Profits First, Workers Last

Tax Cuts for the Rich Don’t Lead to Higher Wages
U.S. House Speaker Paul Ryan, R-Wis., speaks December 19 after the House of Representatives passed tax reform legislation on Capitol Hill in Washington. The final bill was passed by the House and Senate Dec. 20. (CNS photo/Joshua Roberts, Reuters)

Richard White’s The Republic for Which It Stands (Oxford), a monumental account of post–Civil War America, describes how in 1890 the Republican Party managed to push through a sharp rise in America’s already high tariffs. Labor and farmers had wanted to lower tariffs since they imparted a deflationary impetus to the economy. But the Republicans carried the day by, among other things, promising that the new higher prices would be passed through to workers and farmers. In the event, industrialists like Andrew Carnegie cut payrolls and invested their windfall in automating their factories. It may not be coincidental that the Republican success was followed by the long Depression that began in 1893.

Spin the newsreel to the present day, and sure enough, there are Donald Trump, Mitch McConnell, and Paul Ryan, claiming that a massive tax cut for the top 5 percent will be a bonanza for the working stiff. At one point the Council of Economic Advisers put out a pathetic defense of that claim, but that paper was removed from the CEA website. Treasury Secretary Steve Mnuchin vaguely promised another paper, but the passage of the bill let him off the hook.

Happily, we needn’t rely on disappearing papers. There is plenty of evidence on how the modern corporate sector operates. The Commerce Department keeps detailed records of broad corporate income and spending patterns. A key one is the “Gross Value Added,” or the value that a business produces after subtracting the costs of all inputs, like raw materials and workers’ pay. The first chart to the right compares the change in GVA, employee compensation, and after-tax profits. Focus just on the after-tax profit solid line. The blip in profits around 1984 is related to the Reagan tax cuts, mostly because real-estate developers accelerated their projects to avoid the tough new treatment of real estate. The next and bigger blip in the late 1990s is the dotcom boom. Now look at the profit performance after 2002. There is a sharp jump as Wall Street booked its fake profits in the run-up to the Great Recession, followed by a modest dip in 2009-2010, and then back to rollicking growth. If one burrows into the data, corporations started laying off workers before their sales collapsed in order to finance labor-saving equipment and machinery.

The treatment of workers in the recent decade is the worst since before the Great Depression. The second chart to the right is another cut of the data, showing employee compensation as a  percentage of the GVA.

Those 9 percent of unpaid wages funded lavish payouts to shareholders, eight-figure salaries to CEOs, and billion-dollar mergers. And now the Republicans and Trump want you to believe that they will use the even bigger tax reductions to improve the lives of their loyal workers.

Published in the January 26, 2018 issue: 

Charles R. Morris’s most recent book is The Rabble of Dead Money, a history of the Great Depression (PublicAffairs).

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