Tax Cuts Have Boosted Economy
July 3, 2018
The headline comes directly from Steven Mnuchin, our U.S. Treasury Secretary, who recently penned an op-ed piece which appeared in print in the Tampa Bay Times (July 3, 2018). https://www.whitehouse.gov/articles/trump-tax-cuts-strengthened-u-s-economy/
Mnuchin’s opinion piece seems to consist primarily of fluffed-up puffery related to the Tax Cuts and Jobs Act (TCJA) of 2017.
Mr. Mnuchin omitted several critical issues which most economists agree must be included in any analysis of the U.S. economy.
First is the ‘business (economic) cycle’. The National Bureau of Economic Research (NBER) has been tracking the U.S. economy for 160+ years. NBER defines one business cycle as: A period of economic expansion; followed by a contraction (recession); ending at the next point of recovery.
NBER’s 160+ years of records reflect that (over that time) the U.S. economy experienced 66 business cycles. Since 1945, we have experienced 11 business cycles with an average length of expansions of 5 years, followed by an average length of recessions of 1 year.
We can’t forget that the U.S. economy almost collapsed in early 2008 following a period of ebullience and expansion apparently accompanied by loose regulatory oversight of the financial sector.
Quick intervention in 2008 by our federal government saved the U.S. economy from the deepest and longest downturn since the Great Depression. NBER data reflects the point of recovery (beginning of expansion) of the U.S. economy occurred in June 2009, and has now entered its 10th year (109th month) of growth.
Our current economic expansion is now the second-longest expansion on record, exceeded only by the expansion from March 1991 to March 2001, which lasted a full 10 years.
History tells us we are very close to the point of contraction (recession) of the U.S. economy.
Second is the ‘Skills Gap’. When Mr. Mnuchin tells us that “…there are enough job openings in America for every unemployed person in the country” he fails to explain that the majority of open jobs require skills which the majority of unemployed people lack. In other cases, the unfilled jobs are located hundreds – maybe thousands – of miles away from the location of potential job seekers.
One solution to filling the open jobs is to encourage migration – or immigration — of skilled workers.
Another solution is to recruit, educate and train currently underemployed or unemployed U.S. residents who live in near proximity to the open jobs.
Third involves a dangerous combination of tax cuts and deficit spending to finance those tax cuts.
Mr. Mnuchin touts benefits to U.S. workers as a result of repatriation of hundreds of billions of dollars from off-shore corporate subsidiaries to the U.S. In fact, companies thus far have paid out dividends and other withdrawals of $305.6 billion from foreign receipts which far outstripped the amount of this cash which was reinvested domestically. By some estimates, corporations have spent 72 times as much on share buybacks as they have spent on one-time worker bonuses and raises.
The U.S. ‘current account deficit’, which measures the flow of goods, services and investments into and out of the country, widened by $8.0 billion to $124.1 billion, or 2.5 percent of national economic output in the first 3 months of 2018, virtually all of which seems to be attributable to the repatriation tax holiday.
To make up for the loss of tax revenue, the Trump administration is relying on a combination of debt financing and mystical economic growth which they expect to occur at the end of an extended business cycle.
Mnuchin tells us that U.S. economic growth is on steroids.
Some observers have noted that the appearance of economic growth is highly influenced by the infusion of repatriated cash – somewhat similar to feeding 2nd graders sugar before sending them out onto the playground.
The energy is intense, but it won’t last very long, and it is just not sustainable.
A recent report (6/21/2108) from the U.S. Office of Government Accountability (GAO) warns that responsible action is needed on the nation’s growing federal deficit, which grew to $666 Billion in FY 2017 (10/01/16 to 9/30/17) and is projected to surpass $1 Trillion by 2020.
According to the GAO’s 2017 financial report, the federal deficit in FY 2017 increased by 13.5% from $587 Billion in FY 2016 and $439 Billion in FY 2015. Federal receipts in FY 2017 increased by $48 billion, but that was outweighed by a $127 billion increase in spending. (Note that Deficit is an annual measure; National Debt is aggregate, an accumulation of annual shortfalls.)
The aggregate (gross) amount that the U.S. Treasury can borrow is limited by the U.S. debt ceiling. As of April 30, 2018, our National Debt was $21 Trillion, about 78% of GDP.
Since its passage in December 2017, the non-partisan Congressional Budget Office has warned that TCJA will add $1.84 Trillion to the federal deficit over the next 10 years, which they estimate will push the National Debt to an unprecedented 152 percent of GDP by 2028, significantly increasing the odds of a new financial crisis.
Interest rates are rising, and National Debt is increasing, thus interest on National Debt will consume an ever-increasing amount of future federal budgets.
And, of great concern is the flattening of the ‘yield curve’. Traditionally, interest rates on short-term debt are lower than rates paid on long-term obligations.
The spread between the yields of the 2-year Treasury note (2.55 percent) and 10-year Treasury note (2.89 percent) was 34 basis points on June 23. That’s less than half of what it was in early February and the narrowest it’s been since August 2007.
An inversion of the yield curve — when long-term rates fall below short-term rates — traditionally predicts a looming recession.
—————————————————————————-
It’s not clear why Mr. Mnuchin – a seasoned financial services sector professional with a clear expertise in fixed income securities – would omit such important information in his assessment of the U.S. economy.
I am drawn to conclude Mr. Mnuchin is using his position as a high-ranking federal official to ‘butter his own toast’, likely through complex – and undisclosed — derivative positions.
We’ll have to see if the Walrus is correct…..
Paul Ryan Announces Retirement
April 11, 2018
April, 11, 2018: Paul Ryan announced his plan to retire from Congress in January 2019, at the end of his current term, and further stated that he will not run for re-election.
Ryan said that he is proud of the accomplishments which occurred during his 20 years of service in Congress, although he regrets that ‘they were unable to achieve Entitlement Reform’ during his tenure in office. Despite his vocal regrets, he is planning to leave Washington in January 2019 with some of the most generous and egregious entitlements remaining in the U.S.
It has been said that Ryan’s remaining goal (‘Entitlement Reform’) is razor focused on cutting federal spending on Medicare, Medicaid and welfare programs as a way to temper extraordinary increases in the federal deficit.
These increases in the deficit were willfully enacted as a component of the 2017 Tax Cuts and Jobs Act as a result of rare, curious, wild and crazy tax cuts combined with wild and crazy spending increases, at a point in our economic cycle which begs for caution and restraint.
Paul Ryan said that he is extremely pleased to have played a significant role in the passage of the Tax Cuts and Jobs Act which he considers to be a highlight of his service in Washington.
Background on Jobs:
Since 2010, the U.S. economy has supported the creation of almost 17.5 Million jobs, leading to a November 2017 unemployment rate of 4.1%, a 17-year low. (Perspective: Unemployment reached 15% toward the end of 2009; many economists agree that “full-employment” occurs when the unemployment rate is at 5% or lower.)
Hundreds of U.S companies have been looking to hire workers for skilled positions to help them meet growing demand for their products and services. These jobs are often called “family wage jobs” because they provide compensation and benefits sufficient to support a family in the local economy.
The number of job openings in the U.S. (October 2017) remained at the 6 Million level, marginally lower than at the end of 2016. (Perspective: When the Great Recession was at its worst in 2009, job openings fell to 2.2 million, an all-time low.)
Average hourly earnings had risen just 2.5% over the 12 month period ending in October 2017, helping to support the theory that a significant skills gap continues to impede hiring for family wage jobs which typically require advanced reading, math and computer skills.
In addition to the dilemma of finding skilled workers in shrinking regional labor market pools (“skills gap”), hiring managers and economic development experts also report obstacles cited by job seekers such as: transportation (including long commutes); day care/child care; and noncompetitive wage rates.
Despite these documented facts, Paul Ryan, many members of Congress and President Trump actively and enthusiastically supported “The Tax Cuts and Jobs Act” of 2017, telling us – among other things, “Our legislation is focused entirely on growing our economy, bringing jobs back to our local communities, increasing paychecks for our workers…”
At a point in time when we had apparently reached full employment; when some 6 Million higher-skilled, family wage jobs were unfilled, at least 2 questions remained unanswered:
– Other than engaging in war, or the innovative programs launched in the 1930’s (CCC, WPA, etc.), has the federal government ever succeeded in an effort to create sustainable private sector employment?
– If new family wage jobs are created, who would be available to fill them?
Background on the tax side:
When George W. Bush (POTUS 43) took office in January 2001, he inherited a federal budget from his predecessor.
Fiscal Year Ending (FYE) 9/30/2001 resulted in revenues of $2.39 Trillion and expenditures of $2.23 Trillion, resulting in a budget surplus of $0.15 Trillion. FYE 2001 federal debt held by the public was $3.34 Trillion, representing 31.7% of GDP.
Fast forward to his final full year in office (FYE 9/30/08), Bush watched over a federal budget which included revenues of $2.52 Trillion and expenditures of $2.98 Trillion.
That left a FYE deficit of $458.6 Billion, which (combined with prior deficit spending) resulted in total federal debt of $9.99 Trillion at FYE (9/30/08), representing 67.7% of GDP.
The federal budget for FY 2009 was developed by then-president Bush, submitted to Congress, and inherited by Obama (POTUS 44). The actual federal revenues for FY 2009 were $2.10 Trillion; expenditures were $3.52 Trillion. That left a 2009 FYE deficit of $1.41 Trillion, which (combined with prior deficit spending) resulted in total federal debt of $11.88 Trillion at FYE (9/30/09), representing 82.4% of GDP.
Most reasonable people will agree that a newly elected President who inherits a spending plan from his predecessor should not be given credit for its success or failure.
POTUS 44 (Obama) presided over 7 years of steady economic growth in the U.S., and under his watch, the close of FY 2017 budget reflects an increase of total federal debt to $14.67 Trillion, which was a numerical increase, but which represented a relative decrease to 76.3% of GDP.
Not great, but a clear improvement over what Obama inherited from Bush.
Some economists have suggested a 60% ceiling for publicly held debt vs. GDP which seems to make sense.
Although policies enacted during the Obama administration did reduce the ratio for 82% to 76%, we have a long way to go.
The correct way to address this situation is through tax policy reform designed to create balanced federal budgets, focused on reducing federal deficits.
That is not what our Congress has approved, and what President Trump signed into law just prior to Christmas 2017.
Most recent analysis by the Congressional Budget Office (4/10/2018) estimates that the combined effect of the 2017 tax cuts and the March 2018 budget-busting spending bill is sending the annual federal deficit toward the $1 Trillion mark in 2019.
The CBO report says our nation’s current $21 Trillion debt would spike to more than $33 Trillion in 10 years, with debt held by investors spiking to levels that would come close to equaling the size of the economy, reaching levels that many economists fear could spark a debt crisis.
CBO says economic growth from the tax cuts will add 0.7 percent on average to the nation’s economic output over the coming decade. Those effects will only partially offset the deficit cost of the tax cuts.
The administration had promised the cuts would pay for themselves.
Best I can see, only Robert Reich has focused on the Real Facts, and who would listen to a guy like Reich, who has degrees from Yale, Oxford, Dartmouth — clearly a left-wing Liberal Snowflake….
As interim Pres. Trump tweeted today, “We are with you, Paul!”
Hedge Fund Managers Achieve Record Earnings
May 10, 2014
The news this week included a report from Institutional Investor which tells us that the top 25 Hedge Fund Managers took home a combined $21.2 Billion in 2013, a significant increase over 2012, when earnings totaled just $14.1 Billion, the lowest sum since the 2008 financial crisis.
If I did the math correctly, the average wage of these 25 individuals computes to $407,692.31 per hour, somewhat above our current $7.25 per hour minimum wage.
What is it that Hedge Fund Managers do that makes them the highest paid people in the world?
Do Hedge Fund Managers create economic value? Do they create jobs? Do they make products or deliver services which make our world a better place?
Unfortunately, they seem to do none of the above.
Hedge Fund Managers look for opportunities to exploit temporary weaknesses, gaps, flaws or aberrations in the operations of a specific company or in an economic sector overall.
They typically have billions of dollars of resources at their disposal, and by creating and taking well-crafted and strategic financial positions, they have the ability to move markets, generally to their own benefit.
The film “Other People’s Money”, starring Danny DeVito and Gregory Peck, was released in 1991. Danny DeVito plays the role of “Larry the Liquidator” providing us a crude but quite accurate roadmap of what Hedge Fund Managers do every day.
In the 19th century, we called this sort of activity “Piracy” and we labeled the perpetrators “Pirates”.
In the 20th century, we called this sort of activity “Organized Crime” and we labeled the perpetrators “Mafia” or “Gangsters”.
Here we are in 2014, clearly well into the 21st century.
Our Hedge Fund Managers are out in the open, creating outcomes which seem to have no potential for positive impact on the U.S. or world economy, and we are giving them not just permission to operate (no regulatory oversight), but also preferential tax treatment on their booty (known as ‘carried interest’).
Hedge Fund Managers typically receive their compensation in 2 ways – an overall management fee equal to 2% of assets under management, and a 20% share of any profits on the assets under management.
It is the tax treatment of that 20% fee — categorized as Carried Interest — which is currently taxed at 20% — versus the 39.6 percent rate which business owners must pay on their earned income — that has created somewhat of a firestorm in Washington.
None of this makes any sense to me: does it make sense to anyone?
walrus51 