Archive for the ‘gm’ category

Real Life Catches Up

November 28, 2018

President Trump and the Republican controlled Congress trumpeted the windfall that was about to befall the US economy if the Congress passed the GOP tax cut.  The principle tax cut pieces were a dramatic reduction in the corporate tax rate and a one time waiving of the foreign profits tax (repatriation of money earned outside the US at zero or a very low tax rate).  “Jobs, bonuses, and investment”, said the President and GOP leaders.  Hmmm.

At the time, most economists and anyone with an average memory could remember George W Bush lowered the same two taxes with no broad impact upon the economy. Economists knew that businesses congenitally are wired to give any windfall to investors, if not also to top management.  And guess what…

So, once again a well intended tax cut has gone to rewarding investors and top management with only a few crumbs falling in the laps of workers.  The only one who should be surprised is “Charlie” who still believes “Lucy” would hold the football still.

This past weekend General Motors announced 5 plant closings and the reduction of some 14,000 workers.  For the economist or Wall Street investor there was much to cheer and much to be concerned about.  GM’s stated reasons were (1) sedan models were precipitously declining in consumer demand, and (2) GM wished to invest in new technology and needed cash.  Who could dispute these two business goals.

President Trump who may set long standing records for being a “head to tail” thinking reacted strongly telling GM that they should replace production at the three assembly plants with some other cars.  There seemed to be no recognition that the Trump Administration may have contributed to these job losses.  Hmmm.  

The President scolded GM calling them ungrateful in view of the Government bailout begun in 2008 and the more recent subsidies in support of GM’s electric car development.  Do you believe the President?

Most analysts see GM’s announcement as a recognition that sedans are no longer consumers’ choice when compared to SUVs, crossovers, and trucks.  The targeted plants represents over capacity and until new vehicles are ready, these plants will have no assignment.

And, by the way, GM of course, was  rewarded by Wall Street.  GM was acting in a timely manner the Street thought.  Hmmm.

President Trump has plenty to think about. 

  • Why shower tax breaks upon businesses when publicly traded companies will just return the savings to share holders? 
  • What role does the President think the additional $1 billion in cost (due to steel and aluminum tariffs) played in hastening GM’s decision? 
  • And what Wharten School economic theory is the President relying upon that says automotive sales can year after year increase and never see a contraction?

Our “economist-in-chief” would do well to get ready for similar bad behavior from other recipients of government tax breaks.  There are many signs that the economy, with or without the harmful effects of tariffs, is on the verge of contracting. As that happens, everyone will see the President has no clothes to hide the foolishness of the tax reductions and the initiation of the trade wars.

Other than hollow words, what does the President have to stimulate growth now?