Federal Debt Ceiling Observations
May 11, 2023
Hanging their hats on false equivalence
The underlying logic Speaker Kevin McCarthy and his crew lean on in their arguments relative to the federal debt ceiling rely on false equivalencies.
The gist of their message seems to be, “Just as families and businesses balance their checkbooks every month, we believe the federal government needs to make balancing the nation’s checkbook a top priority. Raising the debt ceiling is a short-term solution to a long- term problem. Before we consider raising the debt ceiling, our federal government needs to focus on reducing spending and living within its means to ensure a healthy economy for future generations”.
Sounds pretty good, right?
Yet, that explanation illuminates one of the greatest obstacles we face as a nation: A void of economic and financial understanding among most American adults.
The ‘checkbook’ is the equivalent of an annual budget. Current revenues flow in, and current expenses flow out. If revenues exceed expenses, there is a surplus. When revenues exactly equal expenses, it is ‘break even’. When expenses exceed revenues, there is a current-year deficit.
Staying with the household theme, the federal debt is most equivalent to a home mortgage, and the balance due is an accumulation of debt over time. Remember that new roof? That new kitchen? That fabulous backyard pool? Those were capital expenses, incurred in one year, but with an expected useful life of 10, 15, even 30 years. You add these expenses to the mortgage so that they get paid off over time.
As a retired professional in the field of finance and economics, when I hear Speaker McCarthy or members of his crew attempting to equate current spending to our overall aggregate debt obligations, I cringe.
Some rather simple adjustments to our tax code, including elimination of the carried interest loophole and raising the top corporate rate from 21% to 28% would make huge revenue contributions to balancing the annual (current FY) federal budget.
And, why is it that low- and moderate-income wage earners are required to make contributions to Social Security on every dollar of their earnings up to the current wage cap [a.k.a. ‘the contribution and benefit base’] of $160,200, yet those who are blessed to earn in excess of that amount are exempt from contributions to Social Security on earnings above that amount?
The wage cap on Medicare contributions was eliminated in the 1990’s, so even higher-income wage earners are required to make the 1.45% contribution to the Medicare tax with no limit on earnings.
We clearly have a revenue gap. Why does the cap on social security earnings continue to this day? And, those who claim their income not as ‘wages’ but as ‘carried interest’ not only receive beneficial income tax treatment, they also are exempt from FICA contributions. What a racket!
Federally guaranteed obligations are debt securities issued by the U.S. government, currently considered risk-free because they are backed by the full faith and credit of the federal government. When the Treasury sells these securities, they help to finance the federal debt outstanding at that time.
Allowing the government to default as an outcome from a false debate linking current revenues and spending to our long-term debt obligations would be a preventable tragedy of immense proportions.
Minority Leader Hakeem Jeffries (if you are listening): I implore you to be bold and to tear apart Speaker McCarthy’s logic map, and to take this opportunity to focus in on one of the greatest obstacles we face as a nation: A void of economic and financial understanding among most American adults. Until the American people awake from their deprivation of economic and financial principles, they will continue to be vulnerable to Alternative Facts such as those presented by Speaker McCarthy and his crew.
The Big Lebowski must have learned of McCarthy’s foolish and destructive crusade to equate and combine the federal debt ceiling with the current (2024) federal budget when he so eloquently said, “This will not stand, you know. This aggression will not stand, man”.
Senator Sinema and Carried Interest
August 17, 2022
Political Malfeasance in Action
I grew up in the 1960’s in Buffalo, NY where it seemed that candidates for election to public office couldn’t get nominated until they could prove their ability to attract illegal political contributions. Over my professional career, I spent significant time in other northeast states, counties and cities where political corruption was often the norm.
Most of the corrupt elected officials I observed were guilty of getting their driveway paved; their house painted; maybe a new roof. Not good, not appropriate, and certainly, not acceptable.
The recent behavior of Sen. Kyrsten Sinema (D-AZ) relative to the Carried Interest federal tax loophole puts the actions and behaviors of these historic elected officials in NY and CT into the category of ‘fixing parking tickets’.
The despicable and nefarious posturing by Sen. Sinema has blessed Carried Interest, sometimes known as ‘the cockroach of tax breaks’, allowing it to survive another potential assault by Congress.
The proposal to increase the holding period requirement to qualify certain income paid to investment bankers for the lower Carried Interest tax rate was removed from the landmark ‘Inflation Reduction Act’ of 2022 (H.R. 5376) recently passed by both the Senate and the House and signed into law by President Joe Biden on August 16, 2022.
The “compromise” to remove Carried Interest was demanded by Sen. Kyrsten Sinema (D-AZ) which she justified on a complex and convoluted set of criteria, and which potentially might be related to the $1 Million in campaign contributions she received over the past year from private equity professionals, hedge fund managers and venture capitalists whose taxes would have increased exponentially under the original plan.
The concept of Carried Interest dates back to the 16th century, when ocean-going ship captains would often take a 20 percent “interest” of whatever profits were realized from the cargos they carried. This approach is logical and defensible on the risks to life, property and personal capital undertaken by ship captains.
In 21st century America, the meaning of Carried Interest has evolved to describe a tax loophole — an income tax avoidance scheme — which allows some private equity and hedge fund investment bankers to classify large amounts of their compensation related to performing services (i.e. managing and/or investing other people’s money) as investment gains, which substantially lowers the amount they are required to pay in taxes.
Today’s Carried Interestis essentially a payment (bonus or commission) for investment services that is taken out of the profits of the money managed for investors. Private equity firms use pooled money from large institutional investors (pension funds, college endowments, ultra-high net worth individuals, etc.) to acquire controlling interests in struggling, underperforming or undervalued companies. When the investment are made, these acquired entities agree to pay the private equity firms Carried Interestout of the investment profits on top of management and other fees.
Under our current tax law, when the carried interest income is paid out of the private equity firm to individual partners, directors, etc. it is taxed at the preferential (‘capital gains’) rates granted to investment income, even though the income represents compensation for services. In all other contexts, compensation income – salaries, bonus, commissions, etc. – is taxed everywhere else as ordinary income.
Investment professionals often are required to contribute capital if they are eligible to receive carry, although it varies by firm and by position in the hierarchy (from 23% of associates/senior associates to 71% of managing partners). Essentially, the Carried Interest tax loophole acts as a magic wand to turn ordinary compensation income into preferentially-taxed capital gains income for a few thousand specially entitled individuals each year.
Private Equity (“PE”) is a $4.5 Trillion industry which tends to follow a predictable model: Use very high levels of debt to take control of underperforming (or undervalued) companies and then extract as much value as possible over a short- to intermediate time frame.
One of my favorite movies, “Other People’s Money” (1991: Warner Brothers [directed by Norman Jewison]; starring Danny DeVito and Gregory Peck) almost perfectly illustrates the potentially powerful impact of leveraged debt strategically deployed against a weak management team. In the film, the end result is: (a) closure and liquidation of New England Wire & Cable Company, a boring multi-generational family manufacturing business; (b) the loss of hundreds of decent jobs in a small American city; and (c) millions of dollars of ‘pirated booty’ transferred to anonymous private equity investors, with a mighty fine Carried Interest reward paid to Danny DeVito (the investment banker).
Zero value added to the overall U.S. economy.
Devastating value lost to a small American city, its residents and the regional economy.
Sure, the investment banker (Danny DeVito) took home a fine bonus. He probably was able to buy a nice airplane and maybe a vacation home in the Hamptons.
Meanwhile, the wire and cable products formerly supplied by the now defunct domestic company now are being sourced from a foreign firm. The American city where the former Wire and Cable business was located lost tax revenue which had formerly been used to support local schools and public works. And, local families abruptly lost their incomes, and their homes potentially went into foreclosure.
Most alarming: U.S. taxpayers subsidized the whole mess because of this crazy, foolish and irrational tax break known as Carried Interest.
Some will say that the movie, “Other People’s Money” is a 1991 dinosaur which has no relevance in 2022.
Yet, the devastation continues. In our current environment, retailers are particularly vulnerable to leveraged buyouts, and they provide the most visible examples of companies which have been acquired, pillaged and wrecked by private equity firms.
In January 2020, the New York grocery chain Fairway filed for its second bankruptcy in less than four years and announced plans to sell off its stores, due to several efforts by PE firms to extract value from the franchise. The Fairway failure joins a long list of casualties that includes: Sears; Toys R Us; Payless ShoeSource; and Sports Authority, among many others.
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In theory, PE firms snap up underperforming companies using ‘patient capital’; they bring in professional managers to revamp current operations; and then sell the companies through a Public Offering to generate a healthy return.
In practice, the PE industry revolves around deals known as leveraged buyouts, where the PE investors put up a small amount of their own money to purchase a company and borrow the rest. The acquired business becomes responsible for repaying the debt, which puts an immediate strain on cash flows.
In their quest to generate cash and improve operational efficiency, PE firms often: lay off workers, and cut pay and benefits to remaining workers; they sell off owned real estate and lease back; they sell trademarks and other ‘off balance sheet assets’.
PE firms sometimes extract cash using “dividend recapitalizations” where they use the acquired company to borrow additional money which is then used to pay investors. Beyond that, they often charge the businesses they acquire millions in ‘management fees’.
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Shifting the treatment of so-called Carried Interest income from capital gains to ordinary compensation income could raise between $1.4 Billion and $18 Billion annually from income tax on a very small number of investment bankers.
Most informed Americans refer to the lower tax rate on Carried Interest as a loophole that allows already wealthy private equity, hedge fund and other investment managers to pay a lower tax rate than the majority of their employees and other American workers. Once they are fully informed, a significant majority of voters across the political spectrum support legislation that would close this loophole.
“It’s a real rich benefit for the wealthiest of Americans,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “Why should a private-equity manager be able to structure his or her compensation with low-taxed gains? That seems wrong.”
Sen. Sinema was elected to the U.S. Senate by voters in Arizona to represent their interests. It’s hard to see how continuing this awful Carried Interest loophole is in the best interest of anyone in Arizona, other than to Sen Sinema herself because it seems to provide a rich and reliable source of political contributions to help ensure her continued reelection.
And that also seems wrong.
Remember the 2020 Recession?
August 11, 2022
I don’t either.
Just because you and I don’t remember the 2020 Recession, that doesn’t mean it didn’t happen.
The official arbiter of recessions — the Bureau of Economic Research — says there was one.
When Donald Trump took office in January 2017, he inherited an economy in its 91st month of economic expansion following the end of the Great Recession in June 2009. That expansion continued into 2020, becoming the longest on record, peaking at 128 months in February 2020.
The National Bureau of Economic Research officially recognized the Recession of 2020 as the shortest on record at just 2 months, with the trough of that recession occurring in April 2020.
One milestone which helps to mark the 2020 recession is the price of oil. During the month of April 2020, the price of a barrel of West Texas Intermediate was absolutely erratic, actually closing Negative at (Minus $37/bbl) on April 20, 2020. [Was gasoline free that day? I don’t recall.]
Back to January 20, 2017, Trump’s Presidential Inauguration Day.
Paul Ryan, a Republican from Wisconsin, was serving as Speaker of the House. Mitch McConnell, a Republican from Kentucky, was the Senate Majority leader.
Ryan was first elected to the House in 1998 at age 28. He developed a reputation as a no-nonsense deficit-hawk fully focused on reducing entitlements and reducing taxes. Ryan had been serving as Speaker of the House since 2015.
The 2017 Tax Cuts and Jobs Act (TCJA) was Paul Ryan’s swan song, eagerly supported by Trump and most congressional Republicans.
Unfortunately, it was exactly the wrong time to enact this complex piece of legislation, primarily because it relied on untested assumptions at a point in time when the U.S. was riding the tail end of the longest economic expansion in history. It created massive increases in our national debt; it favored investment increases in oil and related industries (which to some appeared to be a means to curtail pending increases in oil prices); and exuberant expectations that repatriation of corporate profits parked offshore would be used to create domestic jobs turned into a massive stock buyback across the market.
In early February 2018, Paul Ryan began to reflect on the true consequences of the TCJA. He tweeted, “Julia Ketchum, a secretary at a public high school in Lancaster, Pennsylvania, said she was pleasantly surprised her pay went up $1.50 a week. She didn’t think her pay would go up at all, let alone this soon. That adds up to $78 a year, which she said will more than cover her Costco membership for the year.”
In April 2018, Ryan announced his intention to retire from Congress on January 3, 2019 — the end of his current term — thus ending a 20-year career representing his constituents in Wisconsin — so that he could spend more time with his family.
Left to its own devices, the 2017 TCJA may have created an unchecked economic calamity.
Then came the Covid-19 Pandemic which turned into an unforeseen international societal and economic tragedy – and clearly was the trigger which caused the 2020 recession. Yet, the impacts of Covid didn’t begin to surface until 1st quarter 2020, so there is a 24 month period following the January 2018 introduction of the TCJA which economists are now examining to help create real context around current (mid-2022) economic uncertainties.
Even a neophyte like me can add the 2022 Russian invasion of Ukraine to: (a) the long-term economic damage created by the TCJA; (b) the Covid wild card; and (c) the economic devastation of Trump’s tariffs, particularly on our agriculture sector. When we spread the numbers, we can begin to see an almost perfect recipe created under Trump’s watch sufficient to decimate any economy.
Despite the open hostility and recalcitrance of elected Republicans currently serving in Congress, I must give Joe Biden and the Democrats a 5-Star rating for refusing to capitulate, and for keeping the ball moving forward.
Tax Exempt for Religious Purposes
June 15, 2022
This property – a 50-unit vacation destination – was acquired by the Church of Scientology FLAG Service Organization in 1996. Although it is currently assessed for $2.3 Million, it has been off the tax rolls since 2013. That’s right. This 50-unit waterfront motel is tax exempt for religious purposes.
The property is now gated and clearly not accessible to the public, yet it appears to be well-maintained and suitable for its intended use as temporary housing for travelers.
In a post from November 2020, Mike Rinder looked deeply into the concept of awarding tax exemption to the Church of Scientology (Scientology’s Tax Exemption (mikerindersblog.org)
I am resident, voter, property owner and taxpayer in Clearwater, FL where the Church of Scientology has directly and indirectly acquired hundreds of properties, taking many off the tax rolls thus shifting the tax burden to others.
I don’t wish to debate the validity of the religious exemption Scientology won from the IRS, yet I do want to debate the practice of hiring and using an army of lawyers to fight property assessors who attempt to determine that some of the properties owned by Scientology are not used for religious or charitable purposes, and thus not eligible for property tax exemptions.
I also question many of the activities of Scientology which seem to confer ‘excess benefits’ to Chairman Miscavige and others who occupy senior positions in the Organization.
Having received tax exemption from the IRS as a religious organization, the Church of Scientology and its many affiliates are also exempt from filing an annual Form 990 “Information Return” with the IRS:
‘They are encouraged to file, but not required to file.’
The 990 provides a treasure trove of information, including executive compensation, benefits, governance, etc.
If I was a gangster posing as a religious leader, I would want to be exempt from any public disclosure, including the requirement to file a 990.
If I was an honest, fair, selfless religious leader I would hope to be fairly compensated for my education, wisdom and service so that I had adequate shelter, nutrition and safety for me and my household, but I wouldn’t object to disclosing the financial affairs of my organization, which would include disclosure of my personal compensation and benefits.
This goes well beyond Scientology as there are more than a few Exempt Religious Organizations which opt into the nondisclosure arena.
Despite that loophole, a rather large number of religious organizations which have received tax exemption from the IRS continue to file their 990 forms every year.
This seems to be another serious, dangerous and egregious loophole in our Federal Tax Code that needs to be addressed.
We, The People, ought to know what is going on behind the curtain, particularly because we are left paying the piper when those few tax-exempt organizations every year stray from the garden path.
More on: Tax Cuts & Jobs Act
April 16, 2019
Paul Ryan retired from Congress in January 2019 after 20 years of service culminating in his 3+ years of service as Speaker of the House.
Ryan was the chief cheerleader for the Tax Cuts and Jobs Act, and he left D.C. touting it as the greatest accomplishment of his political career.
Ryan repeatedly exclaimed how this new legislation (TCJA) would unleash unprecedented U.S. economic prosperity, by providing:
- Tax relief for middle-income families;
- Simplification of the tax code for individuals;
- Economic growth; and
- Repatriation of $3+ Trillion of profits U.S. companies have parked overseas would generate more investment and jobs in the U.S.
16 months after passage of the TCJA, it should be crystal clear that:
- Almost none of the tax cut benefits have reached the low- and middle income Americans who were promised tax relief;
- The TCJA legislation is some 1,097 pages itself, and it states very clearly that it is an Amendment to (the existing) Internal Revenue Code of 1986 (not a simplification);
- Economic Growth? The jury is still out on this one, but there seems to be no evidence of growth above or beyond the existing growth trend line which began in mid-2009;
- American companies have returned some (+/- $500 Billion) of their profits held overseas as a result of the tax holiday which was part of TCJA. Much of that money was used for stock buy-backs and debt reduction.
In fact, 16 months following the passage of the TCJA, U.S. companies are still waiting for final guidance from the Treasury Department on many of the final rules relative to repatriation.
And, despite continued U.S. economic growth and record corporate profits, a record 60 Fortune 500 companies avoided paying any federal income tax in 2018.
Federal tax revenues have declined during a period of economic expansion and our government spending has increased, thus the verifiable result from Paul Ryan’s signature accomplishment – the TCJA — is an increase in our federal deficit, an extra-special gift to our children and grandchildren.
The Treasury Department announced in March 2019 that the deficit for the first four months of the 2019 budget year (which began Oct. 1, 2018) totaled $310.3 Billion, up from a deficit of $175.7 Billion in the same period the year prior.
The Congressional Budget Office is projecting that the annual federal deficit between revenues and expenses will hit $897 Billion in fiscal year 2019, up 15.1 percent from the $779 Billion deficit recorded in FY 2018.
The end result: Our total federal debt will reach $22 Trillion this year – about 105% of GDP.
Why is that important? A comprehensive study by the World Bank examined economic data from 100 developing and developed economies spanning a time period from 1980 to 2008, concluding that a public debt/GDP above 77% begins to create a drag on economic growth.
The World Bank analysis concluded that for each additional percentage point of debt above the 77% threshold costs 0.017 percentage points of annual real growth.
If the World Bank study is correct, we are currently missing about 0.5% of our economic growth potential due to misguided public policy decisions, in addition to the future burden of repaying federal debt which was incurred unnecessarily.
Paul Ryan achieved his personal goal of shepherding record tax reform through Congress resulting in the passage of TCJA.
Although his personal goal was achieved at the expense of American society, Paul Ryan clearly is a winner. So, please join me in sending a note of thanks and congratulations to Paul Ryan. He left us a legacy.
Paul Ryan & Tax Cuts
April 16, 2019
Dear Paul Ryan,
In 1998 – at the age of 28 – you were first elected to the House of Representatives to represent the 1st District of Wisconsin. You were re-elected a number of times, and you served for 20 years in Congress.
After John Boehner announced his intention to resign from the House and the Speakership in 2015, you were selected by your colleagues to become Speaker of the House.
You were involved in some very positive legislative accomplishments during your 20 year tenure as a Congressman representing the 1st District of Wisconsin, and during your tenure as Speaker of the House.
Unfortunately, your legacy will forever be connected to the Tax Cuts and Jobs Act (TCJA) which was passed into law at the end of 2017.
Although the TCJA provided the Trump Administration with an accomplishment relative to their campaign platform, it is a highly flawed piece of legislation which was created on a foundation of fictitious and inaccurate assumptions.
Just 16 months following the passage of TCJA, we can clearly see the adverse impacts.
Business and corporate tax cuts have resulted in: stock buy-backs; excessive executive compensation and bonuses; acquisitions and consolidations resulting in plant closings and layoffs. All of these have been enabled by tax cuts which have resulted in 60 major corporations paying zero federal income taxes in 2018.
Whereas in times of economic expansion, the great majority of economists advise public sector entities to reduce deficits and aim for balanced budgets, the TCJA does just the opposite.
Some of the loss of tax revenue from business and corporate entities has been replaced by increased federal tax liability on individuals (like me), the majority of the lost tax revenue has been made up through deficit spending.
The annual federal budget deficit is expected to reach $900 Billion in fiscal 2019 and to equalize in the range of $1 Trillion annually for the next decade, up from $779 Billion in 2018.
Mr. Ryan: over the course of your service in Congress, you achieved national recognition as a conservative policy wonk and as a relentless critical observer of our federal budget. You seemed to be a relentless critic of federal deficits, winning acclaim from centrists for your detailed charts showing the dangers that fiscal shortfalls posed to America’s future.
You slipped out of Washington in January 2018 knowing that you led the American people down a dangerous and dead-end road.
In your defense, we can acknowledge that you reluctantly took on the role of Speaker knowing that it was an impossible responsibility to fulfill. Despite this, we must hold you fully accountable for failing to disclose to your constituents – and the entire U.S. population – that the TCJA was a sham – a complete flim-flam designed to create a false reality.
Paul Ryan: Let us hope that your family, your wife, your children – and your neighbors – are willing and able to forgive you for selling out the interests of the people of Wisconsin — as well as the people of the United States – for whatever benefits you personally gained from your treachery toward the end of your tenure in Congress when you became the champion of the fictitious Tax Cuts and Jobs Act.
Mr. Ryan: Good luck to you, and God bless.
National Emergency
February 13, 2019
Yes, we are facing a national emergency, and it’s not along our southern border.
Our real national emergency is our National Debt.
Let’s first agree that when the U.S. federal government runs a deficit, or spends more than it receives in tax revenue, the U.S. Treasury Department borrows money to make up the difference.
Next, let’s agree that our national debt is the amount of money the federal government has borrowed through various means, including: (1) by issuing bills, notes and bonds which are bought by investors (domestic and foreign), including the public, the Federal Reserve and foreign governments; (2) through intra-governmental debt, essentially money borrowed from trust funds used to pay for programs like Social Security and Medicare.
The great majority of economists and economic and fiscal analysts tend to agree that the significance of national debt is best measured by comparing the debt with the federal government’s ability to pay it off using the debt-to-GDP ratio, simply by dividing a nation’s debt by its gross domestic product.
Various sources have estimated that a healthy debt-to-GDP ratio is in the 40% to 60% range. A longitudinal study conducted by World Bank economists published in 2010 estimated that in highly developed countries, 77% was a ‘tipping point’ where productivity and potential economic growth was constrained by adding additional debt without addition of incremental revenue. (In emerging economies, they estimate that 64% is the tipping point.) In either case, potential for default begins to increase once the tipping point has been breached, thus putting upward pressure on borrowing costs.
The first instance when U.S. debt-to-GDP ratio exceeded 77% was toward the end of World War II. In the post-war years, our national debt shrank in comparison to the booming post-war economy, and the debt-to-GDP ratio fell as low as 24 percent in 1974.
Recession and rising interest rates during the Carter administration put upward pressure on the debt-to-GDP ratio, and once the tax cuts enacted during Reagan’s first term combined with increased spending on both defense and social programs, the debt-to-GDP ratio reached 50 % in July 1989.
Economic growth in the ‘90s, combined with tax increases under both Presidents George H.W. Bush and Bill Clinton helped keep the debt load in line, and by the end of December 2000, our national debt was about 55% of GDP.
Following the terrorist attacks on 9/11/2001, U.S. military spending spiked, yet tax cuts enacted in 2001 and 2003 during the George W. Bush administration combined with a mild recession in 2001 and the Great Recession beginning in 2007 caused significant decreases in tax revenues. By the time Barack Obama took office in January 2009, the debt-to- GDP-ratio reached 75%.
Deficit spending is one of the key tools available to stimulate economic recovery, and by the time of Obama’s 2nd inauguration in January 2013, the U.S. debt had grown to $16 Trillion – a debt-to-GDP ratio of 101%. By that time, it was clear that the economic stimulus of deficit spending had worked, evidenced by an expanding U.S. economy; signs of ending the wars in Afghanistan and Iraq; resurgence of the U.S. stock market; continued job growth; and other positive economic indicators.
All of these positive signs at the beginning of 2013 pointed to the need to rein in government spending and to strategically increase revenues (i.e. raise taxes).
Yet, the Congress has stubbornly refused to deal with the reality that our U.S. debt-to-GDP ratio has remained above 100 percent since 2013.
In early 2018, an analysis by the nonpartisan Committee for a Responsible Federal Budget concluded that the Tax Cuts and Jobs Act signed into law in late 2017 will push the U.S. national debt to $33 Trillion — 113 % of GDP — by 2028, a ratio not seen since immediately after World War II.
The Tax Cuts and Jobs Act is a sham (and a scam) which created a situation exactly opposite of what responsible elected officials should have supported. The sooner it is amended, repaired or repealed, the sooner the American people will be transitioned into a less dangerous and more stable and sustainable economic environment.
Economic and Fiscal Policy
February 12, 2019
Our current POTUS rarely stands still long enough for anyone to really examine how his positions and policies impact us in the present, or potentially in the future.
Here are a couple of observations which I managed to glean from rapidly moving targets:
Fiscal Policy: Failure
By late 2017, the U.S. economy had enjoyed over 8 years of economic expansion (since June 2009), leading virtually all economists to conclude we were moving toward the end of an economic expansion cycle. Most experts agree that the government should constrain both borrowing and spending during an expansion phase, concurrently decreasing government debt.
When the expansion phase of a business cycle comes to an end, and the economy begins to sputter – and ultimately to contract – a government with reduced debt will have the capacity to spend more and tax less, helping to support the softening economy return to equilibrium faster and smoother.
The much-touted Tax Cuts and Jobs Act enacted at the end of 2017 introduced a $1.5 Trillion tax cut, sold as a source of economic stimulus when it was least needed.
In times of economic expansion, the government is on notice to reduce its deficit.
On February 12, 2019, the national debt passed a new milestone, topping $22 Trillion for the first time. According to the U.S. Treasury Department, total outstanding public debt hit $22.01 Trillion, up from the $19.95 Trillion when President Donald Trump took office on Jan. 20, 2017. This is mighty dangerous stuff, folks.
Trade Policy: Failure
Tariffs are a tax on consumption, paid by end users.
Over several decades, the U.S. developed a dependence on manufactured goods from China. In turn, U.S. exports to China – predominantly agricultural and unfinished goods – enjoyed strong growth over time.
President Trump abruptly started a trade war with China, imposing tariffs on goods imported into the U.S. beginning in July 2018.
China quickly retaliated, raising tariffs on American goods imported into China, resulting in significant shifts by China to alternative sources.
Winners? Brazil; Russia; Germany; Japan.
Losers? American agricultural producers in Iowa, Nebraska, Indiana, Missouri, Ohio, South Dakota, North Dakota, and Kansas; some American manufacturers; and American consumers overall.
It was once said, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”
The evidence seems to emphatically refute that position.
The Trump Trifecta
October 26, 2018
Since taking office in January 2017, Donald Trump has stood with House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell to proclaim various ‘victories’ for the American people. Here are what seem to be the top three, A.K.A. “The Trifecta”:
- Complicit with Russia, Saudi Arabia and several other suspect regimes. Trump has continued to send public messages which downplay and/or absolve bad actors from behaviors which are contrary to existing international standards.
One clear reason: Trump — and his close advisor Jared Kushner — is involved in highly leveraged real estate development. Neither Trump nor Kushner have the liquidity or availability of traditional financing sources to invest their own money. Instead, they are forced to chase shady money from around the world, including huge sums of money sourced from Saudi Arabia, Russia, China, etc.
Essentially, Trump (along with the Kushner Companies) is beholden to Crown Prince Mohammed bin Salman; Vladimir Putin; various Chinese investors; along with ‘dark money’ sources in Cyprus, Panama and the Cayman Islands, among others.
2. The “Tax Cuts and Jobs Act” (TCJA) was passed in late 2017 incorporating some modest temporary individual and small business tax cuts while focusing in on very substantial big business and corporate tax cuts.
Traditional economic models, developed and refined over countless economic cycles, encourage tax cuts and deficit spending during economic downturns as a means to stimulate economic growth. During times of economic expansion, increased government revenue from tax collections is then used to pay down public debt and help stabilize the economy.
N.B. There was a strong case to be made for a modest corporate tax cut as the U.S. economy began to improve post 2012; there was zero legitimate case to be made for the magnitude of the corporate tax cut which was a cornerstone of the 2017 TCJA.
The foundation of the TCJA was a promise that slashing corporate taxes from a maximum 35% rate to a 21% cap would result in dramatic increases in capital investment, resulting in job creation and wage growth. Americans for Tax Reform, a vocal advocate for the plan, generated promises of employee bonuses, increased wages, increased retirement contributions and/or expanded business operations as a result of the TCJA.
Actual outcomes of the Tax Cuts? Record stock buybacks; extraordinary executive compensation; flat employee compensation; and continued failure of venerable American corporations.
Definitive proof of the foolishness of cutting taxes in a time of economic expansion? A rapidly expanding federal budget deficit. According to the final monthly Treasury Statement for Fiscal Year 2018 (the year that ended on 9/30/2018), the deficit was $779 Billion — a $113 Billion (17%) increase over the$666 Billion deficit recorded from FY 2017.
Perhaps most egregious to the American people? Mitch McConnell is blaming self-funded safety net programs [Social Security, Medicare and Medicaid] as the root cause of our rising federal deficit. Visualize McConnell as he does a little smile; looks straight into the camera; and then blatantly lies to the American people. Was he also lying when he took the Oath of Office?
3. Incendiary, Irrational and Emotionally-Inspired Immigration Policy:
Right or wrong, the U.S. economy depends on immigrant workers – documented or undocumented. Industry sectors which rely on immigrants for between 1/4 and 1/2 of their employment needs include: agriculture; hospitality; construction; textile, apparel and leather manufacturing; food manufacturing; and private households.
Through a series of small moves that add up to dramatic change, the Trump administration has bypassed Congress to create new process and procedures which could have lasting effects on how the US welcomes and evaluates immigrants.
In his election campaign in June 2015, Trump told us, “When Mexico sends its people, they’re not sending their best. They’re sending people that have lots of problems, and they’re bringing those problems with us. They’re bringing drugs. They’re bringing crime. They’re rapists…”
By painting virtually all immigrants with a broad brush as criminals; as a national security threat to the U.S.; as bad people; as people who steal jobs from Americans; he has created a hostile environment on the world stage, offering fear and fallacies with no attempt to find viable and sustainable solutions.
In late October 2018, facing a ‘caravan of migrants’ moving north from Central America toward the U.S. Southern border, Trump has proclaimed that there are ‘criminals and people of Middle Eastern descent among the migrants within the caravan’ and has pointed to it as evidence that the U.S. has weak immigration laws. He has also threatened to cut off aid to Central American countries in response to the caravan.
An internal report from the Department of Homeland Security’s Inspector General found that the Trump administration’s “zero tolerance” crackdown at the border in early 2018 was troubled from the outset by planning shortfalls, widespread communication failures and administrative indifference to the separation of small children from their parents.
It has been said that the Trump Child Separation Policy is related to the worst abuses of humanity in history. Child separation is connected by the same evil that separated families during slavery, and which dislocated tribes and broke up Native American families.
What’s the point?
The point is that differences of opinion are a cornerstone of society, and a critical ingredient of humanity.
The very essence of Debate relies on formal discussion on a particular topic.
In an honest debate, opposing arguments are put forward to argue for opposite viewpoints. Genuine and honest debate can occur in public meetings, academic institutions, and in legislative assemblies.
A genuine debate requires some ground rules, particularly in the areas of logical consistency and factual accuracy, yet it also allows some degree of emotional appeal to the audience.
Sadly, today’s discussions on topics of importance to the American People seem to lack any rules about civility, logic or even factual accuracy.
Turn on the television and we find absolutism, tribalism and a “win at any cost” approach to delicate yet important societal issues. Dialogue has effectively been replaced by diatribe.
Worse, people can select news sources which support and reinforce their biases, finding comfort in “being right” by selective listening or watching. No time or need to consider other options when the platform has been fully developed to mirror your comfort zone.
Add to this dilemma the continuing disenfranchisement of American adults from the political process.
More adult males in America today are able to recite NFL statistics than are able explain issues facing American society, and women are not far behind.
Voter turnout in the United States fluctuates in national elections. In recent elections, about 60% of the voting eligible population votes during presidential election years, and about 40% votes during midterm elections. Turnout is lower for odd year, primary and local elections.
If we compare national voter participation in the 2016 presidential election to viewership of the 2016 Superbowl, we find a dead heat at around 112 Million.
Not necessarily the same people, but it does strike me that we have a real disconnect between the American public and our governance model, perhaps helping to explain why our system seems to be in need of some serious adjustments at this point in time.
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.
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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…..
walrus51 