Trump flunks Economics 101
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.
Sean Spicer (left), Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn talk tax cuts.