In this very interesting paper @Furno_Francesco compares the Kennedy corporate tax cuts in the early 1960s with the recent Trump corporate tax cuts, and finds that the former stimulated output roughly four times more than the latter.

Put differently, the Kennedy tax cuts seem to have increased business investment while the Trump tax cuts were mostly passed on to shareholders which, as Atif Mian, Ludwig Straub and Amir Sufi have explained elsewhere, was likely in turn to lead to higher household debt.
Furno explains that “A large part of this difference can be attributed to differences in pre-reform tax depreciation policy.”
As I argued in my book and elsewhere, I think the reasons the Kennedy tax cuts flowed into investment and Trump tax cuts into savings had to do with the very different relationship between savings and investment at the time of the tax cuts.
From a macro point of view corporate tax cuts increase business profits, which raise corporate savings. Whether these are used to fund investment or are passed on to shareholders depends on whether the main constraint on business investment is scarce savings or weak demand.
In the former case, higher business profits can lead fairly automatically to higher business investment. If savings are abundant and the cost of capital low, however, the constraint is likely to be weak demand.
In that case businesses will have little incentive to increase investment, and a cut in their taxes simply increases the after-tax profits they pass on to shareholders or use to acquire other companies.
In the early 1960s, much of the world was still in the process of rebuilding itself after the ravages of two world wars. With high global investment needs and low global savings (the war caused income to plummet and, with it, savings), the main economic constraint was...
a scarcity of savings needed to fund investment. This was a time when the US was exporting so much of its domestic savings to the rest of the world that capital controls were imposed to restrict the outflow of dollars.
Under these conditions it is not surprising that any policy that generated an increase in savings was likely – in classic supply-side fashion – to lead to an increase in business investment.
In recent decades, however, conditions were dramatically different. The world has become awash in ex ante savings, and the US has become the dumping ground for nearly half of the world’s excess savings.
What is more, US businesses are sitting on huge piles of cash and can only use them to buy back shares or purchase other companies. It is weak demand, in other words, and not scarce savings, that has limited business investment.
In that case policies that increase in savings have little to no impact on business investment, and in fact could actually reduce business investment if the increase in business savings were balanced by a reduction in household income (and, with it, consumption).
To me this is the key difference between the Kennedy and Trump tax cuts. The former provided more savings at a time when American businesses wanted to invest more, but were unable to do so in part because of the fierce global competition for US savings.
The latter provided more savings at a time when the world was awash in excess savings and American businesses wouldn’t invest until they saw a rise in demand.
As an aside, I am re-reading Charles Arthur Conant’s 1900 book, and it is amazing how similar the problem of excess savings the global economy faced in the 1880s-90s. At one point he proposes establishing a state pension system...
to help generate the demand needed to absorb excess global savings. This is because “experience has shown that when saved capital accumulates rapidly, the groping after new uses for it causes waste and disaster”.
Here is an example of economists arguing that the tax cut that "worked" under one set of conditions must also work in the same way even under opposite conditions. This is ideology, not economics. It should be obvious that policies that boost...
savings when savings are insufficient to meet investment needs will have very different consequences from the same policies implemented when ex ante savings exceed desired investment. The US and the world needed more savings in 1964. They need more demand today.

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More from @michaelxpettis

18 Nov
@gonglei89 1/4
The growth in the debt-to-GDP ratio did slow after 2015, partly because the regulators were able to squeeze out especially egregious forms of debt creation and partly because stricter regulations resulted in some debt creation moving off the balance sheet.
@gonglei89 2/4
Beijing however did not get debt under control, or even come close. After 2015 (even excluding 2020), official measures of debt continued to grow more than 1.2 times the GDP growth rate.
@gonglei89 3/4
Given how high the debt ratio has reached by now, this means that the increase in debt each year (still excluding 2020) is the equivalent of more than an astonishing 25% of that year's GDP (or 31% if we use your numbers rather than the PBoC numbers).
Read 4 tweets
17 Nov
In May 2016 the SCMP wrote excitedly about a major new policy piece in the People's Daily by an "authoritative" figure (which in PD-speak means someone extremely senior).
scmp.com/news/china/eco… via @scmpnews
"A People’s Daily article published yesterday," it said, "showed that China’s leadership is trying to make a grand shift in the nation’s economic policies in a bid to say goodbye to debt ­fuelled growth. In a sign of distaste for the credit-pumped growth in the past...
couple of months, the Communist Party mouthpiece cited an unidentified 'authoritative' figure as saying that boosting growth by increasing leverage was like 'growing a tree in the air', and that a high leverage ratio could lead to a financial crisis."
Read 7 tweets
16 Nov
There are two very different types of “wasted” infrastructure spending by the government, and each has a different impact on the overall economy. One kind of waste consists of spending $110 of resources and labor to produce...

wsj.com/articles/who-w… via @WSJOpinion
something that raises economic productivity by $100. In that case the country is poorer overall by $10.

Another very different kind of waste consists of spending $90 of resources and labor and $20 in bureaucratic costs (including graft) to produce something...
that raises economic productivity by $100. In that case the country is still richer by $10, but there has also been a $20 transfer within the country from one sector of the economy to another.
Read 6 tweets
15 Nov
Chinese consumption growth in October surprised on the upside, with annualized month-on-month growth (5.28%) exceeding that of industrial production (4.78%) by 0.5 percentage points. That's fine, but it's not nearly enough.
scmp.com/economy/china-… via @scmpnews
Consider that retail sales for the first ten months of 2021 grew by an average of 4.0% a year in the past two years, while industrial production grew in that period by an average of 6.3%. This means that the consumption imbalance is much worse today than it was two years ago.
If consumption growth continues to outpace production growth, can the former grow fast enough relative to the latter that next year the consumption imbalance is no worse than it was in 2019?
Read 6 tweets
15 Nov
In October China's economy continued to rebalance towards consumption, as in recent months, but much too slowly to make up for the deep worsening of the imbalance that occurred last year. Retail sales were up in October by 4.9% compared to last year.

They rose by an average of 4.6% a year compared to 2019. This was higher than consensus expectations, but still fairly low. During the first ten months of 2021, retail sales were up by 14.9% compared to last year and by an average of 4.0% a year compared to 2019.
Industrial production was up in October by 3.5% compared to last year and by an average of 5.2% a year compared to 2019. This was also higher than expectations, but also still fairly low.
Read 10 tweets
14 Nov
Interesting article. There are two important points I think it illustrates. First, Beijing is already starting to ease growth constraints in the property sector. This is because not to do so would mean much slower growth in 2022 than it can tolerate.
Second, state developers seem to be expanding their share of the market at the expense of private developers. This is no accident.
As long as much of the investment in the property sector is speculative or non-productive, enterprises that do not operate under hard-budget constraints must expand their share at the expense of enterprises that do.
Read 4 tweets

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