Looking at an unfair attack on the Trump tax cuts

I realize that a busy day of “winning” or “owning” this or that group doesn’t leave much time for reflection. But sometimes one needs to hit the pause button. Take the social media hullabaloo about this piece from CBS Moneywatch: “Worker wages drop while companies spend billions to boost stocks.”

From the story:

Six months after the Tax Cut and Jobs Act became law, there’s still little evidence that the average job holder is feeling the benefit. Worker pay in the second quarter dropped nearly one percent below its first-quarter level, according to the PayScale Index, one measure of worker pay. When accounting for inflation, the drop is even steeper. Year-over-year, rising prices have eaten up still-modest pay gains for many workers, with the result that real wages fell 1.4 percent from the prior year, according to PayScale. The drop was broad, with 80 percent of industries and two-thirds of metro areas affected.

“Now, economic confidence has been good, we’re in a strong economy, GDP is growing, but the question has been, where’s the paycheck?” said Katie Bardaro, vice president of data analytics at PayScale.  

The answer is, largely, in the companies’ coffers. Businesses are spending nearly $700 billion on repurchasing their own stock so far this year, according to research from TrimTabs. Corporations set a record in Q2, announcing $433 billion worth of buybacks — nearly doubling the previous record, which was set in Q1.

Look, the buybacks issue is beside the point. (See: “The Buyback Fallacy.”) And to focus on it misunderstands the economic mechanism by which the business tax cuts are supposed to eventually boost worker wages. From my AEI colleague Alan Viard:

According to economic theory, a corporate tax rate reduction raises wages by boosting investment and productivity. Here’s how it works. Reducing the tax rate on a company’s taxable income gives it an incentive to earn more taxable income by expanding their factories, equipment, and other business capital in the United States. It is in a company’s self-interest to expand their U.S. investments because the rate cut lets them keep more of the profits of those investments.

With more capital augmenting their output, American workers become more productive and therefore more valuable to employers. Companies throughout the economy then compete against each other to hire more workers, bidding up their wages. These dynamics — the expansion of the capital stock and the resulting increases in productivity and wages — are likely to play out over a number of years after the rate cut takes effect.

And all that will take time — which, by the way, is why Republicans were wrong to point to those one-time bonuses months ago as a sign the tax cuts were already working. Again Viard: “The one-time bonuses give workers extra money now, although it is too soon for the tax cut to have increased investment and raised productivity, but offer workers nothing in upcoming years, when the tax cut would have had time to push up productivity.”

Also, as the piece itself notes, the PayScale Index is one measure of worker pay, though not one I regularly — if at all — track. Another measure, much valued by economists, is the Employment Cost Index from the Bureau of Labor Statistics. It shows wages and salaries increased 2.9 percent for the 12-month period through the first quarter of this year. And inflation? Well, it’s up 1.8 percent over that period according to the Fed’s preferred measure — the price index for personal consumption expenditures — rather than PayScale’s preferred consumer price index. Both the PCE and CPI have risen in recent months, but the CPI has risen faster. It’s up 2.7 percent from a year ago through May vs. 2.3 percent for the PCE. I think it is reasonable to suggest real wages have been rising.

And why have wages not been rising even faster given low unemployment? Well — and I know this won’t be a satisfying explanation for those who want a monocausal explanation that neatly fits their politics — it’s complicated.