Since Trump’s reduction of the corporate tax to 21%, workers across the country have been rejoicing. Companies like Wal-Mart, Apple, Bank of America, and many more have announced firm wide bonuses and minimum wage raises. To most, the tax cuts appear to be a clear success. However, some commentators, such as Dr. Veronique de Rugy at Reason, are saying not so fast.
Dr. de Rugy claims that these announcements are not in line with economic theory. For wages to be affected by tax cuts takes an extended period of time. The newly freed revenue must be accumulated and invested into new capital equipment which boosts worker productivity and, consequently, their wages. Quite simply, Dr. de Rugy suggests that the tax cuts simply have not been in place long enough to be held directly responsible for these announcements, and she even ponders if they are nothing more than PR moves.
In truth, these bonuses and raises are perfectly in line with what economic theory predicts.
How Wages Are Determined
Wages are equivalent to the expected increase in revenue an individual’s labor generates for the business, or, equivalently, the amount which is expected to be lost if his or her labor went unemployed.
For example, imagine a restaurant employs 5 cooks who are capable of serving C number of customers per hour, earning E dollars in revenue. One cook wins the lottery and retires to the Bahamas, and now the restaurant is only capable of serving C-L customers, and consequently only earns X in revenue. Clearly, entrepreneurs will only be willing to pay the difference between E and X, a number which will be called W, to employ a fifth cook. W is what economists refer to as the marginal revenue product, and, thanks to competition in the labor market, wages tend towards this number in a free market, less a discount for time preference.
To see how taxation effects wages, imagine if every time the restaurant owner goes to deposit his firm’s earnings an armed robber stole 35% of the firm’s net income. Disregarding momentarily what that thief does with his loot, whether he builds roads or funds a study of cocaine’s effects on the promiscuity of Japanese quail, the moment the robbery occurs, the restaurant is making less money than before. It immediately renders the firm less efficient, and the money to be imputed back to the factors of production, including workers, is immediately smaller.1 Put another way: the revenue the firm can keep has now gone down, meaning revenue per employee goes down. This pushes wages down, even though, in a free market, the firm would have been willing to pay employees more.
China Pressuring Wall Street To Stop Trump On Trade War
If anyone still doubted President Trump’s determination to slap tariffs on all – or even more than all – Chinese goods flowing into the US, they probably don’t anymore. So far this week, the president has taken to twitter to trash his own Treasury Secretary’s efforts to restart talks with the Chinese, before Trump publicly declared on Friday that he intends to move ahead with plans to slap 25% tariffs on another $200 billion worth of goods.
Given the president’s unflinching resolve in pursuing his trade agenda, it’s understandable why a shrewd businessmen would go to great lengths to avoid getting in the middle of what looks to be a protracted geopolitical dogfight.
But unfortunately for top Wall Street firms, many of which harbor ambitions of expanding their business in China, that may no longer be an option. Because while the Trump administration has largely left them alone, the Chinese are now trying to use whatever leverage they can (i.e. preferential access to the world’s second-largest economy) to push America’s top bankers to intervene on Beijing’s behalf.
Reuters reported Friday that top Chinese officials have hastily organized an investment conference in Beijing and requested the presence of several top Wall Street firms. The conference will be chaired by former PBOC Governor Zhou Xiaochuan and ex-Goldman Sachs President John Thornton, and feature an appearance by Chinese vice-president Wang Qishan. Dubbed “the firefighter” by the Chinese people, Quishan, in addition to being the most powerful of China’s vice presidents, is also one of the senior Communist officials involved in managing the trade dispute.
While market liberalization is certainly a priority for the Chinese, it’s difficult to imagine that these top officials are planning to attend this conference – especially with so much else going on – just to brainstorm ideas about how China can proceed with opening up its financial sector.
The subtext here is obvious: China wants to figure out who in the US financial services community can help them get through to Trump and help stop this conflict before losses in China’s currency and stock market spiral out of control. And if the carrot of access doesn’t work, China has already proven adept at leveraging the stick.
America vs China: $200 Billion in New Tariffs Coming Soon?
In the latest installment of the story that just won’t go away, the WSJ reported on Saturday that – as Bloomberg reported first yesterday – the Trump administration plans to announce new tariffs on up to $200 billion in Chinese goods as soon as Monday and otherwise “within days”, in a move that will likely render moot the high-level, U.S.-China talks set for later this month, will prompt an immediate retaliation from China, and may lead to a sharply lower futures open on Sunday night.
The silver lining in the imminent announcement is that while previously Trump had said he would proceed with a 25% tariff level, the WSJ reports that the US will start with tariffs of “around 10%.” The level was lowered “following extensive public hearings and the submission of written comments where importers and others complained of the possible impact of the duties” as well as to try to reduce the bite on American consumers ahead of the year-end holiday shopping season, these people said.
But the people familiar said that the tariff level could be raised back to 25% if Mr. Trump concludes that Beijing doesn’t soon show signs that it is acceding to U.S. demands to change its economic policies.
Furthermore, WSJ sources said that while details were still being completed over the weekend, the tariff level could change, or that Trump could change his mind entirely. As of Saturday, an announcement was planned for Monday or Tuesday.
California Has Highest Rate of Poverty in the Nation at 19%
Despite efforts by state legislators at creating a socialist utopia, California still has the highest poverty rate in the nation at 19%, despite a 1.4% decrease from last year according to the Census Bureau
Poverty and income figures released Wednesday reveal that over 7 million Californians are struggling to get by in the second most expensive state to live in, according to the Council for Community and Economic Research’s 2017 Annual Cost of Living Index.
And while California has a “vigorous economy and a number of safety net programs to aid needy residents,” according to the Sacramento Bee, one out of every five residents is suffering economic hardship – which is fueled in large part by sky-high housing costs, according to Caroline Danielson, policy director at the Public Policy Institute of California.
“We do have a housing crisis in many parts of the state and our poverty rate is highest in Los Angeles County,” she said, adding that cost of living and poverty is often highest in the state’s coastal counties. “When you factor that in we struggle.”
Silicon Valley residents in particular are leaving in droves – more so than any other part of the state. Nearby San Mateo County which is home to Facebook came in Second, while Los Angeles County came in third.
“They’re looking for affordability and not finding it in Santa Clara County,” said Danielle Hale, chief economist for realtor.com.