By ALAN J. ORTBALS
In November, Trump’s chief economic advisor, Gary Cohn, had an embarrassing moment caught on camera. At the Wall Street Journal’s CEO Council conference in Washington, D.C., he asked a room full of business leaders how many would invest their tax act gains in their businesses. Just a few hands went up.
Obviously shocked, he asked, “Why aren’t the other hands up?” What shocked me was, why did he expect a different response?
Any business owner/manager will tell you that they don’t invest in their businesses — increasing inventory, expanding facilities, purchasing equipment or hiring personnel — because they can afford to. They invest in their businesses because demand for their product or service requires it. If the demand is there, they’ll borrow the money to do what’s necessary to meet that demand. If it’s not, having a fat bank account won’t matter.
The Republicans are hoping that, given the right tax incentives, multinational corporations will bring home the $2.5 trillion they have stashed overseas. They are betting on the idea that those companies will put that money to work here, providing a massive boost to the economy.
They may well bring it back, but the only boost will be to their own balance sheets. I expect they’ll use that money the same way they did in 2004, the last time such tax incentives were implemented: paying down debt, buying back their own stock; and/or acquiring other companies.
That’s what that room full of CEOs was telling Gary Cohn two months ago and that’s how they responded in a recent survey taken by Bank of America Merrill Lynch. It found that 65 percent of companies would first use their savings to pay down corporate debt; 46 percent said they’d buy back stock; and 42 percent planned to go shopping for other companies (they could choose more than one). Capital expenditures (i.e., investing in their companies) came in a distant fourth.
The reason for this is obvious. A tax cut cash dump on wealthy people consolidates and coagulates wealth but does little to stimulate consumer demand, which is what’s really needed in an economy like ours that’s 70 percent consumer-driven. And, that’s what the new tax plan does, delivering the bulk of the $1.5 trillion in tax benefits to the wealthiest Americans.
If you want to see how this economic philosophy works out in the real world, google Kansas tax cuts 2012 and you’ll quickly get the answer. In one word: Disastrous.
On the other hand, take a look at what’s happened in Minnesota over the last seven years.
When Gov. Mark Dayton took office in January 2011, he inherited a $6.2 billion budget deficit and a 7 percent unemployment rate. During his first four years in office, Dayton pushed for an increase in the state income tax from 7.85 percent to 9.85 percent on individuals earning over $150,000, and on couples earning more than $250,000 when filing jointly — a tax increase of $2.1 billion. And, he signed a bill to raise Minnesota’s minimum wage to $9.65 an hour. His political opponents predicted that businesses owners would stampede to the exits, jobs would be lost and incomes would tank, but that’s not what happened.
Instead, over Dayton’s first term Minnesota added 172,000 new jobs, the unemployment rate plummeted to 3.6 percent and Minnesotans boasted a median income that was $10,000 higher than the U.S. average.
By late 2013, Minnesota’s economy was the fifth fastest-growing in the United States and Forbes magazine ranked Minnesota the ninth best state for business. By January 2015, Dayton had turned that $6 billion deficit into a $1 billion surplus and Minnesotan’s ranked tops in the country for economic confidence, according to a Gallup poll.
One of the wonderful things about American federalism is we have 50 states with the autonomy to craft their own solutions to common problems, acting as public policy laboratories from which we all can learn. Kansas and Minnesota took two very different approaches to economic stimulus. We should follow what works, not what doesn’t.
Alan J. Ortbals is president and publisher of the Illinois Business Journal. He can be reached at [email protected] or (618) 659-1977.
By ALAN J. ORTBALS