30 April 2018

The real reason the Republican tax cut isn’t going to work

Now, the important thing to understand here is that profits are supposed to be like a bat-signal showing businesses where to invest. When they're high, it usually means that there's so little supply of what consumers demand that companies can charge almost anything for it. Other firms, then, should be able to swoop in and compete away some of these profits while still making enough themselves for their upfront costs — the investments they have to make — to be more than worth it. That's what's supposed to be the magic of the market: Just by having everyone pursue their own self-interest, we can figure out how much of everything we need better than any bureaucrat could.

But this process has lost some of its mojo recently. Corporate profits, adjusted for taxes, inventories, and depreciation, have hit an all-time high as a share of the economy the past 10 years, but business investment has not. Nowhere close. It has been average at best.