So the markets have finally reached the conclusion that cutting taxes in a boom will result in inflation and higher interest rates. Well, duh.
The crash is coming on the heels of an upturn so large that only a prolonged rout can overturn it. The fairly minor increases in wages, inflation, and interest rates arising from the tax bill to date don’t warrant that kind of a reaction. In my opinion, however, these will be the enduring impacts of the legislation:
- Real estate, particularly in blue states, is going to take a significant hit as the result of higher long-term interest rates and new limitations on deductions. Due in part to regulatory changes subsequent to the Great Recession, however, we won’t see declines similar to those in 2008.
- Wages in services that cannot be automated or offshored (e.g., construction, lawn maintenance, and health care) will increase as long as the labor market remains tight.
- Wages in manufacturing, however, mostly will remain flat. There is no such thing as a tight labor market when you can move your factory to India. It will take a long time to run out of Indians.
- Higher interest rates will make it harder for companies to expand, but they will have enough cash on hand that they can do it without the assistance of banks. The real question is, will they? Everything I see indicates that the answer is no, due to ongoing weaknesses in aggregate demand driven by demographic changes and the decline of the American middle class, which was not addressed by the tax cut.
In short, in the long run, the tax bill will exacerbate inequality and damage the housing industry, but will do nothing to address the real issues in the American economy.