The timing of Trump’s tax cuts favoring U.S.-based corporations and the very rich is not aimed at heading off a new overproduction crisis, though it may precipitate such a crisis.
Rather, the timing aims to head off a comeback by the Democratic Party in this year’s mid-term elections. Such an outcome is especially likely this year as a result of Trump’s xenophobic, anti-woman, racist, anti-immigrant, climate change-denying, homophobic, trans-phobic, and all-around reactionary policy initiatives—not to speak of his escalating threats of war, including nuclear war.
While there are growing signs of disquiet and disillusionment within the Democratic Party base, the most powerful progressive class and national forces within that base—labor and the African-American community—have yet to break off their ill-founded marriage with the “Democratic” faction of the corporate duopoly.
Ruling rich love the cuts
The capitalist ruling class, of course, welcomed the tax cuts, even though some expressed disquiet about the roughly $1.5 trillion in federal deficits the cuts are projected to produce. Most workers and middle-class people will—for 10 years, after which the cuts will disappear—enjoy a small measure of tax relief. But the centerpiece of the Trump plan is a huge cut—by almost half—in corporate taxes. This, it is hoped, will make U.S.-based companies more competitive on the world market and slow down if not stop the hemorrhaging of what remains of U.S. industrial might to China and other emerging economies.
The more starry-eyed Trump supporters—the anti-globalist, economic nationalist, “America Firsters,” including Trump himself—expect miracles of U.S. industrial resurgence to bring back the “good old days” of U.S. dominance of the world market—“Make America Great Again.”
But this is a pipe dream.
From ‘average prosperity’ to ‘boom’
Early last year, the U.S. economy transitioned from the phase of the industrial cycle that Karl Marx called “average prosperity” to the “boom” phase, when expanding production collides with a more slowly growing market, leading inevitably in an overproduction crisis. (For a detailed explanation of the industrial cycle, and why capitalist markets grow more slowly than production during booms, see my article “Production, overproduction and overproduction crises” and also this blog post.)
A key feature of the boom phase of the industrial cycle is sharply rising interest rates, with lower-risk, short-term rates (such as on three-month treasury bills) rising more rapidly than higher-risk, long rates (such as on treasury bonds of 10- or 30-year maturities). In the face of overproduction and rising risk but also rising demand for credit, money capitalists—institutional investors, giant banks, corporations such as General Electric, General Motors and Ford that have transformed much of their operations from industrial production to money lending, and other lenders—demand higher and higher interest rates as the cycle moves towards it next peak.
‘Tyranny of the bond market’
In a previous article, I made reference to the “tyranny of the bond market” and analyzed key trends that could bring about another super-crisis such as the previous one in 1929-33, which ushered in the Great Depression of the 1930s. In that article, published in September 2015, I pointed out that the economy was on track for, at minimum, a new recession, due I guessed in 2017. That would have been a decade following the start of the Great Recession of 2007-08.
As things turned out, Trump’s surprise election and promise of a massive tax cut for corporations and the wealthy helped prolong the boom phase of the industrial cycle into this year. Meanwhile, interest rates continued to rise until, judging from the wild gyrations in stock markets here in the U.S. and across the globe, the rising rates now threaten profits to such an extent that a new overproduction crisis/recession looms.
Further weakening bond prices—and raising interest rates, since bond prices and interest rates vary inversely—is the planned reduction by the Federal Reserve of its “balance sheet,” greatly swollen as a result of bailing out the big banks and other lenders by purchasing their holdings of government and mortgage debt during the Great Recession.
The Federal Reserve further expanded its balance sheet by buying up huge quantities of government securities on the open market—termed “quantitative easing”—in order to push down long-term interest rates to boost recovery from the Great Recession. Reducing the Fed’s balance sheet means selling off this huge pile of financial assets over a period of time.
The combination of the greatly increased federal deficit due to Trump’s tax cuts, on one hand, and promised reduction of the Fed’s balance sheet, on the other, virtually guaranteed a deluge of bonds coming onto the market at a most inopportune time. The result, not surprisingly, was a plunge of bond prices and spike in interest rates that then spread to the stock market.
Without going through again the complex of reasons presented in the article cited that could be the basis for a new super-crisis (readers are urged to study it), we can now add the new and unprecedented factor of Trump’s tax cuts going into effect, ballooning the federal deficit, just as the industrial cycle is approaching its peak and the Fed is beginning to sell off its bond holdings.
Cuts to ‘entitlements’
The Republicans in Congress, led by House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, promise to cut spending on “entitlements”—in other words go after Medicare, Medicaid, Social Security and other social spending—to shrink the federal deficit and reassure the bond market. But this will not be politically possible prior to the coming election and may well not be possible afterwards. The resistance to any such move is sure to be massive, swift and fierce.
The much trumpeted Trump tax cuts have initially boosted Republican chances in the upcoming elections as working people see small increases in their take-home pay. But the boost will be short-lived as the next overproduction crisis hits home, with its mass unemployment; widespread bankruptcies, foreclosures and evictions; and a rising death toll from opioid use and lack of health care.
Exactly when the crisis will hit is impossible to say, and whether before or after the mid-term election, but it is getting close if it hasn’t already started. And it could be the start of super-crisis 2.0 if the rising Asian industrial powerhouses cannot avoid being swept in.