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The Trump tax-cut stimulus has disappeared

Rick Newman
Senior Columnist

President Trump believes debunked conspiracy theories about Ukrainian malfeasance in the 2016 U.S. election. That has contributed to an impeachment inquiry against him.

Turns out Trump favors bogus economic theories, too.

Two years ago, Trump predicted the Republican tax cut would raise family incomes by $4,000 a year, on average. “It’s going to be fantastic for the economy,” he said at a White House signing ceremony on Dec. 22, 2017. “The numbers will speak.”

The numbers have now spoken, and it’s more like a hiss. Gross domestic product grew a scant 1.9% in the third quarter, signaling a slowdown in the economy since Trump cut taxes. Economic growth under Trump actually peaked at the end of 2017, right before the tax cut went into effect. It came close to that high in the second quarter of 2018, when GDP grew at a 3.5% annualized rate. But growth has been drifting down ever since. The economy grew just 2.9% for the full year in 2018, and it’s on pace for perhaps 2% growth for the full year in 2019. Trump predicted he’d boost GDP growth to at least 3% and possibly 4%.

A brief uptick in growth under Trump is now retreating to Obama-era levels.

Trump and his fellow Republicans also predicted a boom in business investment that would trickle down to workers and result in that big wage gain. Again, there was a small bump in investment in the middle of 2018, but this too has fallen sharply. Nonresidential fixed investment, a proxy for business spending, fell 3% in the third quarter. “Real spending on business equipment has slowed sharply,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, explained to clients. “We expect no near-term relief.”

The U.S. manufacturing sector has actually contracted during the last two monthsManufacturing employment has flatlined this year, and anecdotal reports of layoffs suggest a bigger decline could be coming. Overall, the pace of job growth has slowed from an average of 216,000 new jobs per month during President Obama’s second term to 188,000 under Trump, and just 161,000 so far in 2019.

What about wages? Nothing special. They’re up 2.9% during the last 12 months, an improvement over the 2.2% annual average during Obama’s second term. Factoring out inflation leaves workers with a real wage gain of 1.2% during the last year. Based on median household income of $61,937, that’s a windfall of $743. Only $3,257 left to go.

Share buybacks and big deficits

Critics of the GOP tax cuts have pointed out that instead of investing, many corporations used the spare cash to buy back shares and boost dividends. Buybacks, in fact, hit a record in 2018. But even that boomlet is waning, with buybacks slowing sharply this year. That’s one reason some analysts worry stocks could sputter into 2020.

President Donald Trump speaks at the International Association of Chiefs of Police Convention Monday, Oct. 28, 2019, in Chicago. (AP Photo/Charles Rex Arbogast)

The most lasting impact of the tax cut may be ballooning federal deficits. In a growing economy, the gap between government spending and borrowing should decline. In the late 1990s, there were even four years of federal surpluses. Under Trump, however, deficits have risen from $665 billion in 2017 to $984 billion in 2019. Federal revenue from income taxes has risen, but revenue from corporate taxes has fallen 23% since Trump signed the tax cut. Trump and others said the tax cuts would stimulate so much new activity that tax receipts would actually rise. They were wrong.

While business spending has tanked, consumer spending has held up. Job security remains solid and workers feel okay about their prospects. But consumers are wary of Trump’s trade war with Chinacautious about the future and gloomy about the direction of the country. Maybe we need another tax cut.