The sugar high is beginning to wane

The volatile and recent downward trend in the stock market is an indicator.The slowing of global growth, uncertainty over trade, increasing business costs due to tariffs and increasing interest rates are causing a dampening effect.

While the US economy had 3.5% annualized growth in the 3Q2018 following 4.2% in 2Q2018 (it was 2.2% in 1Q2018), imbedded therein are two numbers that should give pause. Business investment was much higher in 2Q2018 at 8.7%, partly due to getting stuff in the hopper before the tariffs started. Yet, business investment fell to 0.8% in 3Q2018. That is an ominous sign. This concern is also apparent in several third quarter earnings announcements by major corporations.

While we should finish 2018 with annual growth north of 3%, economists have predicted that 2019 will have 2.4% annual growth, falling to 2.0% growth in 2020. I should add they feel the impact of the tax cut for corporations is waning (which is sad because it is an imbedded profit margin increase). In other words, the companies view this tax reduction as a “sugar high” that won’t last.

When the tax bill was passed, the White House and Congress touted that it would take GDP growth to 4% and pay for itself. Tax cuts have never paid for themselves and the best they have done is abet the economy enough to save maybe 20% to 30% of the foregone tax revenue. But, the tax bill was estimated by the Congressional Budget Office to increase the already $21 trillion in debt by $1.5 trillion over ten years. And, the tax bill did nothing to address the projection the debt would increase by $10 trillion by 2027. Absent any change, we are looking at debt of $33 trillion by 2027.

It should be noted the annual deficit increased in the government fiscal year just ended to $779 billion from $665 billion, partly due to foregone $166 billion in tax revenue. The deficit is budgeted to be $985 billion in the 2018-19 fiscal year, on projected expenses of $4.407 trillion and revenue of $3.422 trillion. The deficit is expected to grow past $1 trillion in fiscal year 2019-20.

The US President has tended to be a short-term thinker. He is too focused on doing things that look good now. This is one reason he has had six bankruptcies. The problem is the sugar high is going to end. And, we spent $1.5 trillion to add more sugar to a pretty good economy. We are now beyond 9 years in economic growth (the second longest in US history) and 8 years in job growth, with a bull stock market dating back to March, 2009. Plus, we took one of our levers off the table with an unneeded tax cut. I was all for lower corporate tax rates, but we went well beyond deficit neutral.

This is not a new concern of mine, as I have been actively writing about our debt and deficit for several years, well before the current President took his oath. One of my concerns over Obama was his not doing anything with the Simpson-Bowles Deficit Reduction plan. Both he and Congress just put a very good working draft on the shelf. Our building debt is a ticking time bomb that will cause a huge day of reckoning. And, one things politicians don’t talk about it, is it will take tax increases and spending cuts to get there. The math will not otherwise work. That is the conclusion of the Committee for a Responsible Federal Budget and the Simpson-Bowles effort.

15 thoughts on “The sugar high is beginning to wane

    • Vanessa, so true. I have volunteered to help folks with debt education organizations get the word out. The reps say when they meet with GOP legislators, they are with the reps until the subject of tax cuts come up. Dems understand the need for both, but get quite antsy when cuts are discussed. Keith

  1. You remember the shell game played at carnivals around the nation? A pea under a shell … move them rapidly about left right center right center left … okay, now where’s the pea. That one? No, but good guess … sorry kid, you lose your nickel but come play again sometime, eh? Trump, Mnuchin and the rest can spin it however they like, and some of the fools will believe whatever they tell them, but the truth is … their tax cut and the tariffs and all the rest add up to one huge con game. Funny thing happened on the way to the forum … those deficit hawks must have gotten shot down …
    Good post, Keith … these are the facts people need to hear, need to understand. Far too many would prefer to listen to the buffoon in the Oval Office and keep telling themselves that somehow it will all come out fine.

    • Jill, good analogy. I have had a couple animated conversations with staff members of the Freedom
      Caucus when I point out that it was hypocritical to support a debt increasing tax cut after complaining about debt for years when it was high, not much less than now.

      We need someone to shot straight with people. To be frank, any idiot can put forward a tax cut. A real statesperson is needed to propose the bitter pill solutions. Keith

      • I don’t understand how the members of Congress who voted for the tax cuts can fail to realize that the day of reckoning will come. Were they so short-sighted? Were they like Scarlett O’Hara in Gone With The Wind … “I won’t think about that today. Tomorrow is another day.”? It isn’t even rocket science, but simple Econ 101.

      • Jill, after signing the Grover Norquist pledge, the only way for Republicans to consider revenue increases is to call them son thing else. As you recall, the GOP big donors told the legislators to pass this tax cut or we will withhold funding. It gets no simpler than that. They were ordered to by donors. Keith

      • Agreed. Two terms for Senators and three for Congress. That is twelve years apiece, if reelected. That should provide enough time to learn the ropes and make a difference.

        I wish the moderates from both parties would form a middle of the road party that would get the extremists to take notice.

      • That is exactly what I would have proposed … it’s long enough. McConnell should have been long gone … he’s beginning to smell funny.

        I’ve often had the same thought about a third, more middle-of-the-road party, but frankly I think it would take decades to come into its own. And I have to ask the question today … are there any moderates in either party?

      • Jill, the moderates are under attack in both parties, but primarily in the GOP. The gerrymandering has come at a huge cost with more strident people getting elected. Several former Republican pundits have pushed for the Dems to win, so the Republican Party can regain what it was. I have witnessed Dems who are moderates gain traction in the campaigns. The stories of the far left are real, but not as pervasive as made out to be. Keith

  2. Note to Readers: Using the free WordPress allows ads to show up at the bottom of my site that I did not choose. I presume for North Carolina readers, there is an ad for state senator Dan Bishop. I do not support his candidacy as I find him very divisive and anti-LGBTQ. He is one of the major proponents behind the divisive HB2 law that was eventually pulled as it hurt our state financially and was discriminatory.

    His opponent has made some poor decisions in the past, so he is no day at the beach. But, he seems to have remedied his shortcomings and is an otherwise reasonable candidate.

  3. “Sugar High” is the perfect description. Trump is the king of short-term thinking (if you can call it “thinking” at all). Ads like the one you describe in your Note to Readers (I can’t see it but I don’t live in North Carolina) are why I pay a little more to WP each year to be ad-free.

    • Janis, I have toyed with paying for the service. Those who know his history feel he should have a lot more money than he does given his leg up. His bankruptcies and other bad decisions have dampened his wealth. Of course, he has made good ones, so he won’t go hungry. Keith

  4. Note to Readers: I debated putting the reference to Trump’s bankruptcies in the piece. But, I wanted to spotlight a history of short term focus. Finance was supposed to be his strength, but per very credible reporting, Trump has a difficult time understanding trade deficits and tariffs and has a distaste for multi-lateral agreements. On the latter, I believe it is due to he cannot declare victory if everyone benefits and everyone concedes something.

  5. Note to Readers: I find it amusing, sad and expected that the US President is laying the groundwork to blame anyone else but himself for slowing in the economy. He has started blaming Democrats and the Fed. Of course, he has been so eager to take credit for all the good things happening.

    Reuters had another article today about the slowing across Asia is only going to get worse as folks are cutting priduction. Presidents get too much credit and blame for the economy, but do offer headwinds and tailwinds. The tailwinds Trump has offered are the tax cut impact, but it is waning as companies have baked it in, and regulations easing.

    Yet, the headwinds include the tariffs, which are unforced error, the building debt, the environmental impacts of the cutting of regulations, the bullying of allies and the retrenching impact on tourism and immigration. Keith

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