Trump flunks Eco­nomics 101

San Francisco Chronicle - - OPINION - CATHER­INE RAMPELL Email: cram­pell@wash­ Twit­ter: @cram­pell Wash­ing­ton Post Writ­ers Group

Pres­i­dent Trump told a whop­per about his tax plan this month. But it’s not the one that ev­ery­one is fo­cus­ing on.

In an in­ter­view with the Econ­o­mist, Trump said his ex­pen­sive pro­posal to cut taxes was akin to “prim­ing the pump,” a phrase he de­clared he’d in­vented just a few days ear­lier.

Lots of com­menters, crit­ics and co­me­di­ans pounced on this coinage claim. They noted not only that the ex­pres­sion “prim­ing the pump” was in use a cen­tury ago, but also that Trump him­self ut­tered the phrase many times be­fore the date he claimed to have de­vised it.

Fun as it is to mock this silly et­y­mo­log­i­cal fib, do­ing so misses the much larger lie: that Trump’s tax plan is in any way akin to the use­ful eco­nomic pol­icy tool of “pump-prim­ing.” It’s this lie that will help him scam the Amer­i­can pub­lic.

Lit­eral “pump-prim­ing” refers to in­ject­ing a lit­tle wa­ter into a pump so you can draw much more wa­ter out (from a well, for ex­am­ple). Metaphor­i­cal “pump­prim­ing,” in eco­nomic con­texts, refers to the fact that some­times gov­ern­ments need to in­ject a lit­tle pub­lic money into the pri­vate econ­omy to get a much larger amount of pri­vate money mov­ing.

In prac­ti­cal terms, that means cut­ting taxes or in­creas­ing govern­ment spend­ing to rev up com­pa­nies and con­sumers. It’s a col­or­ful way of char­ac­ter­iz­ing the Key­ne­sian re­sponse to a short­fall in ag­gre­gate de­mand: When the econ­omy is in re­ces­sion, you tem­po­rar­ily en­dure big­ger bud­get deficits in or­der to en­cour­age more pri­vate-sec­tor ac­tiv­ity.

Trump’s tax plan, how­ever, is ba­si­cally the op­po­site.

First of all, the econ­omy is not in re­ces­sion. Un­em­ploy­ment is 4.4 per­cent, and long-term stock mar­ket priceto-earn­ings ra­tios are at their high­est lev­els in 15 years. These are hardly the kind of con­di­tions sug­gest­ing need for Key­ne­sian-style stim­u­lus.

Sec­ond, “pump-prim­ing” refers to a tem­po­rary deficit­fi­nanced stim­u­lus — em­pha­sis on “tem­po­rary.” It is not a per­ma­nent give­away. If your wa­ter pump is work­ing cor­rectly, you don’t con­tinue dump­ing more and more wa­ter into the well.

Trump’s deficit-fi­nanced tax cuts, as far as we know, would be per­ma­nent. (The only rea­son they might end up be­ing tem­po­rary would be to skirt a Se­nate rule against in­creas­ing long-term deficits.) We don’t have enough de­tail to know how much the cuts would cost, but a Tax Pol­icy Cen­ter es­ti­mate of an ear­lier ver­sion of the plan ball­parked it at $7.2 tril­lion over the first decade and $20.9 tril­lion by 2036.

And third, even if we were in a re­ces­sion, and even if the cuts were tem­po­rary, the ter­ri­ble de­sign of this tax plan seems un­likely to do much stim­u­lat­ing at all.

Sim­pli­fy­ing the tax code and re­duc­ing dis­tor­tions in eco­nomic ac­tiv­ity caused by wacky loop­holes would in­deed be wor­thy goals and would prob­a­bly help the econ­omy. But that’s not the thrust of Trump’s pro­posal.

In­stead, he’s propos­ing big­ger loop­holes, and enor­mous tax cuts weighted to­ward cor­po­ra­tions and the wealthy.

So you have to ask: What ex­actly is the mech­a­nism by which any of this would stim­u­late the econ­omy?

Maybe you think putting more money in the pock­ets of the rich would lead them to spend more, or de­vote more hours to work­ing, cre­at­ing more eco­nomic ac­tiv­ity and more jobs. In other words, “trickle-down.”

In fact, in a re­cent pa­per, Uni­ver­sity of Chicago Booth School of Busi­ness eco­nomics pro­fes­sor Owen Zi­dar looked at changes to the tax code over the post-World War II pe­riod, with an eye to­ward com­par­ing the eco­nomic ef­fects of tax cuts felt by the rich compared with the poor.

He found that the re­la­tion­ship be­tween tax cuts and job growth is pri­mar­ily driven by cuts for lower-in­come groups and that the eco­nomic ef­fects of tax cuts for the top 10 per­cent are tiny.

A slew of ear­lier stud­ies on the earned-in­come tax credit sup­ports this view that tax pol­icy aimed at putting more money in the pock­ets of the poor and lower-mid­dle-class pro­vides a big­ger bang for your buck.

Or maybe you think cut­ting cor­po­rate taxes and cap­i­tal gains rates would en­cour­age more in­vest­ment. This ar­gu­ment would be more con­vinc­ing if com­pa­nies were not al­ready sit­ting on moun­tains of cash that they can’t find suf­fi­cient in­vest­ment op­por­tu­ni­ties for. Or if the last time we tried some­thing sim­i­lar there had been any ef­fect at all on cor­po­rate in­vest­ment. (There was none.)

It’s im­pos­si­ble to know why Trump made his ridicu­lous, eas­ily dis­prov­able claim of coin­ing “pump-prim­ing.” But if he’s smart, dis­tract­ing the me­dia from his plan to drain the well — and di­vert all its wa­ter to those al­ready well-hy­drated — would be a pretty use­ful ob­jec­tive.

Carolyn Kaster / As­so­ci­ated Press

Sean Spicer (left), Trea­sury Sec­re­tary Steven Mnuchin and Na­tional Eco­nomic Coun­cil Di­rec­tor Gary Cohn talk tax cuts.

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