Imagine that you are the CEO of a large American manufacturer. You survived the Great Recession by cutting costs and hoarding cash. Today, you’re sitting on a cash mountain, your share price is pretty high, and the investors are happy.
The Trump tax cut figures to increase your net profits by about 10%. What do you do with the extra cash?
Here are your options:
1. Pay higher wages to your employees. Are you kidding me? The workforce has been cowed by threats to cut jobs through automation and offshoring, and you don’t have a union. The shareholders would be furious. It won’t happen.
2. Invest in additional production capacity. Why? Where are your new customers? Overseas, you see stagnant growth, an overpriced dollar, and protectionism; at home, you see an aging population that is more interested in saving than spending, and a hollowed-out middle class.
3. Return the money to your shareholders in the form of dividends. But they like higher share prices better, and they would just use the money to finance the exploding federal deficit, anyway.
4. Purchase a competitor or buy back shares to increase the value of your stock. Now we’re getting somewhere.
5. Just sit on the cash and listen to the applause from your shareholders. Another viable option.
There are plenty of other problems with the tax cut, but this is the core issue. It just won’t generate the kind of growth that Trump is predicting.