Guestwords in the East Hampton Star: Trump’s Economic Fallout for Suffolk County and Long Island
President Trump’s three main economic initiatives have been radical 2017 cuts in taxes (at the expense of states and localities), unprecedented high tariffs on Chinese goods, and “deregulation” of federal agencies (entailing rejection of science-based programs). These initiatives have turned Washington, D.C., and the country upside down. How has this worked out? Following are some outcomes.
Mr. Trump’s denial of Covid-19 gives him ownership of its economic impact: The virus is not just an act of God. Mr. Trump’s knowing denial of its threat and refusal to recommend wearing masks immediately was a betrayal of his country. The pandemic is a national challenge just as much as the 9/11 attack on the World Trade Center towers. An early science-based national response would have greatly reduced the huge negative economic impact.
The corporate tax cuts did not deliver on business investment: The main idea behind the 2017 Tax Act was to reduce the top federal tax rate on corporations from 35 percent to 25 percent. At the last minute, the law, which skipped customary hearings and staff analysis, took the tax rate down to 21 percent, even lower than its major advocates had asked for. Mr. Trump claimed the law would close tax loopholes, about which his newly uncovered tax returns show him to be informed. But few loopholes were closed by the 2017 law. He said businesses would invest the money and thereby create jobs. But after a few months, corporations switched to using the money to buy back their stock, which made a negligible contribution to job creation.
The impact of a fiscal change on the economy is measured by the “fiscal multiplier” — the change in gross domestic product for each dollar of change in tax cuts or spending. A 2015 Congressional Budget Office analysis concludes that fiscal multipliers are more successful for spending programs than tax cuts, for lower-income than for higher-income taxpayers, and for periods of recession than for booms. A widely cited fiscal multiplier for corporate tax cuts is only 0.32, compared with multipliers of 1.71 for an increase in food stamps, 1.55 for extending unemployment benefits, and 1.44 for infrastructure investment.
Tax cuts for individuals: The Tax Act substantially reduced tax rates for the top personal income brackets. When new money gets into the hands of average people, they spend it, because they have real needs that are not being met. This is not true for the very rich. Nevertheless, Mr. Trump argued that tax breaks should go to highest-income taxpayers. Policies that increase unemployment benefits, child credits, and food stamps are not only more equitable, they also generate more jobs.
The Tax Act’s cap on the SALT deduction hit New York State hard: The lowering of the corporate tax rate from 35 percent to 21 percent in 2017 was paid for in part by a radical cap on the deductibility of state and local taxes (SALT) at $10,000 per taxpaying unit, whether single or married and filing jointly. This cap was deliberately targeted at higher-tax blue states. New York State has suffered the most, as indicated by the July jobs data, the latest we have. Jobs were down from a year earlier in every one of the nation’s 49 metro areas with a 2010 census population of 1 million or more. They are below the level of five years ago in more than half of these metro areas.
The five worst-hit metro areas in the country over five years include all three of the large New York State metros — Rochester, Buffalo, and New York City (which takes in a wide swath including Westchester, Nassau, and Suffolk Counties, northern New Jersey, and a piece of Pennsylvania). The SALT cap was a shock to state and local officials, who are scrambling to address lost tax revenues, and one of the hardest-hit cities is New York, which, unlike the federal government, must raise new taxes, cut spending, or borrow. That’s a choice between higher taxes, fewer employees, or postponed fiscal stress. Cutting the quality of services, from sanitation and health care to schools, will affect real estate values just as much as high taxes. Coupled with new interest in less-dense living to avoid exposure to Covid-19, this is making the East End of Long Island a beneficiary. But Suffolk can’t afford to let the engine of its prosperity falter.
The cap on the SALT deduction encourages moves by higher-income residents: The cap on the SALT deduction has made it more attractive and urgent for higher-income individuals to move to lower-tax states and communities. Blue-state residents have been moving to red states and will presumably seek to raise standards of education and other government services in their new locations. One silver lining is that it doesn’t take very many people moving from a populous blue state to increase electoral support for quality education in a small red state. Residents of New Jersey and New York are moving to Florida, while Californians are moving to Idaho and Nevada. Residents of New York City are moving to less-dense communities like East Hampton. Activism for better-quality services may generate some surprises in future elections.
Stressed states and localities need cash and are not getting it: This fiscal year has caught nearly every government by surprise. The CARES Act gave the Federal Reserve the right to lend to states and localities, but the Fed is acting as if the facility is intended as a last resort, for municipalities that can’t obtain private financing. But the municipal bond industry and many state laws favor long-term investment, not financing an operating deficit. Forcing municipalities to cut spending while the coronavirus crisis is still at our door is reverse Keynesian of the kind that exacerbated the worst years of the Great Depression.
Fortunately for the Town of East Hampton, the supervisor, Peter Van Scoyoc, and the town board have been able to keep the town functioning on a steady basis, but concentrating federal aid on businesses rather than local government means less fortunate communities face bleak options.
Tariffs on Chinese goods: Mr. Trump’s radical high-tariff moves are being paid not by Chinese producers but by American retailers and consumers, especially the fashion industry, which is suffering a knockout blow. China’s response to the U.S. tariffs has been to divert key supplies to Europe and has created shortages in this country — for example, in personal protective equipment and many medicines. China has meanwhile retaliated with tariffs on U.S. farm products. The relief program seems to have been concentrated on large agribusinesses, leaving small farmers without aid.
Deregulation has created new risks: The president’s science-denying efforts to roll back environmental, pharmaceutical, and other safety regulations have increased risks in each of these areas and have hampered a national response to the Covid-19 pandemic.
Over all, the economy has fared poorly. Yet the stock market has had an astonishingly good run. The main reason is that some corporations have been buying back their stock and the Federal Reserve has been flooding the financial markets with liquidity to help banks make loans and stave off business bankruptcies. Historically, the total return on stocks in the S&P 500 since 1947 has been higher under Democratic presidents, 10.8 percent per year, versus a rate under Republicans of 5.6 percent per year. The top performance was under Presidents Clinton and Obama, while the most negative was under Nixon and George W. Bush.
It’s a case of an open spigot for big business and a parched earth for states and local governments and nonprofits. This has left New York City in a financial crisis, but East Hampton has been relatively unscathed.
John Tepper Marlin has lived in Springs since 1981. He was for 20 years a federal government economist and the chief economist to three New York City comptrollers. Steven Newman, a resident of Queens, was chief of staff and first deputy to two New York City comptrollers.