Start saving. As in right now. Save all that you can.
In my last column, “Buckle up, L.I., the GOP tax plan is headed our way” (Jan. 25-31), I promised to offer my suggestions this week on how to deal with President Trump’s grand tax plan, the 2017 “Tax Cuts and Jobs Act.”
Save. That’s the best advice I can offer.
As noted, the new law eliminates much of the property-tax deduction that Long Islanders have long depended on to balance their budgets, along with a host of personal deductions and even the home-equity interest deduction. The Long Island housing market thus could be in for a bumpy ride.
Our saving grace, Trump said, was to be the stock market. The new law, which slashed the corporate tax rate from 35 to 21 percent, was supposed to send American companies into overdrive, which would unleash a new stock rally. And it did — for a handful of weeks — until it sputtered. And crashed. Sorry, dropped precipitously.
Last week the Dow Jones Industrial Average posted its two worst trading days ever, falling 1,175 points on Feb. 5 and 1,032 points on Feb. 8. By week’s end, after one hellacious roller-coaster ride, the Dow had plummeted from 25,500 to 24,190.
Cue the Wall Street pundits to reassure spooked investors that they mustn’t pull their money out of the market. The economy is strong, they said. The market is good.
The tax plan clearly precipitated last week’s wild ride, however. Wages rose sharply in recent months, according to the latest federal jobs report. That’s seemingly a good thing, but not for investors. When wages rise too quickly, that leads to inflation, when prices accelerate, often faster than people can afford to pay them. To control inflation, the Federal Reserve raises interest rates, which, theoretically, should slow borrowing and prevent the economy from overheating.
Last week’s crashes were the inevitable result, reputable economists tell us, of cutting taxes unnecessarily when the economy was already chugging along at a healthy clip, unemployment had reached new lows, and most people had enough money at least to make ends meet. When the Fed pulls the emergency brake on the economy by raising interest rates, that slows growth, which is bad for stocks.
Social scientists speak of a rational model of behavior — that people, individuals, will most often behave according to predictable rules that foster order, and in doing so, they act according not only to their own self-interest, but also the greater good. In this way, society advances.
Then there are the chaos theorists. They believe that seemingly random events — which are, in reality, often cyclical — at times disturb what should otherwise be rational systems, causing disorder.
One could describe the perfectly normal, utterly boring presidency of Barack Obama as a rational system. There was order, predictability. The economy — and the stock market — behaved in linear fashion, progressing steadily (albeit slowly) upward, with only the occasional hiccup. Market anxiety was banished from our lexicon. There were no get-rich-quick schemes. There was also little fear of losing your shirt.
Obama was proof that the rational model has merit. It is possible to achieve a state of relative equilibrium within a system as complex as the American economy.
Then along came Trump. He is proof that chaos theory has merit as well. Within a single week, we saw staggering stock market fluctuations, caused by a seemingly random event — the election President Trump.
Throughout his life, Trump has brought chaos to those surrounding him. That was all well and good when he was a private citizen. Now, however, he is bringing chaos to the American people. Every day, it seems, we are subjected to a steady stream of scandals — of unpredictability.
In my last column, I wrote at length about the $1.8 trillion that the GOP tax plan will add to the federal debt over the next decade. As I suspected I would, I received a letter from a Trump supporter reminding me that debt rose by $9 trillion under Obama, so what, according to this reader, was another $1.8 trillion?
One, when Obama assumed the presidency in 2009, the U.S. teetered on an economic precipice. One wrong move by the White House could have sent America into the Second Great Depression. Obama had to act swiftly and decisively. He behaved reasonably by borrowing to reduce middle-class taxes, invest in education and health care, and focus on infrastructure improvement. That historic move early in his presidency set the U.S. on the path to economic recovery, which continued throughout his tenure.
When Obama handed the White House keys to Trump, he also handed off one of the strongest, most resilient economies in American history. Stimulating the economy by cutting corporate tax rates, à la Trump & Company, defied logic — that is, rationality.
So, what can I say? Save your money. When the Trump tax cuts expire in 2025, you could be in for a rude awakening if you don’t. In the meantime, let’s hope and pray that rationality returns to the American economy.