Corporate investment will determine pace of growth
Strohwig Industries, a tool and die maker in Richfield, has had a good year, and the company is optimistic that 2018 will be even better.
The lowering of the federal corporate tax rate to 21% from 35% means that its customers will have more money to buy its products and services.
“That certainly is our hope and expectation,” said Michael Retzer, controller of Strohwig Industries, which employs about 175 people. Whether that proves true will help determine the economic benefits of the new tax plan.
When sales are strong for companies such as Strohwig Industries, it’s a sign that businesses are spending money on the equipment and technology that make the country more productive.
That’s what really matters over the long-term.
Economic growth ultimately stems from two things: population growth (specifically the number of workers) and increases in productivity.
There are stretches of strong or slow economic growth, as well as the occasional boom or bust, tied to interest rates, tax rates, greed, fear and a lengthy list of other factors. But ultimately, over the long term, the economy won’t grow any faster than the population and increases in productivity.
The productivity part is the more important of the two, and it hinges on investment and innovation.
The tax cut that was part of the tax overhaul is expected to increase consumer spending and spur the economy to grow at a faster pace in the shortterm, though economists disagree on how much.
“My guess is you will have a short-term spark,” said Niloy Bose, a professor of economics at the University of Wisconsin-Milwaukee.
It’s what economists liken to a sugar high. The tax cuts for individuals and families also end over time.
The long-term gains will come from what businesses spend on equipment and technology, said Noah Williams, an economics professor at the University of Wisconsin-Madison.
For that reason, Williams and most economists consider the lower corporate tax rate to be the most important part of the tax overhaul.
The law also allows business to expense, or deduct from their profits, the cost of new equipment immediately instead of deducting it over many years.
That change, which will be phased out after five years, provides an additional incentive for companies to spend more on investments that can increase productivity.
None of this, however, is a given.
“It’s all contingent on what companies do,” said Stephen Cole, an assistant professor of economics at Marquette University.
Just because a company has more cash doesn’t mean that it has promising places to invest it.
That’s one of the reasons that companies in the S&P 500 spent more than $6 trillion from 2005 through 2014 buying back their own shares.
Large U.S. corporations overall also haven’t lacked for cash or access to it.
“And that’s been true for many years,” said Brad Chandler, director of the Nicholas Center for Corporate Finance and Investment Banking at UWMadison.
S&P Global Ratings estimates that the 500 largest industrial companies — a list that doesn’t in-
clude financial, transportation and real estate companies or utilities — have $1.6 trillion in available cash and cash equivalents.
But Chandler said the lower corporate tax rate changes the projected return on future investments, though he expects this to come into play only on the margins.
“They are not sitting on their hands waiting for a tax change if there is a real economic reason to do something,” he said. “They’ve already done the things that make clear sense.”
What is important is that companies could be more likely to build a new factory in the United States, he said, rather than in Netherlands or Ireland, because of the lower corporate tax rate.
That, too, is one of the reasons that Mike Katz, president of Molded Dimensions in Port Washington, believes that lowering the corporate tax rate is good policy.
The company, which makes custom rubber and cast polyurethane components, is fiscally conservative and pays for capital expenditures, such as new equipment, with cash, Katz said. But the lower tax rate could increase investment at some small companies.
A company could decide to spend $50,000 on a robot, for example, because it would not need to borrow the money.
“This could help them on margins,” Katz said.
But he disagrees that lower taxes will result in the hiring of more people.
“If you are making hiring choices based on your marginal tax rate, you’re misguided,” said Katz, whose company has added about 20 people in the past three years and now employs about 100 people.
Lower taxes also won’t make a bad investment attractive.
“Not at all,” he said.
Still, the prospect of companies’ remaining or expanding in the U.S. is one of the reasons for Strohwig Industries’ optimism about the tax overhaul,
“If companies are less likely to go overseas, that helps us,” Retzer said.
When a customer moves a factory to China, Strohwig Industries can’t follow it, he said. And when they move to Mexico, the company can sell to them but not provide the same services.
The lower corporate tax rate and other changes will help keep companies in the U.S., Retzer said.
“And that to me is reform,” Retzer said.
The lower tax rate also will enable Strohwig Industries to keep more of its profits — and pay its employees more in bonuses.
The company, which employs people who are the epitome of skilled industrial workers, pays monthly bonuses when business is strong.
It resumed paying them in April because of the prospect of tax reform.
That stronger economic growth will lead to higher wages is one of the promises of the Republican tax plan. But wages are tied to supply and demand, and the market generally determines what companies pay their workers.
Profits reportedly now account for 9.5% of the gross domestic product — well above the historical average. Yet wage growth has been sluggish, despite the drop in unemployment.
“We just haven’t seen the type of wage growth that we should see with the declining unemployment rate,” said Cole, of Marquette University.
Most economists expect more pressure on businesses to raise wages. But Cole and others noted that this could put upward pressure on inflation.
That could result in the Federal Reserve’s raising interest rates at a faster pace and, in turn, increase the interest expense on the federal debt.
Almost no economists believe that the tax overhaul and tax cut will offset the increase in the national debt. Nor have projections by the Joint Committee on Taxation or those by Moody’s, Tax Policy Center and Penn Wharton Budget Model.
“This huge amount of this debt we are going to accumulate, it has longterm consequences,” said Bose, the economics professor at UW-Milwaukee. “There is no doubt about it.”
The projected increase in federal deficits would come at a time when the country faces rising costs for Social Security and Medicare because of the baby boom generation reaching retirement.
The deficit projections also don’t include the effects of a recession.
“I don’t believe that anyone believes we are going to get through the next 10 years without a recession,” said Jared Bernstein, a former economic adviser to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities. “The question is how deep.”
The country already is now in one of the longest economic expansions in its history. And Cole said the country has never gone more than 10 years without a recession.
For now, though, the economy appears solid.
And Williams, the economics professor at UW-Madison, said the tax cut should result in a short-term increase in demand and output.
The unknown is how much, given that the economy is growing and close to full employment.
But reducing corporate taxes is good policy, Williams said.
How much it results in the investments that affect long-term growth — the investments that really matter and that benefit companies such as Strohwig Industries — won’t be known for years.
And even then, it could be difficult to tease out.
“This will have a positive impact,” Williams said. “How large is hard to say.”