December 12, 2017

Economic Scene: Tax Plan’s Biggest Cuts Could Be in Living Standards

Still, the evidence underscores a not-insignificant weakness in the Republicans’ longstanding economic platform: Tax cuts are not the secret sauce to power the American economy. They have, in fact, very little power to affect economic growth. However strenuously Republicans may argue that tax reform is about increasing economic efficiency, encouraging investment or promoting competitiveness, tax cuts are always primarily about redistribution.

That’s because the main effect of tax cuts is in changing how the fruits of economic growth are distributed. This means that for policymakers interested in improving the welfare of the American people, the first and most important item to consider is whose welfare is most worth improving.

A decade ago or so, the nonpartisan Tax Policy Center and the liberal-leaning Center on Budget and Policy Priorities estimated that making the Bush tax cuts permanent — rather than letting them expire in 2010 — would increase the after-tax income of people earning $1 million or more up to 7 percent, an order of magnitude more than it would increase the size of the economy in the long term. The bottom 80 percent of American families, by contrast, would actually be worse off because they would bear the brunt of paying for the cuts.

Republicans’ current efforts are just as skewed. The Joint Committee’s analysis of an early version of the Senate Republican plan found that 10 years from now, millionaires would get a tax cut worth $8,500, on average. People earning $75,000 or less, by contrast, would experience a tax increase.

Adding in the cuts to Social Security, Medicaid, education and other programs that Republicans are planning to cull to pay for the tax reductions, the cost to poor and middle-income families would be even greater.

And this presents an immediate ethical problem. Students of the history of economic thought learn early on that taking money from the poor and the middle class to give to the rich tends to reduce overall welfare for the simple reason that an extra dollar provides much more to those who have few of them than to those already rolling in money. Most conventional proposals to increase general welfare support redistributing in the other direction.

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Indeed, from Charles I. Jones and Peter J. Klenow at Stanford University to economists at the Organization for Economic Cooperation and Development, most analysts agree that pumping up income growth is not automatically equivalent to increasing welfare. It depends on whose income grows.

There are policies that might trim economic growth and still vastly improve living standards for most Americans. And there are others that might nudge growth ahead and still do more damage than good.


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This is particularly important to keep in mind when policies to increase growth are so hard to come by. Jason Furman, who headed President Barack Obama’s Council of Economic Advisers during his second term, notes that this not limited to taxes. Whether it is changes in regulations or trade agreements, tax cuts or public investment, policy can’t do much to bolster growth in a well-developed economy like that of the United States. It mostly just changes how the economic pie is shared.

“For mature economies with mature institutions, the difference in growth rates that results from different policies is considerably lower than one might suspect,” he wrote. “The growth effects of tax changes are about an order of magnitude smaller than the distributional effects of tax changes.”

According to Mr. Furman’s analysis, changes in tax policy since 1986 — including the Bush tax cuts and increases in taxes in the Clinton and Obama administrations — altogether raised the after-tax income of the bottom 60 percent of Americans by more than 6.5 percent. Meanwhile, they reduced the income of the 1-percenters at the top by more than 12 percent.

The American economy has not been doing great distributing the spoils of growth. Since 1993, the pretax income of the richest 1 percent of Americans has been growing at a steady clip of over 3 percent per year, according to data from Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Paris School of Economics. For the bottom 99 percent, income growth has averaged only 0.6 percent per year.

Of the world’s seven richest large economies, the United States and Britain have experienced the highest growth in income per person since the mid-1990s. But the United States ranks second from the bottom in the income gains of the poorest fifth of households over the period. And it also fares poorly when it comes to incomes in the middle of the distribution.

This lopsided distribution of riches imposes a question on Republicans perpetually pushing for tax cuts on corporations and high-income Americans: What understanding of national welfare justifies the upward redistribution they are proposing? Using growth as a justification seems like a ruse.

Mr. Furman’s conclusion is, in the end, fairly dark. Politics won’t be pretty in a world in which policy has little power to improve average living standards and must content itself with slicing and reslicing the economic pie. This is a world of near-zero-sum games, where somebody’s gain means somebody else’s loss. Politics, in this world, is defined by class warfare.

And yet reading about Republicans’ latest step in their long march to cut tax rates at the top of the distribution — redistributing income from the bottom to the top — I can only agree that that’s the world we live in.

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Treasury Defends Tax Plan Cost With One-Page Analysis

Yet Treasury’s analysis does not show the type of revenue-neutral tax cuts Mr. Mnuchin and Republican leaders have suggested. Instead, it looks far beyond the tax legislation and assumes more robust economic growth than many economists consider likely, largely from economic policies that have yet to be proposed or enacted.

“I don’t believe in magic,” said David H. Brockway, staff director of the Joint Committee on Taxation during the Reagan administration. “It’s just a political statement.”

The Treasury analysis assumes gross domestic product to grow at a rate of 2.9 percent over the next 10 years, rather than the 2.2 percent rate that many other groups have projected. That faster growth would raise $1.8 trillion over that period, paying for the $1.5 trillion tax cut and raising an additional $300 billion, the Treasury report said.

Most economic models have shown the tax bills will reduce government revenues over a 10-year period, even with economic growth. The Joint Committee on Taxation’s analysis of the plan, which does account for a modest increase in economic growth, projected that the tax plan would mean about $1 trillion in lost revenues.

On a conference call to discuss the report, a senior Treasury official said that about half of the difference between Treasury’s estimates for higher growth was based on the proposed corporate tax cut, which would reduce the tax rate for corporations to 20 percent from 35 percent. The rest of the difference is attributed to reducing taxes for “pass-through” businesses, whose profits flow through to their owners and are taxed at individual rates, and the administration’s plans for infrastructure, deregulation and changes to the welfare system that were outlined in the White House budget proposal this year.

“It’s not a dynamic score of the bill, because it includes regulatory reform, infrastructure and welfare reform,” said Douglas Holtz-Eakin, a conservative economist who was chairman of former President George W. Bush’s Council of Economic Advisers. “It looks to me like it’s a restatement of their budget.”

The impact of the Republican tax cuts on economic growth and the debt has been a subject of fierce debate among economists, with many arguing that the administration is relying on overly rosy assumptions.


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“We acknowledge that some economists predict different growth rates,” the Treasury Department wrote in the report outlining its analysis of the plan.

Kevin Hassett, chairman of President Trump’s Council of Economic Advisers, said the Treasury analysis was “absolutely defensible.” He said that they started with the assumption that Mr. Trump’s economic policies would boost growth by about one percent per year over the decade and worked backward to demonstrate the effects of the tax cuts would not add to the deficit.

“If you just assume you would get that kind of growth, then you say how much revenue you get from that,” Mr. Hassett said on CNBC. “It’s all really just math.”

The Trump administration’s growth estimates have been at odds with those of government scorekeepers for much of this year. Last summer, the Congressional Budget Office analyzed the White House’s 2018 budget and found its estimate for 3 percent growth to be far-fetched. It said that the average gross domestic product growth over 10 years was currently 1.8 percent, and that under Mr. Trump’s plan it would be 1.9 percent — far lower than the rate assumed by the administration.

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Several groups that have analyzed the Senate plan using sophisticated economic modeling have found it would not generate anywhere close to the revenues needed to pay for itself.

The Joint Committee on Taxation, the economic scorekeeper of Congress, projected in late November that the Senate bill would increase the size of the economy by 0.8 percent over 10 years, beyond what it would otherwise have achieved — which is well short of the growth path implied by the Treasury one-pager. The committee’s so-called dynamic analysis projected that the Senate plan would add $1 trillion to federal deficits over that time, after accounting for increased growth. That analysis was for the Senate Finance Committee’s version of the bill, not the amended version later approved by the chamber.

On Monday, the independent Tax Policy Center and the Penn Wharton Budget Model each released a dynamic analysis of the bill as passed by the Senate. Both found the bill would add slightly to economic growth over a decade, but not by nearly enough to offset lost tax revenues. The Tax Policy Center estimated that the bill would add $1.3 trillion to deficits, after accounting for growth. The Penn model pegged that loss at between $1.5 trillion and $1.8 trillion.

Kent Smetters, a professor at University of Pennsylvania’s Wharton School, said that Treasury’s view of what the tax cuts would do for economic growth was “aspirational in nature” and not driven by analysis of an actual plan.

The Treasury officials pointed to an assessment from the Council of Economic Advisers and a letter written by leading conservative economists that concluded that the tax cut plan would spur greater economic growth than some outside groups have projected.


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Republican lawmakers have seized upon those analyses to assert that the tax cuts will not add to the $20 trillion national debt, yet some of the economists who signed the letter have said otherwise.

Robert Barro, a Harvard professor who signed the letter to the Treasury, said the corporate tax cuts would lead to less revenue in the short run before faster economic growth made up for some of the losses.

“Might be roughly a wash in Year 10, in which case cumulated fiscal deficit over 10 years would rise,” Mr. Barro said, nodding to the fact that the debt would increase over that 10-year period.

Mr. Holtz-Eakin said that he was frustrated that lawmakers were characterizing the letter as affirming that the tax cuts would be fully self-financing.

The Treasury analysis comes as Congress is putting the finishing touches on a tax bill that the House and Senate are hoping to vote on next week. The House and Senate are trying to reconcile their two bills, which can add no more than $1.5 trillion to the deficit over a decade.

A senior Senate aide said Republicans on Capitol Hill were blindsided by the Treasury report and had no warning that it was coming during such as sensitive time in the legislative process.

Treasury had promised to release its analysis before Congress voted on earlier versions of the legislation. The delay in producing any analysis prompted calls from Democrats to look into political interference in the department. Mr. Mnuchin is also under fire for shutting out the career tax staff as Republicans march forward with their overhaul. The Treasury inspector general said last week that an inquiry into the matter was a priority.

Democrats doubled-down on their criticism of the Treasury Department on Monday, calling its analysis “fake math.”

“It’s clear the White House and Republicans are grasping at straws to prove the unprovable and garner votes for a bill that nearly every single independent analysis has concluded will blow up the deficit and generate almost no additional economic activity to make up for it,” said Senator Chuck Schumer of New York, the Democratic leader.

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Janet Yellen Didn’t Set Out to Be a Feminist Hero

Despite his unorthodox decision to replace her, even Mr. Trump has agreed that Ms. Yellen has performed well in the job. In the Rose Garden announcing Mr. Powell’s nomination, the president called Ms. Yellen an “absolutely spectacular person” and said she had “done a terrific job.”

Janet L. Yellen on Capitol Hill last month. During her single term as the Federal Reserve chief, unemployment has plummeted and inflation has been consistently low. Credit Gabriella Demczuk for The New York Times

So, why, many women wondered, replace her with a man?

“Janet should’ve been renominated, as every past Fed chair has been renominated for nearly the last 40 years,” Senator Elizabeth Warren of Massachusetts said in an interview. “But it’s not the first time and certainly not the last a highly qualified woman is passed over for a job she clearly deserves.”

It’s a funny thing Americans have about powerful women. Voters haven’t always responded to women who ask for the big jobs (see: Hillary Clinton), but when they see a woman simply doing the job — and a good one, at that — they seem happy to give her rock star status.


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It’s true of Ruth Bader Ginsburg, the Supreme Court justice who has become known to many young women simply as “the Notorious RBG.” And it was true of Mrs. Clinton when she was secretary of state, traveling the world and negotiating with world leaders in a scrunchie and glasses while basking in 70 percent approval ratings. (When Mrs. Clinton was asked about her in-the-toilet favorability numbers during the 2016 presidential campaign, she said, “Once I’m doing the job, we’ll be back to people viewing me as the person doing the job instead of the person seeking the job.”)

To protest Ms. Yellen’s departure, liberal activists have worn “Yellen wigs” in support of the economist’s signature floppy white bob (as well as her affinity for keeping interest rates low). Supporters describe her in terms more suited to Taylor Swift than a 71-year-old academic shaping monetary policy.

“I’m the biggest Janet fangirl,” said Julia Coronado, founder of the economic research firm MacroPolicy Perspectives.

Emily Eisner, a doctoral student a the University of California, Berkeley, and editor of the school’s Women in Economics at Berkeley blog, echoed the sentiment, saying, “I don’t want to use the word idol, but symbolically, she has meant a lot to me.”

Kaivan Shroff, a former campaign aide to Mrs. Clinton, wrote on Twitter, “Janet Yellen is such a BOSS.”

Mr. Powell, the incoming chairman, studied closely under Ms. Yellen and is largely expected to continue the economic path she has laid. “They appointed the apprentice instead of the master,” Heidi Hartmann, the president and chief executive of the Institute for Women’s Policy Research, said.

The change, Ms. Hartmann added, speaks to the broader problem of a lack of women represented in finance and economic policymaking. “I think men have a fair amount of loyalty to other men, and the other people Trump consulted would’ve been more open to a man,” she said.

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The White House shunned any accusations of sexism playing into the decision. “The mere suggestion is an affront to Chair Yellen,” the press secretary Sarah Huckabee Sanders said.

Described as even-keeled and soft-spoken, but fierce (“People underestimate her at their peril,” Ms. Warren said), Ms. Yellen has never inserted herself into the gender wars but by virtue of that “large I.Q.,” she has inadvertently found herself in the cross hairs.


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The Brooklyn-born Ms. Yellen was the only woman among those earning a Ph.D. in economics at Yale in 1971. For years, she was known in academic circles as “the trailing spouse,” overshadowed by her husband, George Akerlof, a Nobel-prize winning economist. The couple has a son, Robert Akerlof, who is also a highly regarded economist.

This trailing spouse, however, went on to be a top economic adviser to President Bill Clinton, the president of the Federal Reserve Bank of San Francisco and a member of the central bank’s board of governors. Then, in 2013, 100 years after the Federal Reserve was founded, she made history as its first woman chair.

But history making is often a messy matter. And even with her low profile, Ms. Yellen managed to kick up a central-banking storm.

Mr. Obama’s initial choice to steer the nation’s shaky economy through the recession had been the economist Lawrence H. Summers, who had served as an adviser. But many Democrats in the Senate, including Ms. Warren, protested the move. They argued that Ms. Yellen, who had worked closely with the outgoing chairman, Ben S. Bernanke, was the obvious choice.

Then there was the issue of Mr. Summers, who during his time as president of Harvard had caused controversy and a suitable backlash when he argued that inherent differences between the sexes were a possible reason for the lack of female science professors.

Theories abound that Ms. Yellen has been accepted — and even beloved — in a high-powered role because she has not made being a woman a central theme of her career. In contrast to Mrs. Clinton who made gender a significant part of her 2016 candidacy, Ms. Yellen has inserted the issue more subtly.

“You try to make the economy better and reflect priorities of the nation, and there isn’t a woman’s budget,” said Alice M. Rivlin, who served as director of the Office of Management and Budget and as vice chairwoman of the Federal Reserve Board during the Clinton administration. “I felt the same way about the Federal Reserve.”

In May, Ms. Yellen delivered a speech at Brown University on the impact of women in the labor force, one of only a handful of times she has directly addressed gender issues.


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Women in the workplace have been “hampered by barriers to equal opportunity and workplace rules and norms that fail to support a reasonable work-life balance,” Ms. Yellen said, adding that “if these obstacles persist, we will squander the potential of many of our citizens and incur a substantial loss to the productive capacity of our economy.”

Considering her tenure at the Federal Reserve, economists said that having a woman in that role had brought about a more representative approach to monetary policy, even if Ms. Yellen did not emphasize an agenda intended to advance the interests of women. Several academic studies, for example, show that women economists are more likely to address inequality than their male counterparts.

“The economic profession as a whole has a terrible white male problem,” Ms. Coronado, said. “Are you even going to ask the right questions if you have a lot of privileged people setting the agenda?”

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Tax Plans May Give Your Co-Worker a Better Deal Than You

So a decorator, an artist or a plumber would have a higher tax rate than an owner of a decorating business, an art shop or a plumbing supply store. A corporate accountant could have a higher rate than a partner in an accounting firm. And under the House bill, which differentiates between active and passive investors, the head of a family business who works 60-hour weeks would have a higher rate than her brother, who gets an equal share of the profits but spends his days playing Call of Duty.

The proposals’ impact rises steeply as paychecks grow. High-income earners — roughly the upper 10 percent — who can take advantage of the new distinctions would be rewarded with substantial gains compared with those who can’t.

Supporters argue that the revised tax regime is an attempt to update the code to reflect changes in the economy. Rather than depend primarily on individual rate cuts to further power the economy, the Republican plans focus on cutting taxes on certain types of business income. The idea is that these businesses will reinvest those higher returns and stimulate growth.

“This is a radically different approach,” said Fred Goldberg, commissioner of internal revenue under President George Bush.

A decorator, an artist or a plumber would have a higher tax rate than an owner of a decorating business, an art shop or a plumbing supply store. Credit Daniel Acker/Bloomberg News

Corporations and other types of businesses get the biggest cuts. Employees don’t.

“Theoretically, this makes a certain amount of sense in a vacuum,” said Jared Walczak, a senior policy analyst at the conservative Tax Foundation. “It’s just difficult to define what constitutes wage income compared to business income.”

Indeed, economists and tax experts across the political spectrum warn that the proposed system would invite tax avoidance. The more the tax code distinguishes among types of earnings, personal characteristics or economic activities, the greater the incentive to label income artificially, restructure or switch categories in a hunt for lower rates.

Expect the best-paid dentists to turn into corporations so that they can take advantage of the new 20 percent corporate tax rate, instead of having to pay a top marginal rate of nearly 40 percent on some of their income. Individual income taxes can be deferred on profits left inside a corporation instead of deposited in a personal account. What’s more, corporations can deduct local and state taxes, which individual filers can’t.


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Look for a wave of promotions as staff lawyers on salary suddenly turn into partners to qualify for the 23 percent deduction the Senate bestowed on pass-through businesses.

Pass-throughs, which range from an ice cream stand to multibillion-dollar operations like Georgia-Pacific (a Koch Industries subsidiary) and Fidelity Investments, don’t pay corporate taxes. Instead they pass through income to their owners or shareholders, who pay taxes at the ordinary rate on their individual returns.

The Republican provisions applying to pass-throughs have been singled out for some of the greatest scorn. Writing about the House version, Dan Shaviro, a professor of taxation at New York University Law School who worked on the 1986 tax overhaul, said it “might be the single worst proposal ever prominently made in the history of the U.S. federal income tax.”

Uneven treatment is compounded by other rules that unintentionally introduced preferences.

To prevent certain professionals and specialists like investment managers, doctors, athletes, performers and others from reorganizing themselves as pass-throughs, the Senate excluded households with joint incomes of $500,000 or more (and $250,000 for single taxpayers). But the peculiar way the income scale is phased out means that solo practitioners and partners who earn roughly $529,000 to $624,000 could face a tax of up to 85 percent on income between those two thresholds, according to the nonpartisan Tax Policy Center.

Some Pass-Throughs Would Pay a Steep Tax on Service Income

The Senate bill would tax pass-through business income earned by those who provide a service at a much higher rate from $529,000 to $624,000 in income.

By Lindsey Cook | Source: Tax Policy Center

A graph of the rate increase looks as if a skyscraper were plopped in the middle of an open field. That is a powerful incentive to search for tax shelters.

At the same time, an unrelated rule that closes a loophole affecting highly paid corporate executives will have the effect of allowing pass-through corporations — but not traditional corporations — to deduct compensation over $1 million.

“The more you look at any of the major rules, the more ambiguities, glitches, clearly unintended consequences and tax planning opportunities you see,” said Michael L. Schler, a lawyer in the tax department of Cravath, Swaine Moore. He has written a 50-page summary of the more glaring problems, scheduled to be published soon in Tax Notes.

Contract Employees Get a Break in the Tax Bill

Employees who earn more than $24,000 could be taxed at a higher marginal rate than a contractor who earns the same wages in the Senate tax plan.

By Lindsey Cook | Source: Tax Policy Center

The proposed classification system is unusual. Although the gains on long-term investment have generally been taxed at lower rates for most of America’s tax history, all other income was taxed at the same rate since the federal income tax was instituted in 1909.


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That included both earned income — money generated by a day’s labor — and what is called unearned income, which includes dividends, interest on bonds, alimony, rent, royalties, licensing fees and pension checks.

If anything, wage earners, at least in the popular imagination, were elevated above the original “coupon cutters” — not thrifty housewives but those who lazed on the couch and collected income generated by securities, which they clipped at the corners to redeem. In the 1920s, steely capitalists worried that such indolent fat cats would undermine entrepreneurship while fiery radicals ridiculed their only work as picking up a ticket at the opera box office.

But despite countless loopholes, exemptions and special breaks in the tax code, there was never a move to single out employee compensation from other earned income.

Efforts to simplify the system and move closer to uniform rates were most successfully championed by President Ronald Reagan and congressional Democrats when they sharply lowered individual rates in the Tax Reform Act of 1986. Earnings and even long-term investment gains were briefly taxed at the same rate for the top bracket.

“There was a simple notion there,” said C. Eugene Steuerle, a deputy assistant Treasury secretary for tax policy during Mr. Reagan’s second term and now an economist at the Urban Institute. “We said, ‘Let’s create a top rate that is as even as we can get it across all sorts of structures and most types of capital income.’” The source didn’t matter.

Long-term capital gain rates were again lowered in the 1990s. And the tax code took a major step away from the reform act in 2003 under President George W. Bush when short-term capital gains, like dividends, were taxed at a lower rate than wages.

Relative to the Reagan approach, Mr. Steuerle said, the latest Republican bills are “moving in the opposite direction.”

In some eyes, the message contained in the bills is as disturbing as the practical impediments. Tax codes are as much about values as they are about accounting. And rates and breaks are deployed to encourage or discourage various types of activities.

“Wage income will be the highest taxed income,” said John L. Buckley, a chief of staff for Congress’s Joint Committee on Taxation in the 1990s. “I think it’s grossly unfair. Somebody working for a wage gets a higher tax rate than somebody doing the same job under a different legal structure.”

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For Older Venezuelans, Fleeing Crisis Means ‘Starting From Zero,’ Even at 90

This was not what she had in mind when, as a younger woman, she looked toward retirement in Venezuela.


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“You work toward your golden years, you save,” she said, “and then everything goes toward survival.”

There was no alternative, she said, but to leave: “To stay is to die.”

In October, Carmen María González de Álvarez reversed her parents’ journey from Europe. They were born in Las Palmas, the capital of Gran Canaria in the Canary Islands of Spain, and in 1953 migrated to Venezuela, where Ms. González was born.

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On the return to her familial homeland, she was accompanied by her husband, Nelson Álvarez, 64, and their son, Nelson Luis, 30.

The family was compelled to leave everything it had built in Venezuela because caring for Nelson Luis, who has catastrophic epilepsy, had become too trying in Venezuela’s collapsed health care system. They had run through their savings to pay for their son’s costly array of medicines.

Furthermore, Mr. Álvarez’s work as a real estate agent had dried up: He went a year without selling a property. “We were bleeding out,” he said. “If we waited six months, we’d be down to nothing.”

Ms. González, 58, and her son arrived with Spanish citizenship, which offered key advantages, like access to social services. But even so, it has been a rough transition for the family.

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After 7 Years of Job Growth, Room for More, or Danger Ahead?

“It’s a very poorly timed fiscal stimulus,” said Joseph Song, an economist at Bank of America. “It kind of raises the risk of a boom-bust cycle.”

For now, however, the figures present a political opportunity for President Trump, who ran for office on a promise to revive the American economy.

Economists almost universally say Mr. Trump has had little to do with the rebound, which began long before he was elected and has not accelerated meaningfully since he took office. But with unemployment low and wages beginning to creep upward, voters may be more inclined to give credit.

Sarah Huckabee Sanders, the White House press secretary, said on Friday that the jobs report was evidence that “President Trump’s bold economic vision continues to pay off.”

Source: Bureau of Labor Statistics

Wherever the credit lies, workers are benefiting from an economy that is delivering broad-based gains in income and employment for the first time in at least a decade. Groups that were left behind in the early stages of the economic recovery, such as African-Americans and people without a college degree, have seen their unemployment rates drop sharply in recent years.

And although wage growth remains disappointing, household income — which reflects not only hourly pay rates but also how many people have jobs and how many hours they are working — has shown strong gains, particularly for poorer households.

Companies in nearly every sector are reveling in the best opportunities they have seen in years. Improving global growth is giving a lift to manufacturers, which have added jobs for four straight months. Rising incomes and strong consumer confidence helped retailers, whose payrolls grew at the fastest pace since January despite the shadow of rising online sales. Even the fall hurricanes, which led to a short-lived slowdown in hiring in September, are now helping employment as Texas and Florida rebuild. The construction sector added 24,000 jobs in November.


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So as far as the business climate, “maybe it’s not quite the best ever, but it’s pretty close to the best ever,” said Mike Bolen, chief executive of McCarthy Building Companies, a commercial construction company with offices across the country.

“Typically, we’ll have one region that’s really hot and one region that’s really slow, and right now, all five regions are just cooking,” he added. “Everything’s busy.”

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Business could get even busier soon. The Republican tax plan aims to encourage business investment by cutting corporate taxes, which could increase demand for the big projects — hospitals, airports, office building — that make up a big part of McCarthy’s business. In fact, Mr. Bolen said, many clients are already making plans on the assumption that the legislation will pass.

“A lot of people are making decisions this year assuming that it’s going to happen,” Mr. Bolen said. “If it doesn’t happen, I think you’ll see some people pull back.”

The challenge for McCarthy, as for other builders, is finding the workers for their projects. A couple of years ago, Mr. Bolen said, job seekers would line up outside the gates of construction sites, hoping for a chance to work. Today, McCarthy is having so much trouble finding qualified workers that it is building a 10-acre training center outside of Houston and hiring staff members to teach construction skills.

“It’s a really big deal now, probably a bigger deal than I’ve ever seen it, and I don’t see it getting better,” Mr. Bolen said. “We are spending a lot of money and effort trying to train up the unskilled portion of our work force.”

The question vexing many economists is why, if labor is as scarce as Mr. Bolen and other executives claim, workers are not seeing bigger increases in their paychecks. McCarthy has raised pay, especially for people with specialized skills. But over all, wage growth remains restrained. Average hourly earnings were up 2.5 percent in November from a year earlier, only a bit faster than the rate of inflation.

“It’s still just creeping higher,” said Brett Ryan, an economist at Deutsche Bank in New York. “Wage growth is just not taking off the way we’ve seen in the past.”

That picture could change. Other measures of earnings, for example, show faster growth. And according to an analysis by Ian Shepherdson, chief economist for the forecasting firm Pantheon Macroeconomics, wages are rising faster in regions where the unemployment rate is lowest. That suggests that pay growth could accelerate if the unemployment rate continues to fall in 2018 as Mr. Shepherdson expects.


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Companies are feeling more pressure to raise pay. For the first time in six years, chief executives surveyed by Business Roundtable, a coalition of big corporations, reported that labor expenses were their biggest cost pressure in the fourth quarter.

Catherine Barrera, chief economist of the online job site ZipRecruiter, said wages would pick up when workers gained the confidence in the economy to demand raises — and to change jobs if they do not get them. There are signs that could be happening. Nearly 9.5 million workers quit their jobs voluntarily in the third quarter, the most since 2001.

“If people are feeling really confident and comfortable with the labor market, they’re going to be more likely to seek that next opportunity,” Ms. Barrera said. “When we see that type of confidence, that’s when wages will grow.”

Rising pay would be good news for workers. But it could cause concern at the Federal Reserve, where policymakers have been gradually raising rates and paring the Fed’s bond holdings in a bid to keep inflation in check.

The Fed is all but certain to raise interest rates at its meeting next week, and has signaled plans to do so three times next year as well. But if inflation starts to pick up, the Fed could be forced to act more quickly than it wants, with unpredictable effects on financial markets and the economy.

“You could be looking at a combination in the summer of stronger growth, unemployment at 3.5 percent and still falling, and wage growth picking up as well,” Mr. Shepherdson said. “That requires a fairly substantial adjustment to markets.”

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E.U. and Japan Reach Deal to Keep ‘Flag of Free Trade Waving High’

The agreement also reaffirms its parties’ commitment to the Paris climate accord, from which the Trump administration has said it will withdraw.

Tokyo and Brussels began trade talks in 2013, and said in June that they were nearing a deal. Japan trades less with the European Union than it does with the United States or China. But completing a deal with the European Union became a more urgent priority for Tokyo after President Trump’s decision in January to withdraw the United States from another agreement, the Trans-Pacific Partnership. Japan has also pushed to revive that deal, even without the United States.

Japan had effectively paused its talks with the European Union while it focused on the larger Pacific Rim deal, which included 10 other nations along with the United States and Japan. Mr. Abe has made liberalizing trade a centerpiece of his economic agenda — a notable shift in a country that, despite its success exporting cars, electronics and other merchandise, had long shied away from trade deals.

The change of direction on trade owes partly to the waning power of Japan’s farm lobby, which has fought to keep tariffs on imported agricultural products high, impeding the country’s ability to strike agreements. Japanese negotiators still focus much of their efforts on protecting farmers, but with Japan’s rural population rapidly aging and shrinking, governments no longer see making concessions on agriculture as politically fatal.

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The European Union and Japan have a combined annual economic output of around $20 trillion, and together would constitute a trading area roughly the size of the one created by the North American Free Trade Agreement. The future of Nafta, which comprises the United States, Canada and Mexico, has also been cast into doubt by tense renegotiations.

Still, while Japan and the European Union have expressed confidence over the agreement they announced on Friday, political interests are still at play. National and some regional legislatures in Europe will have a say, a process that nearly derailed a trade deal with Canada.

The main beneficiaries from the agreement are likely to be Japanese carmakers and European food and beverage producers.

The deal will make it easier for European producers of cheese, beef, wine and processed meat to sell in Japan, which imposes duties of as much as 40 percent on some products. European makers of pharmaceuticals, medical equipment and trains are also expected to come out ahead.


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The pact also presents Japanese carmakers with an opportunity to increase sales in Europe, which has long been difficult for them. Toyota and other Japanese manufacturers have only a 13 percent share of the auto market in the European Union, in part because of import tariffs, compared to the United States where they account for about 40 percent.

But Japan’s carmakers already have major manufacturing operations in Europe which are not subject to import duties, suggesting that their meager sales also stem from lack of products that appeal to European tastes.

While the pact will be important for some industries, said Angel Talavera, senior eurozone economist at Oxford Economics in Britain, its overall economic impact will be modest.

The deal “does not materially alter the outlook for the eurozone, as Japan represents only around 2 percent of total exports,” Mr. Talavera said in an email. “I don’t think this is a game changer.”

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What to Watch For in Friday’s Jobs Report

Now congressional Republicans are on the verge of passing a $1.5 trillion tax cut plan, which President Trump could sign into law this month. Economists expect the bill to provide at least a modest lift to the economy — but they aren’t sure that’s a good idea. With unemployment so low and the economy fundamentally healthy, a tax cut could lead the economy to overheat, pushing up inflation and forcing policy makers at the Federal Reserve to raise interest rates faster than planned.

“It’s a very poorly timed fiscal stimulus,” said Joseph Song, an economist at Bank of America. “It kind of raises the risk of a boom-bust cycle.”

All Eyes on Wages

Perhaps the biggest question is what Friday’s report will reveal about paychecks. Wage growth has long been the weak spot in an otherwise strong recovery, and the October jobs report held to that pattern: Average hourly earnings rose just 2.4 percent from a year earlier, barely enough to keep up with inflation.

Most economists expect wage growth to pick up as the unemployment rate falls. Other measures of earnings have already shown modestly faster gains, and there are signs that businesses are feeling pressure to raise pay. For the first time in six years, chief executives surveyed by the Business Roundtable, a coalition of big corporations, reported that labor expenses were their biggest cost pressure in the fourth quarter.

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“With the unemployment rate this low and with just not enough people coming back into the work force to fill positions, firms are having to resort to offering higher wages,” said Joseph Brusuelas, chief economist of RSM, a financial consulting firm.

Then again, economists have been predicting faster wage growth for months or even years, and it has yet to materialize.

Happy Holidays?

Friday’s report will give the first glimpse of hiring in the holiday season. It could be a complicated picture. Most economists expect a strong holiday shopping season, and preliminary data suggests that Black Friday shoppers spent more this year than last. But brick-and-mortar retailers have been cutting jobs through most of the year, and holiday hiring will most likely be slower than in past years as more Americans do their shopping online.

On the other hand, the rise of e-commerce has also created jobs in warehouses and at delivery services such as FedEx and United Parcel Service, which recently warned of delays because of the volume of online orders.


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“We are seeing a lot of jobs being created in e-commerce,” said Catherine Barrera, chief economist of the online job site ZipRecruiter. “Amazon is hiring like crazy.”

The View From Washington

Policy makers at the Federal Reserve have sent clear signals that they plan to raise the benchmark interest rate at their meeting next week. The jobs report would probably have to be catastrophic to change that.

Friday’s report could, however, affect the Fed’s plans for next year. Economists expect the Fed to raise rates three times in 2018. But if the unemployment rate continues to fall — and especially if wages start to rise more quickly — Fed officials could feel pressure to raise rates faster to head off inflation.

The report could also have political implications. Mr. Trump has frequently cited strong jobs numbers as evidence that his economic policies are working. Most economists are skeptical that presidents have much influence over the economy. But with Mr. Trump nearing the end of his first year in office, the report could take on symbolic importance.

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Ford Will Build Electric Cars in Mexico, Shifting Its Plan

Sherif Marakby, Ford’s vice president for autonomous vehicles and electrification, said Thursday that the company had altered its plans for the Michigan plant — in Flat Rock, 25 miles southwest of Detroit — because it now expected the market for self-driving cars for taxis and delivery fleets to grow rapidly after it rolls out its first model in 2021.

“We want to make sure we have the capacity at Flat Rock when we launch,” he said in an interview. “We are very optimistic that we will grow the volume in the autonomous business.”

Ford now plans to invest $900 million in the Flat Rock location, up from $700 million. The company said the retooling for autonomous vehicles would create 850 jobs there, 150 more than it previously expected.

Can Ford Turn Itself Into a Tech Company?

Its very name was synonymous with the 20th-century economy. Now it’s trying to catch up with Silicon Valley on self-driving cars.

Producing electric cars in Mexico will enable Ford to take advantage of lower labor costs and improve the “fitness” of that business, Mr. Marakby said.

Ford’s change in plans was reported by The Wall Street Journal and later confirmed by the automaker.

Electric vehicles tend to be expensive to build and generate thin profit margins or even lose money because batteries remain costly and sales volume low. Auto wages in Mexico rarely exceed $10 an hour, compared with about $29 an hour in the United States.

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“If you’re worried about your margins on your E.V., moving production to Mexico is not a bad idea,” said Mike Ramsey, an automotive analyst at Gartner.

Ford plans to begin assembling a small, battery-powered sport-utility vehicle in a plant in Cuautitlán, north of Mexico City, in 2020. The vehicle is supposed to go 300 miles before needing to recharge its battery, giving it a greater range than any electric cars now on the market.


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Ford plans to follow that model with at least 12 electric vehicles as part of a broader, global strategy. Ford and other automakers expect sales of electric cars to take off in the years ahead as China, European Union countries and others push automakers to cut tailpipe emissions.

Ford’s shift drew no immediate public comment from President Trump. While campaigning last year, he criticized the company repeatedly for its plan to build a small-car plant in Mexico. He also criticized G.M. for importing Chevrolet hatchbacks from a Mexican plant.

In January, in the days leading up to Mr. Trump’s inauguration, Ford announced that it was canceling the new plant and investing in Flat Rock instead. That drew compliments from the president-elect.

In May, however, Ford ousted its chief executive, Mark Fields, and replaced him with Jim Hackett. Under Mr. Hackett, Ford seems to have taken a different tack. In one of his first moves, he set a plan to import Focus compacts into the United States from a plant in China.

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Conservative Groups Seeking Support for Tax Cuts Find It a Hard Sell

“The American people have waited 31 long years to see our broken tax code overhauled,” the leaders of the Koch’s political network insisted in a letter to members of Congress on Monday, urging swift approval of final legislation. They added that the time had come to put “more money in the pockets of American families.”

The problem, as Republicans are learning, is that most Americans do not believe that is what the tax plan will do.

Steve Schmidt, a Republican strategist, said that amid all the talk about the need to score an important victory for their party, “it bears mentioning that the ‘win’ is something that is extraordinarily unpopular with 75 percent of the American people.”

The tax proposal seems ill fitting for the mood on the right, perhaps explaining some of the skepticism. It would add $1 trillion to the deficit, according to the official congressional scorekeeper, contradicting the calls for fiscal austerity that conservatives made for years under President Barack Obama. And its generosity to corporations and the wealthiest Americans is at odds with the soak-the-rich economic populism President Trump preached during his campaign.

But for groups like the U.S. Chamber of Commerce, those in the Kochs’ vast network and others closely aligned with the pro-business wing of the Republican Party, the tax bill would be the only tangible legislative achievement after 11 months of an uneasy and, so far, unproductive alliance with a president they fiercely resisted during last year’s election.

The legislation is among the most unpopular public policy initiatives taken up by Congress in recent years, polling shows. A variety of factors is compounding that, Republicans say, from its complexity, to the secrecy and hurriedness of the process to the perception that the benefits will flow largely to a select few.

“We Republicans get into the weeds and talk about technical tax policy and the budget process, and for the average American, that ends up sounding like the adults on the old Charlie Brown cartoon — wah, wah, wah,” said David McIntosh, president of the Club for Growth, which has been among the groups pushing for tax cuts. “And the Democrats are messaging: ‘This is not fair to the middle class and the poor.’”


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Ken Spain, a Republican consultant who works on financial and tax issues and had worked for the Koch political network, said the legislation has become “a blank canvas” for the opposition to paint and that his party is to blame.

“There hasn’t been a cohesive messaging strategy to date, and the polling data reflects that,” he added.

So far, Americans for Prosperity and its field staff and volunteers have visited more than 41,000 homes and made 1.1 million phone calls. Credit Cassi Alexandra for The New York Times

Americans also see the tax bill as inextricably linked to the Republican Party and Mr. Trump. And majorities of the country deeply disapprove of both.

In many public polls, Americans see the Republican tax plan in a more negative light than they did the Affordable Care Act before it became law in 2010. Opinion on the health care law, never overwhelmingly popular, was generally evenly split at that time.

But the discontent runs deeper than an affinity for one party over the other. Not only do a majority of Americans doubt it is good policy, but people in conservative areas of the country have low expectations that it would do anything to help them, new polling has found.

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In counties where Mr. Trump performed exceptionally well — that he won but Mr. Obama carried in 2012, or where he ran 20 percent ahead of what Mitt Romney received in 2012 — only 17 percent said they expect to pay less in taxes, according to a recent NBC News/Wall Street Journal poll. Another 25 percent said they expected their family would actually pay higher taxes.

Those numbers were similar to a recent Quinnipiac poll that found 59 percent of voters believe the Republican tax plan favors the rich at the expense of the middle class.

Peter D. Hart, the Democratic pollster who helped conduct the NBC/Journal poll, called the tax cut package “penthouse populism” that risked tarnishing Mr. Trump’s image with those who see him as a “drain the swamp” crusader fighting powerful and entrenched interests. “The swamp isn’t only Washington to them,” Mr. Hart added, “it’s Wall Street. It’s the wealthy.”

Given the lack of public appetite, Republicans and the conservative groups working to shift attitudes on the tax proposal have had to fine-tune their messages. Mr. Trump and White House officials, for example, used to often highlight how the tax cuts would spur an uptick in growth.


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“Grand economic arguments don’t matter,” said Corry Bliss, executive director of the American Action Network, a conservative group that works closely with Republican leaders in Congress. “What became clear is that to connect with voters you have to explain what is best for them,” Mr. Bliss added, noting that voter cynicism and mistrust in politics have become increasingly difficult to overcome, even with the strongest messaging.

“When we say, ‘This is going to create eight million jobs,’ people don’t believe it. And they don’t care. They care about one job: their job.”

The American Action Network, among the largest groups helping lead the effort to sell the tax plan, has committed $22 million to running television ads in English and Spanish. One is a new commercial that ran in California, Texas, Florida and Virginia in which a man says in Spanish, “Congress, a simpler, fairer tax code means more opportunity for working families.”

Americans for Prosperity and its field staff and volunteers have hit more than 41,000 homes and made 1.1 million phone calls. In all, the Koch groups have spent $10 million on events, grass roots canvassing and advertising. In Little Havana late last week, the high school students — for whom the canvassing worked toward their community service requirements for graduation — were leaving bright orange door hangers behind on each home they visited.

“Unrig the Economy,” the signs said, listing the various purported benefits of tax reform: “Improve Lives/Leave More Money in Your Pocket/Create Stronger Job Growth.”

Sometimes it can be hard to tell if they are making much progress. Enoch Jean-Mary, a junior, said that when he has made phone calls lately, only about two of every 10 people he reaches agree to take a survey on tax reform.

But Starla Brown, the Americans for Prosperity Florida grass roots director, insisted she was seeing real enthusiasm. When she spoke to a group of Florida State University students recently, she said, “There was resounding applause when I brought up tax reform, which was a surprise.”

After their canvassing ended and the students piled into the back of Ms. Brown’s S.U.V., she started flipping through the channels on her satellite radio, hoping to find an update on the looming Senate vote. The students sat behind her, talking not about taxes but the new iPhone.

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