Thursday, March 1, 2018

Krugman: Bonuses and Bogosity [feedly]

Bonuses and Bogosity

On Feb. 19 Walmart, America's largest employer, announced broad-based pay hikes. In fact, it announced that it would be raising wages for half a million workers. The Trump tax cut is working!

Oh, wait. That announcement was three years ago – it came on Feb. 19, 2015. And as far as I can tell, nobody gave the Obama administration credit for the move.
Why did Walmart raise wages? Partly because the labor market was tightening: unemployment had fallen more than 40 percent from its peak in 2009 (a decline for which the Obama administration's stimulus and other policies actually do deserve some credit.) This tightening labor market meant that Walmart was having trouble attracting workers.

Walmart was also in the midst of a change in business strategy. Its policy of always low wages, always, was starting to look problematic: low pay meant high turnover and low morale, and management believed that moving at least partway to the Costco strategy of paying more and getting better performance as a result made sense.

The moral of this story is that unless the economy is deeply depressed, there will always be some companies, somewhere, raising wages and offering bonuses. Which brings me to the Trump tax cut and the very bad, no good job much of the media initially did of covering its effects.

Every card-carrying economist agrees that cutting corporate tax rates will have some trickle-down effect on wages – in the long run. How much of a trickle-down effect depends on a bunch of technical factors: what share of corporate profits represents monopoly rents rather than returns to capital, how responsive inflows of foreign capital are to the U.S. rate of return, what share of the capital stock is even affected by the corporate tax rate. Enthusiasts claim that the tax cut will eventually go 100% to workers; most serious modelers think the number is more like 20 or 25 percent.

Whatever the number, however, it's about the long run. It requires a chain of events: lower taxes -> higher investment -> higher stock of capital -> higher demand for labor -> higher wages. And this chain of events should take a number of years, probably decades, to fully work itself through. Even in the most favorable analyses, there is no reason to expect any wage gains in the first few months after a tax cut.

Yet for a while there the news was full of stories about companies announcing that they were giving their workers bonuses thanks to the Trump tax cut. Why were they doing this?

Well, the tax cut provided no immediate incentive to raise wages. It did, however, give companies that benefited from the tax cut a strong political incentive to claim that the tax break was the reason for bonuses or wage hikes they would have given in any case. Why not? They want the tax cut to look good, since it's good for them. And hyping its benefits is a cheap way to make a de facto campaign contribution to an administration that can do a lot to help companies it likes, say by removing pesky safety or environmental regulations.

In other words, the whole "bonuses thanks to tax cut" story was bogus, and obviously so. Yet much of the media fell for it.

There was also a big element of innumeracy involved. Most people have no idea just how big the U.S. economy is; if you say "company X just hired 1000 workers" or "company Y just gave 5000 workers a $1000 bonus" they imagine that these are big stories, when in reality they're just noise in an economy where around 5 million workers are hired – and an almost equal number quit or are fired – every month.

The numbers we have so far show that the much-hyped bonuses are trivial – less than $6 billion, or 0.03% of GDP – while stock buybacks have been more than $170 billion. And many of those bonuses would probably have happened anyway, whereas stock buybacks are running far above historical levels.

Furthermore, the surge in stock buybacks suggests that the long run effect of the tax cut on wages will be small. Remember that the chain that should lead to trickle-down begins with lower taxes -> higher investment. If companies use the cuts to buy back stocks, not add to plant and equipment, the wage-growth story doesn't even get started.

So the real news about the tax cut is that it is – I know you'll be shocked – mainly a giveaway to corporations. Who could have predicted?

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