The statement, “What is good for General Motors is good for the country,” is attributed to Charles E. Wilson, then president of General Motors, during 1953 hearings on his nomination by President Eisenhower to be secretary of defense. His comment was generally considered to be outrageous and was widely mocked.
There is, however, at least a thread of truth in Wilson’s worldly view in that businesses sustain our economy and rely on a healthy business climate to succeed. That philosophy is the foundation for the proposed changes to the tax code and most other policies of the Trump administration.
Pending revisions to the tax code, driven more by a seemingly frantic effort to follow through on a campaign promise than by sound analysis, primarily benefit businesses, arguably leveling the international playing field and encouraging repatriation of massive tax haven stores of cash. Direct benefits to those with lesser incomes, particularly ordinary wage earners, will at best be paltry, more symbolic than real.
So, why are there not outraged calls for equity? The explanation is that American citizens across the board are buying in to what they are being told about prosperous businesses generating increased jobs, increased wages and increased national prosperity. The belief extends to pronouncements that the tax reduction law “will pay for itself” through increased tax revenues. That prediction is vital to the country’s economic future and should not be taken at face value.
It is likely that there will be a short-term uptick in economic indicators (already reflected in increased stock prices) as tax cut revenues enter the system. Politicians, particularly President Trump, will boastfully proclaim, “mission accomplished,” and bask in the afterglow of the encouraging numbers. But in the longer term, those indicators may loose their luster.
Faith that the current policy tilt in favor of business interest will succeed is based on a belief that the favored “job creators” will actually create new jobs and pay higher wages rather than simply increasing their take of resulting cash flow through executive compensation, enlarged dividends, stock buy backs, and mergers and consolidations. As the economy is currently so strong and retained earnings of large corporations are so large, the latter scenario, seems the more likely. More uncertain, and more promising, is the way small businesses, which operate on tighter margins in less stable markets, will respond.
As is generally recognized, the elephant in the room with respect to the wisdom of the pending tax cuts is their effect on the national debt. The tax cut will cut federal revenues by about $150 billion a year. A nonpartisan congressional analysis released by the Joint Committee on Taxation on Nov. 30 estimated that increased tax revenues stemming from the $1.5 trillion tax reduction (over 10 years) will cover only a third of the loss, thus leading to an increase of $1 trillion in the federal debt. In other words, the “trickle down” will fall far short of filling the bucket. Many leading economists share this skepticism.
National debt numbers can be alarming. As of an instant during the course of this writing it was shown to be $20,592,003,902,578 ($20.6 trillion) and it is still increasing like a raging stream due to federal deficit spending of more than $650 billion per year. The figures are so massive as to be virtually impossible to comprehend. If each dollar of the national debt were laid side by side it would create a carpet covering almost the entire state of Utah.
One way of measuring the relative magnitude of the national debt over time is to compare it to Gross Domestic Product (GDP), which is a computation of the value of all final goods and services produced in the United States in a year. Because GDP is currently about $20 trillion, it would require that every penny of the value all goods and services produced in the United States in 2018 be used to pay off the national debt by the end of the year, leaving no funds for anything else. Many economists consider that the current debt to GDP ratio of over 100 percent, which is extraordinarily high, poses unacceptable risks of economic instability for the country.
Of course, the national debt will never be retired, and conditions will exist from time to time warranting increases to address emergencies such as recessions and wars. Debates in Congress have been focused upon keeping it within reasonable limits by cutting expenditures or raising taxes. The Republican Party has now shifted gears and backed off its balanced budget rhetoric with an attempt to increase federal revenues by boosting economic output through a giant tax cut. To increase the national debt by lowering revenues when the economy is sound, corporate profits are high, and unemployment is low is counterintuitive. Whether the gamble will be successful is problematic.
Another risk factor is a possible increase in interest rates by the Federal Reserve that would curtail capital investments and reduce the purchasing power of earned income. Increases, which, are already predicted based upon current inflationary pressures, could be accelerated by the infusion of cash resulting from the pending tax cuts. Interest rate increases also raise the costs of servicing the national debt in numbers that can be devastating to the federal budget.
Irrespective of the uncertain impact of the tax cuts on the national debt, efforts to curtail continuing budget deficits will persist. As discretionary expenditures have already been squeezed almost to a quantitative limit, the likely targets, assuming that military expenditures are maintained, will be safety-net “entitlement” programs such as Medicaid, Medicare and Social Security, the primary beneficiaries of which are lower income wage earners and those living in poverty. Pressures to reduce such costs will be exacerbated if the tax cuts add to the deficit problem. Since “welfare reform” is next on the Republican legislative agenda, it should be no surprise when focus turns to proposed cuts.
The legacy of Charles E. Wilson has prevailed in the current administration, but it will take years for the impacts of the tax cut to be known. In the meantime, the statement that the tax cut legislation “will pay for itself” must be taken on faith. Setting aside all partisanship, it will, hopefully, all work out, but the odds are not good. The only certainty is that each party will blame the other if job-creating investments fail to materialize and the national debt increases as predicted.
Clayton Parr is a retired attorney living in Draper.