Brocker.Org: Trump’s ‘voodoo economics’ takes aim at exactly the wrong target

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Mark Wilson/Getty Images

The US economy grew at its
slowest pace in three years
in the first quarter, and a
closer look at the data helps  illustrate a key fallacy in
Donald Trump’s economic agenda.

The latest figures showed business investment is picking up while
consumer spending is pulling back. Yet the president’s
proposed tax cut outline and budget priorities are aimed
primarily at boosting the bottom line of corporations, which
don’t really need the help.

In economics jargon: this is a
classic supply-side response
 to a demand-side problem.

In English: Why help companies and investors if workers are the
ones in trouble?

Trump’s plan pays lip service to individual tax cuts, but its
core has always been a steep reduction in corporate taxes. The
plan has also widely been criticized for
favoring wealthy Americans. 

Jason Furman, a former White House economic adviser under
President Obama, summed up the dichotomy in a tweet.

(SR means sustained real, I think.)

Now, one quarter does not a trend make. Many economists
believe there are issues with the Bureau of Labor Statistics’
seasonal adjustments that have led to repeated instances of
surprisingly weak first quarter readings, some later revised
higher. This
could mean the reported 0.7% annual rate is artificially
low. 

The breakdown of GDP’s components also shift a lot from
quarter to quarter.


Screen Shot 2017 04 28 at 10.57.56 AMReuters

However, the trend of corporations famously flush with “cash on
the sidelines,” coupled with stagnant wages for the middle-class
is long-standing, and precedes the Great Recession.

As soon Trump’s team, led by ex-Goldman Sachs partners
Treasury Secretary Steven Mnuchin and White House Advisor Gary
Cohn, delivered their one-page list of bullet points on taxes,

Democrats in both chambers of Congress hit back. 

Rep. Ted Lieu called it “Voodoo economics on steroids,”
while House Minority Leader Nancy Pelosi depicted it as a “wish
list for billionaires.”

The term voodoo economics dates back to the time of Ronald
Reagan, who was accused by his then-opponent George H. W. Bush of
employing a trickle-down economics approach where the wealth
never really trickled down — as witnessed by the sharp rise in US
inequality over the last 30 years.

The deeper problem with the philosophy behind Trump’s plan
is that it has been proven wrong time and time again by both
economic study and reality. Most recently, President George W.
Bush implemented a program of tax cuts aimed at the wealthy in
2001 and 2003 that led to a famously jobless recovery that
culminated in the deepest recession in modern times.

And a wide body of economic research, whatever the
profession’s shortcomings, has shown repeatedly and
apolitically that
stimulus programs aimed at the poorest segments are more
effective
, for the rather simple reason that lower-income
Americans are more likely to spend any newly available funds than
the rich, who have a greater ability and thus a propensity to
save.

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