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.

That nagging math problem

Dwarfed by other news yesterday, the Congressional Budget Office (CBO) updated their budget projections reflecting the new tax law and spending plan. Over the next ten years, the just over $21 trillion debt is expected to increase by $11.7 trillion bringing it to about $33 trillion. Before these two changes, it was expected to increase to about $31 trillion.

The CBO also said the deficit should rise to $804 billion by 2018 fiscal year end. Last year it was $665 billion. Further, the annual deficit should pass $1 trillion by 2020 and stay there.

There are many in Congress today who have screamed bloody murder in the past over rising debt and got elected under the banner of the Tea Party. I have seen footage of members who called this a crisis when it was only $8 trillion and then $13 trillion. They were right then, but now debt and deficit don’t seem to matter as many voted for a law to increase it.

I have seen some recent discussion about the need for a balanced budget amendment. To be frank, that won’t do. We need more revenue than expenses. The tax law passed in December is projected to increase the debt by $1.5 trillion, but Congress knew that then and still passed it, even many of these Tea Partiers.

I said this before, but I believe the tax law passing is extremely poor stewardship, even malfeasance. We are borrowing from our future to try to make an economy, that was in a 103 consecutive month growth period with seven consecutive years of 2 million plus job growth, even better.

To be frank, we cannot cut our way out of this problem. The math will not work. We must also have more revenue than we had before the tax cut. At some point, a future Congress and President will get all the flak for abruptly addressing this problem. Yet, they will be the better stewards, far better than the current President, Congress and their predecessors have been.

Bill Clinton takes a lot of heat for his womanizing, rightfully so, but he handed a surplus budget and smaller debt to George W. Bush. Bush went against the advice of his Treasury Secretary and passed a tax cut and then we invaded two countries draining our budget. And, my biggest criticism of Barack Obama is he shelved the Simpson-Bowles Deficit Reduction Committee report failing to use it as very good starting point for change.

Folks, like climate change, this math problem is not going away. We must address our debt now or it will be much more severe later. And, if people think it does not matter, that country we are imposing tariffs on owns a lot of our treasury bonds, bills and notes. They have floated the idea of stop buying them even before the tariff war. That also makes it a security risk as well.

Tick, tick, tick – young folks please raise some holy hell on this

Tick, tick tick…the US debt of $20.7 trillion is expected to increase by $10 trillion by 2027 even before the December Tax Bill and last night’s Budget Bill were passed.

Tick, tick, tick…per the nonpartisan Congressional Budget Office and Committee for a Responsible Federal Budget, the Tax Bill is projected to increase the US debt by $1.5 trillion or so by 2027.

Tick, tick, tick…last night’s Budget Bill which has now been signed into law is expected to increase the debt by $400 billion over the next two years.

Tick, tick, tick…unless something is done about it, the debt will be close to $33 trillion in 2027. The scarier thought is that might be low.

Tick, tick, tick…the added dilemma we are facing is the interest rates are increasing, since we may have overheated a good economy. That will add further to the annual interest cost on the debt.

If I were in my twenties, I would be raising holy hell about this. I just called several members of the Freedom Caucus, telling them I am an Independent and former Republican voter. While they were right to raise issue with the $400 billion, I said it was hypocritical to vote for a Tax Bill that increases the debt by $1.5 trillion.

Invariably when I called I spoke with a nice young staffer in their twenties, because I asked them if they were. During our conversations I asked them “you do realize we are leaving this problem for you?”

In December, 2010, the US debt was over $13 trillion. The reason this date is important is the bipartisan Simpson-Bowles Deficit Reduction Committee presented their findings and recommendations in that month. In essence, they recommended a series of changes that followed a ratio of $2 of spending cuts to every $1 of revenue increases. Since Democrats did not like the former and Republicans the latter, the Committee’s good work was shelved.

Fast forward to today and not only have we not done much about it, we have made the problem worse with these two bills. In Congress, it is both parties’ fault. It is President Obama’s fault for shelving the Simpson-Bowles study and it is President Trump’s fault for not making this an issue and promoting tax cuts. It is President Bush’s fault for passing tax cuts against the advice of his Secretary of the Treasury after being handed the baton on a balanced budget.

Our deficit was $666 billion in the last fiscal year. It will be over $1 trillion at the end of this one. This is not good. Please let your Congressional representatives, Senators and the President know we need to do something about this. We need revenue increases and spending cuts. The math will not work otherwise. Please check out the websites for the nonpartisan Committee for a Responsible Federal Budget, Fix the Debt and The Concord Coalition for more information.

 

 

Headwinds and Tailwinds to the Economy

Presidents get too much credit and blame for the economy. They can provide headwinds and tailwinds, but global market forces tend to control what happens. By headwinds, I mean the wind is against the economic growth, with tailwinds aiding economic growth.

In the US, we are under the third longest economic growth period in our measured history with 103 consecutive months of growth. We have also had seven consecutive years of 2 million plus jobs created. And, the stock market more than doubled under Obama and continues its rise under Trump. These are great numbers. But, before we pat ourselves on the back too much, not everyone has benefitted and wealth disparity among economic classes has been widening for the past thirty-five years.

Economists I have watched project the good news to continue for the year, but several have cautioned about the future and if we don’t address the inequity, we will have major problems on top of other concerns.

On the tailwinds ledger, the global economy continues to grow and the World Economic Forum projects a 3.9% increase for the year. In the US, the cut back on regulations, plus the reduction in new ones over the rates of the past, have given more confidence to businesses (more on this later). Plus, the reduction in corporate tax rates will help fuel some growth, provided these companies who are sitting on cash, choose to invest it in their people and business. And, with more money in many people’s pockets, this will add some fuel.

On the headwinds ledger, several economists have noted we are robbing Peter to pay Paul, leveraging our future with even more debt. Not only did we not address the expected increase in debt taking it from $20 trillion to $30 trillion in 2027, the tax law will increase it by $1.5 trillion. The interest cost thereon will take a greater bite out of our budget. But, other headwinds are of concern. Retrenching from global markets and trade agreements replacing them with binary ones, will be dilutive to growth. Not investing as much in science and innovation is a major concern to Joseph Stiglitz, a Nobel laureate in economics.

This will be heightened if we restrict immigration. What seems to get lost in the argument where some have become too cold-hearted in my view, is immigration is accretive to the US economy. Plus, the people immigrating tend to be more entrepreneurial and better educated, in many cases. These sh**hole countries that someone demeaned are sending us more educated people than reside here in the states, on average.

We should not fail to remember that “innovation is portable” so says David Smick, an economic advisor to Ronald Reagan, Bill Clinton and Jack Kemp, one of the smartest Congresspersons who considered a run for President. If we do not provide an inviting place, innovation may be hindered. I should note that Steve Jobs was born to Syrian immigrants to the US. What if they had been denied entry? Apple might not have ever come to fruition.

Finally, not all regulations are bad, so restricting regulations may cause headwinds down the road especially with more freedoms given to pollute the environment and take advantage of customers. This is a developers mindset. Remove obstacles to build, but leave the clean up for others. Unfortunately, we taxpayers are the others. We citizens, that must drink and breathe more polluted waters and air and realize the impact of climate change, are the others. As coal ash deposits have taught us, there is a cost to environmental degradation.

So, we need to be mindful of what we are facing. I have communicated with numerous Congresspersons, Senators and the President, that we are avoiding some elephants in the room – debt, climate change, water crisis and income inequity. In my view as an Independent voter, passing a tax law that increases the debt was extremely poor stewardship, as we cannot cut our way out of this problem. The math won’t work.

 

While we are asking questions

There will be a great deal written about Former FBI Director James Comey’s testimony under oath. I emphasize the last two words of the preceding sentence. The President and his advocates’ rebuttals will not be under oath, at least at this time, so we should remember this fact.

Yet, it got me to thinking about asking various people a question under oath to see how they would fare. In no particular order:

Senator Marco Rubio, you have bragged on playing a heavy role in the federal government stiffing insurance companies for taking on adverse risk under the ACA. Can you explain to Americans why they must suffer with higher insurance premiums for you to score political points?

Senator Mitch McConnell, The New York Times reported that just before the 2012 election, you had a report by the Congressional Research Service buried that concluded trickle down economics does not work. In light of the recent failures of that approach in Kansas, where tax rates have just been increased to pay for services, does that seem dishonest to hide such information from Americans, especially since the President’s tax plan had some of Kansas’ ideas?

Former President Barack Obama, do you feel remorse about not pushing the Simpson-Bowles Deficit Reduction plan back when it might have gotten some footing and we could have done more with our debt?

Former Senator and Secretary of State Hillary Clinton, while you may have reason to raise issues about the election, would you say that you ran a poor campaign, not focusing on states that you took for granted such as Wisconsin, Michigan and Pennsylvania while you tried to win states like Arizona? Do you feel you let your opponent speak to the disenfranchised voter more than you did?

Senator Ted Cruz, you single handedly shut down the government in October 2013, almost causing us to default on our debts until ten female senators broke the impasse. Do you feel that showed you as part of the problem with Washington? Why should we trust your judgment?

President Donald Trump, since you have been shown to lie about 70% of the time as a candidate and incumbent and your five biographers all note you have a problem with the truth, why should we believe what you say just about anything?

There are more folks I would like to ask questions of. Let me know some of yours.