Pennsylvania. Last August it predicted that Trump’s tax law would have only a modest impact on the U.S. economy because of the repatriation of profits America’s largest corporations had stashed overseas. In its study the authors wrote that “direct economic effects from repatriated income are likely to be very small … that TCJA will raise $254 billion in revenue over the next ten years [and its] indirect impact will be to increase GDP by less than 0.2 percent after ten years.”

Wednesday’s report from the Commerce Department completely obliterated the folks’ forecast at Penn Wharton: American companies repatriated $665 billion of their earnings in 2018, taking advantage of the law’s tax holiday provision. That’s in a single year, not over ten years.

And the best is yet to come: there’s still an estimated $2.5 trillion in profits stashed overseas just waiting for a time like this. Like briquettes on a charcoal grill it takes time for their benefits to show up. But once they do, then – to extend the analogy – things really start cooking.

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That two-thirds of a trillion dollars recalled from abroad is currently being invested in new plants and equipment, new technology, new labor-saving hardware and software – and the results are already beginning to show up. Labor productivity, a measure that has languished for years, jumped a breathtaking 1.8 percent in 2018, compared with just a 0.5 percent improvement from 2012 to 2016.

American companies are using those repatriated profits to fund the “low-hanging fruit” – projects already on the drawing boards and approved once the funds were available. Now that America is the most-favored nation for foreign investors, the flood of billions from abroad will continue and is likely to increase, bringing the higher-hanging, and even more profitable, fruit within reach.

Profits of American corporations were up 11.1 percent in the fourth quarter of 2018, while profits “per share” rose nearly 17 percent. That’s the fifth straight quarter of double-digit earnings growth for America’s largest companies.

The improved outlook being predicted by Wall Street is showing up in consumer and business sentiment. The Business Roundtable’s survey of future business expectations is 15 points higher than its 2012-16 average. And the University of Michigan’s consumer confidence index has nearly completely recovered from its swoon following the Fed’s intervention, to 97.8 from 91.2.

The trade gap with China is narrowing. It fell by 14 percent in January, reflecting American consumers’ increasing preferences for products made in America. It also reflects the jump in American soybean exports to China, from $300 million in December to $1.2 billion in January.

All of this bodes well for the U.S. economy, already producing more than $20 trillion of goods and services a year, leaving China (whose economy, at $13 trillion, is shrinking) and Japan (at $5 trillion) farther and farther behind.

If the president successfully concludes his negotiations with the Chinese communists, and is able to install enforceable rules that keep them from continuing to steal U.S. technology, the side benefit – lower tariffs – will help keep the U.S. economy humming for years.

This is no “sugar high,” but the reflection of sensible policies initiated by Trump: lower taxes, fewer regulations, and (hopefully) continued Fed inaction. We are witnessing the launching of the Trump economy going into afterburner once the new investments from those repatriated profits kick in.



Penn Wharton: Estimates of TCJA Repatriation of Foreign Earnings on Investment and GDP

The Wall Street Journal: Company Repatriations of Cash Surged, Then Moderated in 2018

The Wall Street Journal: U.S. Trade Gap Narrowed Sharply in January

Kevin Brady: Tax Reform Is No ‘Sugar High’

The Wall Street Journal: U.S. GDP Growth Revised Down to 2.2% Rate in Fourth Quarter

The Wall Street Journal: U.S. Jobless Claims Fell Last Week

2018–19 United States federal government shutdown

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