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The incredible shrinking Trump boom

SO far, President Donald Trump has passed only one significant piece of legislation: the 2017 tax cut. It was, to be fair, a pretty big deal: corporations, the principal beneficiaries, have saved more than US$150 billion, and over the course of a decade the tax cut will probably increase the budget deficit by more than US$2 trillion.

But the tax cut was supposed to do more than just give stockholders more money - or at least that's what its proponents claimed. It was also supposed to lead to many years of high economic growth, 3 per cent or more at an annual rate.

Independent observers were sceptical, to say the least. They conceded that the tax cut might lead to a brief sugar high, because that's what big deficits do. But any favourable effects on growth, they argued, would soon fade out. And they always insisted that it would take some time to assess the tax cut's actual effects.

Nonetheless, when the economy grew pretty fast in the second quarter of 2018, Mr Trump and his supporters cried vindication, and ridiculed the critics.

But a bit of time has passed since then. While the numbers aren't official, there are a number of independent observers, including both Federal Reserve banks and private financial institutions, that produce "nowcasts" that estimate growth based on early data. At this point, all these nowcasts show slowing growth, and most put the first quarter of 2019 at about 1.5 per cent.

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The results so far look nothing like the huge, sustained boom the Trump camp promised, but instead like the brief sugar high predicted by the critics.

But Mr Trump is a special kind of leader. When things don't go his way, when events fail to turn out as he planned and promised, he always knows exactly what to do: blame someone else. Sure enough, he's now asserting that we'd be having a "yuge" economic boom, 3 per cent growth, all that, if only the Federal Reserve hadn't raised interest rates.

OK, this is where you need to be able to hold two ideas in your head at the same time. Was the Fed wrong to raise rates? Probably yes. Does this account for the failure of the Trump tax cut? No.

The Fed was clearly overoptimistic about the economy's prospects, as it has pretty consistently been for the past decade. It's worth noting that throughout that whole period conservative critics of the Fed - the same people now backing Mr Trump - attacked the institution for keeping interest rates too low, not too high. Still, it's now clear that the attempt to normalise monetary policy was premature.

But the Fed's premature rate hikes aren't why the Trump tax cut is failing. How do we know that? Because all those boasts about why the tax cut would work miracles were based on a specific story about what is holding the US economy back. And that story was and is all wrong.

The Trumpist theory - which was, I'm sorry to say, endorsed by conservative economists who should have known better - was that there was a huge pile of money sitting outside the US that companies would bring back and invest productively if given the incentive of lower tax rates. But that pile of money was an accounting fiction. And the tax cut didn't give corporations an incentive to build new factories and so on; all it did was induce them to shift their tax-avoidance strategies.

As Brad Setser of the Council on Foreign Relations points out, a casual glance at the data seems to suggest that US companies earn a lot of their profits at their overseas subsidiaries. But a closer look shows that the bulk of these reported profits are in a handful of small countries with low or zero tax rates, like Bermuda, Luxembourg and Ireland. The companies obviously aren't earning huge profits in these tiny economies; they're just using accounting gimmicks to assign profits earned elsewhere to subsidiaries that may have a few factories, but sometimes consist of little more than a small office, or even just a post-office box.

These basically phony profits then accumulate on the books of the overseas subsidiaries, rather than the home company. But this doesn't affect their ability to invest in the United States: if Apple wants to spend US$1 billion here, it can always borrow the money using the assets of its Irish subsidiary as collateral. In other words, US taxes weren't having any significant effect in deterring real investment in the US economy.

When Mr Trump cut the tax rate, some companies "brought money home". But for the most part this had no economic significance. Here's how it works: Apple Ireland transfers some of its assets to Apple USA. Officially, Apple Ireland has reduced its investment spending, while paying a dividend to US investors. In reality, Apple as an entity has the same total profits and the same total assets it did before; it hasn't devoted a single additional dollar to purchases of equipment, research and development, or anything else for its US operations.

Not surprisingly, then, the investment boom Trump economists promised has never materialised. Companies didn't use their tax breaks to invest more; mainly they used them to buy back their own stock. This in turn put more money in the hands of investors, which gave the economy a temporary boost - although for 2018 as a whole, one of the biggest drivers of faster growth was, believe it or not, higher government spending.

So the theory supposedly behind the Trump tax cut has turned out to be a complete bust. Corporate accountants got to have some fun exploring new frontiers in tax avoidance; the rest of us just ended up saddled with an extra US$2 trillion or so in debt.

Now, I'm not deeply worried about that debt. Given low borrowing costs, the costs and risks of federal debt are far less than the usual suspects - again, the same people who cheered on the Trump tax cut - have claimed. But think of all the other things we could have done with US$2 trillion - all the infrastructure we could have built and repaired, all the people who could have been given essential health care.

What a colossal, corrupt waste. NYTIMES

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