Don’t start thanking Trump for pay raises just yet

Wal-Mart has just announced higher wages and one-time bonuses for most of its workers — linking the news to the corporate tax cuts signed last month by President Donald Trump. It joins a growing list of companies saying “Thank you” to the president by raising their employees’ pay.
The White House is crowing (its celebration only slightly dimmed by Wal-Mart’s other announcement, that it’s about to close about one in 10 of its Sam’s Club stores). Trump said pay would rise, and see, it is; his critics said the windfall would all go to wealthy shareholders, and see, it isn’t.
But what do these announcements really say about the costs and benefits of Trump’s new tax law? Precisely nothing.
It’s true of course that the cut in corporate taxes gives firms extra cash, which they can use to raise wages, pay shareholders, invest in new capital, or cut prices for their customers. Signs of a tightening labor market make this a good moment for many firms to bump up pay, something they probably would have done in any case. But whatever the short-term effect of the tax change, it will be overwhelmed by the longer-term implications. The difference between good and bad tax reform is measured not over days and weeks, but over years — and it’s all about growth.
Intelligent advocates of the new tax law argued not that the corporate tax-cut would give workers a nice bonus this year, but that it would spur investment across the economy, raising economic growth over the course of the next decade and beyond. Intelligent critics attacked that claim, saying that the growth benefits wouldn’t materialize, that the distributional consequences of the plan were bad, and that the reform made an absurdly complex tax code even more so.
The recent flurry of wage announcements has no bearing on this debate. Over time, the test of who’s right will be the trend in investment. If the prospect of higher post-tax profits encourages firms to invest, the economy will expand faster than it otherwise would have — and the extra output will find its way, year after year, into higher wages and living standards.
Critics of the reform are right to doubt this, not least because the tax reform will add to public borrowing, which will tend to raise interest rates and the cost of capital. Meanwhile the planned instability and insane complexity of the new rules will drag on the economy even more than before.
Time, and the trend of investment spending this year and next, will tell. The second week of the new tax year is a little early to be declaring victory.

—Bloomberg