AMID BOOM YEAR, TAX BILL TURMOIL
Rise of downtown
The completion of a new “tallest” building often marks the end of a building boom — but not in downtown Los Angeles. The 73story Wilshire Grand Center, developed by South Korean investors, opened in June. The $1.35billion skyscraper houses an InterContinental hotel, several floors of office space and five restaurants. Nearby, giant cranes work away on projects like the $1-billion Metropolis condominium and hotel complex and the $1-billion Oceanwide residential, hotel and retail complex. Money pouring in from U.S. and foreign investors — both Metropolis and Oceanwide are backed by Chinese developers — is transforming L.A.’s central core.
Home prices soar
In 2017, home prices fully recovered from last decade’s crash, but all was not right with Southern California’s housing market. The median price hit a nominal record of $505,000 in September, partly driven by continued low mortgage rates. But a lack of homes for sale played a big role too. That doesn’t bode well for affordability as the region’s economy continues to add jobs, making it hard to find housing near booming job centers like L.A.’s Westside.
Tech loses its Teflon
This year marked the end of Silicon Valley’s honeymoon with America. Utopian visions of a digital future quickly turned dystopian thanks to revelations that the country’s biggest tech companies were manipulated by Russian operatives to undermine the 2016 election. Google, Facebook and Twitter were all forced to appear before lawmakers in Washington to explain how their platforms were infiltrated by trolls, bots and fake news. The scrutiny has raised the odds the industry will see new regulations.
Amazon plays kale card
Amazon.com went on its own spending spree this year, adding Whole Foods to its shopping cart. Jeff Bezos’ Seattle mega-company bought Whole Foods for $13.7 billion and vowed to immediately slash prices at the notoriously pricey grocery chain. Avocados, salmon, brown eggs and organic apples all got the lower-price treatment, although prices for other products went up. Meanwhile, Amazon continues to make significant strides in streaming video, lightning-fast delivery, voice-recognition personal assistants, music, audiobooks, online shopping, pharmacy — and even bricks-and-mortar stores.
Uber veers off course
Uber started the year as the king of ride-hailing and start-ups. But a relentless string of scandals has weakened its standing. It lost executives over sexual harassment and bullying accusations, ousted Chief Execuitve Travis Kalanick and concealed a data breach that affected more than 50 million customers. It faced lawsuits from drivers, passengers and Alphabet-owned Waymo, and was kicked out of London. Amid boardroom infighting, Uber is now facing a huge mark-down in its valuation as it tries to sell at least 14% of its shares to Japanese conglomerate SoftBank.
Banks’ friend, the GOP
A decade after the housing bust sparked the worse U.S. recession since the Depression and ushered in tighter lending regulations, the financial industry is loosening its leash. In October, Congress voted to overturn a Consumer Financial Protection Bureau rule that would have allowed consumers to hit banks with class-action lawsuits. A month later, President Trump moved to neutralize the bureau itself, installing White House budget director and harsh bureau critic Mick Mulvaney as its interim head. Next up: reworking regulations on unwinding failed financial institutions.
Hollywood drama
It would create one of the biggest players in Hollywood, marrying a telecommunications giant with the owner of HBO’s “Game of Thrones” and the “Harry Potter” films. But there’s one hitch: The Department of Justice has sued to block AT&T’s $85-billion purchase of Time Warner Inc., contending it would wield too much control over entertainment. Many observers suspect the unusual action has something to do with Trump, who has long expressed disdain for Time Warner’s cash cow, CNN. A court case could establish a benchmark for antitrust actions and have a chilling effect on other big media deals.
In a recent interview, the conservative economist Stephen Moore — an advisor to and unapologetic fan of President Trump — explained the policy rationale of the tax cut bills that were then making their way through a Republicandominated Congress.
“It’s death to Democrats,” he told Bloomberg’s Sahil Kapur. “They go after state and local taxes, which weakens public employee unions. They go after university endowments, and universities have become playpens of the left.”
The key element missing from this assessment by an economist? Economics. Nonetheless, Republicans have marketed the tax cuts as keys to economic growth — and that’s why the plans have elicited widespread skepticism from budget analysts.
It’s not only because there’s virtually no historical evidence that tax cuts are tied to economic growth. It’s that even if one believes the linkage exists, now would be the wrong time to cut taxes. The economy is growing strongly and unemployment is falling fast. Moore himself, in an email exchange with me in October, described the economy as “sizzling hot.”
If that’s so, then the tax cuts could lead the economy to overheat, possibly into a recessionary meltdown. The economy was on a high through most of 2017, but the hangover in 2018 could be epic.
The consequences would be dire for the middle class. Pressure would mount to reduce spending. Under Republican regimes, that means cutting Social Security and Medicare benefits. Some Republican officeholders already are talking that way, including Sen. Marco Rubio of Florida, who told a Washington forum earlier this month that reducing spending means “instituting structural changes to Social Security and Medicare for the future.”
Medicare was threatened with an automatic annual budget cut of $25 billion. That’s the result of a law requiring Congress to offset any increase in the federal deficit with spending cuts. The law limits Medicare cuts to 4% of its budget per year, or $25 billion of its $625billion budget. Congress voted to waive the provisions known as Paygo (for “pay as you go”) for 2018 but they may still kick in for later years. That could result in fewer services or higher premiums for some seniors.
Residents of California and other high-service, high-tax states would detect the impact of the proposals as soon as they calculate their 2018 taxes, when the deductibility of state and local taxes will be limited to $10,000. According to a survey by my colleague Jon Schleuss, more than 30% of residents deducted state and local taxes in 12 of the 14 California congressional districts represented by Republicans, and in seven of the districts the ratio was 40% or higher.
None of this will matter if the tax cuts produce an economic surge, as their supporters predict. They also assert that the corporate tax cuts at the center of the tax plan will translate into higher wages, as businesses redirected their tax savings to their workforce. No evidence exists for either claim, but there is considerable evidence to contradict them.
Following a study of changes in tax rates dating back to 1950, the Congressional Research Service reported in 2014 that “past changes in tax rates have had no large clear effect on economic growth.”
Bruce Bartlett, who confessed in a recent op-ed to having “helped create the GOP tax myth” that cuts equal growth as a member of President Reagan’s domestic policy team, observed that economic growth actually was higher in the 1970s than after Reagan’s tax cut in 1981.
In times like this, Washington should be using the revenue flowing into the Treasury to reduce the deficit and pay down the national debt — not adding to the deficit and setting up a surge in borrowing. That will leave the government with little ammunition to combat the next recession, “unless previously unimaginable and politically intolerable deficits, tax increases or spending cuts suddenly become acceptable,” argues Stan Collender, a former staff member of the House and Senate budget committees.
Moreover, he says, “Washington’s ability to invest in anything new that will improve the economy (think infrastructure, education and medical research) will be far less.”
The GOP tax plan, in other words, is mortgaging the future. And the future starts on Jan. 1.