The Republican tax overhaul is delivering a dose of caffeine to an already wired economy, priming a potentially more dangerous downturn when the stimulus burns off.
That’s the conclusion reached by a pair of major reports from independent economists that landed Tuesday as Republicans and Democrats were using Tax Day to argue over the impact of the law. Teams at Morgan Stanley and the International Monetary Fund write that the slashed corporate rate — along with the front-loaded incentives the package offers businesses — will goose economic growth in the immediate term but quickly exhaust itself. And Morgan Stanley sees signs that a reckoning may be coming for stock market investors and the broader economy sooner rather than later.
“The ‘feel good’ factor from this policy action likely exists within a late-cycle moment,” the bank’s analysts write. “For investors, this means it is less ‘morning in America’ than ‘happy hour in America.’ ”
Meanwhile, another new study finds the benefits of the bill flowing disproportionately to shareholders and executives rather than workers. In the first quarter of the year, corporations directed $305 billion to stock buybacks and cash mergers, moves that tend to enrich management, while dedicating $131 billion to wage growth, according to institutional research firm TrimTabs. “If the first-quarter numbers were extrapolated over a five-year period, they would show $6.1 trillion in buybacks and deals to $2.6 trillion in wages, or only slightly above the previous five-year pace for worker raises,” CNBC’s Jeff Cox writes.
Whatever juice the cut is providing this year may not be worth the squeeze it puts on policymakers confronting the next recession, Morgan Stanley found. Beyond “some near-term GDP lift,” the report says, “positives become less reliable, and, in our view, downsides are less discussed.”
The downsides, in short:
1. The stress that the tax cuts add to stretched deficits will make it harder for future lawmakers to approve stimulus spending in the event of a downturn. Only two Republicans voted for the 2009 stimulus package, after all. It’d be tough to imagine more appetite next time, especially if, say, the ratings agencies are threatening to downgrade U.S. credit.
2. If you buy the evidence this is a late-cycle economy, it’s exactly the wrong time to add a fiscal jolt. “Late-cycle economies are generally marked by accelerating inflation, financial conditions tightening, and an elevated probability of recession the further out we march through the forecast horizon,” the report says. “It is late-cycle stimulus, followed by a more aggressive monetary policy response, that creates the recipe for a boom-bust cycle that can shorten the expansion.”
3. The fuel the cuts added to the stock market may already be spent. In the 15 instances between 1945 and 2003 when Washington delivered stimulus from cutting taxes, the resulting rally for stocks was brief and ended up reversing itself. And the market performed better when the revenue loss was small — not the case with last year’s overhaul. These charts illustrate the trend:
4. The broader economic impact likewise will be short-lived. That’s in part because the tax overhaul packs its biggest punch into the next few years, before a number of its corporate incentives expire. “The US tax reform will reduce growth momentum starting in 2020, and then more strongly when full investment expensing begins to be phased out in 2023,” the IMF report says. “Given the increased fiscal deficit, which will require adjustment down the road, and the temporary nature of some provisions, growth is expected to be lower than in previous forecasts for a few years from 2022 onward, offsetting some of the earlier growth gains.”
In the face of mixed reviews from economists and voters, the Trump administration and congressional Republicans continue to press the case for their only major legislative accomplishment. Here was Ryan:
The new tax code was written with everyday families and #SmallBiz in mind. Enjoyed sitting down with @RepKevinBrady, @RepCathyMcMorris, and these taxpayers to hear how their families and businesses are already benefitting from #TaxReform. pic.twitter.com/fRXk0Pwasq— Paul Ryan (@SpeakerRyan) April 17, 2018
And White House senior adviser Ivanka Trump:
Most memorably on Tuesday, Larry Kudlow, the top White House economic adviser, appealed to taxpayers to ignore the Congressional Budget Office experts who have projected the tax cuts will help usher in trillion-dollar deficits as soon as 2020.
“Never believe the CBO. Very important: Never believe them,” Kudlow said during an interview on “Fox & Friends.” “They're always wrong, especially with regard to tax cuts, which they never score properly.”
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— Global growth bulls. WSJ's Josh Zumbrun, Chuin-Wei Yap and Paul Hannon: “Economic policy makers gathering in Washington for the spring meetings of the International Monetary Fund and World Bank are sticking to optimistic global growth forecasts even though trade tensions between the world’s two largest economies have unsettled global stock markets. Global economic output is on course to grow 3.9% in 2018, the best year since 2011, with every major economy poised to grow for the second year in a row, according to the International Monetary Fund’s forecasts released Tuesday.”
— Goldman posts big profit, stock drops. WSJ's Liz Hoffman: "Goldman Sachs Group Inc. reported sharply higher profit, looking more like the balanced business Chief Executive Lloyd Blankfein has been working to build in the wake of the financial crisis. The Wall Street firm’s profit rose 26% from a year ago, one of the strongest showings among the five big U.S. banks to have reported quarterly earnings so far. Morgan Stanley reports Wednesday. Shares fell, however, after Goldman said it wouldn’t buy back stock in the second quarter.”
TAX DAY FLY-AROUND:
— IRS grants extension. The Post's Jeff Stein, Damian Paletta and Mike DeBonis: "The Internal Revenue Service announced late Tuesday that it would let taxpayers submit tax returns without penalty through Wednesday, after a long day of technical problems that fueled confusion about what is already one of Americans’ most frustrating interactions with their government.
"A computer glitch at the IRS knocked offline the agency’s ability to process many tax returns filed electronically, a stunning breakdown that left agency officials flummoxed and millions of Americans bewildered. Senior government officials were at a loss to explain what happened, even as close to 5 million Americans were expected to try to file their taxes before the midnight deadline. IRS officials did not specify what went wrong, saying only that they would undertake a “hard reboot” of their systems."
Trump, too. NYT: "For decades, presidents have publicly released their tax returns each year — an act of transparency and a way to connect and commiserate with Americans on Tax Day. On Tuesday, President Trump did not even file his taxes. White House officials said Mr. Trump, who has steadfastly refused to make any of his previous tax returns public, requested a six-month extension because of the complexity of preparing his 2017 returns. He plans to file by mid-October, officials said."
Four biggest banks save $2.5 billion. WSJ's Michael Rapoport: "Big banks just received the first installment of benefits corporate America will reap from the new federal tax law. The haul: more than $2.5 billion. The latest gain came Tuesday when Goldman Sachs Group Inc. reported first-quarter profit that rose 26% from a year earlier. This was aided by a lower corporate tax rate that boosted earnings by about $232 million."
— China targets sorghum. The Post's Emily Rauhala: “China announced temporary anti-dumping measures on U.S. sorghum, potentially hitting U.S. growers and exacerbating the brewing trade war between Beijing and Washington. China’s Ministry of Commerce said that starting Wednesday, Chinese importers of U.S. sorghum, used by the Chinese for animal feed and brewing alcohol, will be required to put down a 178.6 percent deposit in anticipation of anti-dumping tariffs. The deposits could discourage imports of U.S. sorghum, hurting American producers. Sorghum growers said the measure puts them at the center of a widening trade dispute through no fault of their own.
“The news came a day after the United States banned U.S. firms from selling parts to Chinese phone maker ZTE for seven years. The Commerce Department said ZTE violated an agreement reached after the company was caught shipping U.S. goods to Iran.”
A carrot-and-stick approach. Bloomberg's Enda Curran: "At the same time that Beijing promised foreign car makers such as Ford Motor Co. greater freedom to compete in the world’s biggest market, it also slapped anti-dumping duties on imports of U.S. sorghum. The contrasting moves send a message to Washington: China is willing to open some areas of its economy, but will also respond to signs of rising U.S. protectionism."
Anxious diplomacy. Reuters reports that China's international trade rep held a series of meetings with European ambassadors, appealing to them to stand with Beijing against American trade moves.
Mnuchin: China, Russia on notice. Bloomberg's Saleha Mohsin: "Trump’s accusations that China and Russia are gaming their currencies were a 'warning shot' about the consequences about devaluation, rather than part of a wish to achieve a weaker dollar, U.S. Treasury Secretary Steven Mnuchin said. 'China has devalued their currency in the past -- as a matter of fact, through 2016 they devalued it significantly and starting in 2017, since the president was elected, they’ve used a lot of their reserves to actually support their currency,' Mnuchin said early Tuesday in a CNBC interview. 'The president wants to make sure they don’t change these plans and he’s watching it.'"
— Kudlow pumps brakes on TPP. Bloomberg News's Toluse Olorunnipa: “Kudlow downplayed the possibility the U.S. would enter into negotiations to rejoin the Trans-Pacific Partnership trade pact, calling it more of a 'thought than a policy' for now. The U.S. is 'in the pre-preliminary stages of any discussions' on rejoining the Asia-Pacific trade deal, Kudlow told reporters Tuesday during a briefing ahead of a meeting between [Trump] and Japanese Prime Minister Shinzo Abe. Kudlow said the U.S. would like to reach a separate free-trade deal with Japan. He added that an exception for Japan on steel and aluminum tariffs that Trump recently announced would be 'on the table' during the summit with Abe. 'It’s a key point on the agenda,' he said.”
Trump likewise throws cold water on rejoining the pact, in a Tuesday night tweet (as a number of people pointed out South Korea isn't in the TPP):
While Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States. Too many contingencies and no way to get out if it doesn’t work. Bilateral deals are far more efficient, profitable and better for OUR workers. Look how bad WTO is to U.S.— Donald J. Trump (@realDonaldTrump) April 18, 2018
— Trump pushes weapons. Reuters: "In a telephone call with the emir of Kuwait in January... Trump pressed the Gulf monarch to move forward on a $10 billion fighter jet deal that had been stalled for more than a year. Trump was acting on behalf of Boeing, America’s second-largest defense contractor, which had become frustrated that a long-delayed sale critical to its military aircraft division was going nowhere, several people familiar with the matter said. With this Oval Office intervention, the details of which have not been previously reported, Trump did something unusual for a U.S. president – he personally helped to close a major arms deal. In private phone calls and public appearances with world leaders, Trump has gone further than any of his predecessors to act as a salesman for the U.S. defense industry."
— NAFTA negotiators to meet. Reuters's David Ljunggren: "The top U.S., Canadian and Mexican officials driving NAFTA renegotiations will meet in Washington on Thursday, a Canadian government source said on Tuesday, as pressure for a quick deal mounted. Although the United States is eager to quickly wrap up negotiations to update the $1.2 trillion North American Free Trade Agreement, officials say several contentious issues must still be resolved. U.S. Trade Representative Robert Lighthizer wants some kind of agreement in place before campaigning for a July 1 presidential election in Mexico gathers pace."
— GOP eyes deregulatory offensive. Politico's Zachary Warmbrodt: "Republicans are preparing to open a new front in their push to roll back regulations across the government, using a maneuver that could enable them to strike down decisions by federal agencies that reach back decades. As soon as Tuesday, GOP senators, backed by [Trump], will use the Congressional Review Act to topple safeguards issued by the CFPB in 2013 that were intended to discourage discrimination in auto lending.
"While Republicans in the Trump era have already taken advantage of the 1996 law to remove more than a dozen recently issued rules, this would be the first time that Congress will have used it to kill a regulatory policy that is several years old. Now, actions going back to President Bill Clinton’s administration could be in play under the procedure GOP lawmakers are undertaking, forcing numerous agencies to reconsider how they roll out new regulations."
— Greenlighting rollback of auto loan rule. The Post's Renae Merle: "The Senate is poised to vote this week to rescind a five-year old Obama-era policy warning auto lenders against allowing minority borrowers to be charged more than their white peers. The legislation, sponsored by Sen. Jerry Moran (R-Kan.), takes aim at one of the Consumer Financial Protection Bureau’s most controversial campaigns and addresses years of complaints by Republicans and the powerful auto industry that the watchdog agency had overstepped its bounds... The auto lending guidance is the latest example of 'runaway regulations,' ...McConnell said Tuesday morning."
— McConnell: Rescissions unlikely. Reuters: "McConnell warned on Tuesday against trying to rescind some spending from a $1.3 trillion appropriations bill passed in March, an idea that has been promoted by House Republican leader Kevin McCarthy and that the White House is mulling. 'We had an agreement with the Democrats' on the spending bill, McConnell, a Republican, said in an interview with Fox News when asked about reports that... Trump wanted to cut a major portion of the spending. 'You can’t make an agreement one month and say: ‘OK, we really didn’t mean it,’' McConnell said."
Ices Mueller protection. The Post's Karoun Demirjian and Sean Sullivan: McConnell "appeared Tuesday to quash new momentum behind a bill giving special counsels such as Robert S. Mueller III legal recourse if they are fired, telling Fox News that he would refuse to put it to a floor vote. 'I’m the one who decides what we take to the floor. That is my responsibility as the majority leader. And we’ll not be having this on the floor of the Senate,' [he] said Tuesday. McConnell’s statement comes barely a week after Senate Judiciary Committee Chairman Charles E. Grassley (R-Iowa) said the panel would take up and vote on the measure during a business meeting April 26."
— Quarles argues for easing. Reuters's Katanga Johnson and Michelle Price: "Trump’s top banking regulator on Tuesday defended plans to ease lending rules and trading restrictions introduced following the 2007-2009 global financial crisis during his first appearance before Congress. Federal Reserve Vice Chair for Supervision Randal Quarles plays a key role in Trump’s pledge to spur economic growth by cutting red tape, but his proposals were challenged by Democratic lawmakers worried about creating new risks and harming consumers... Quarles defended his first six months in office, outlining his work to simplify the so-called Volcker Rule banning banks from making profit-seeking trades on their own accounts. He also suggested reforming the Community Reinvestment Act that promotes lending to low-income communities."
Capital Alpha's take: "Though Quarles’ testimony yielded few surprises, it should be viewed as encouraging for banks. As we’ve noted previously, Quarles is not a blow-up-the-place crusader, but he reiterated his openness to exploring whether several regulations can be revised in a way that would be helpful to banks."
— Schneiderman probes crypto. CNN Money's Aaron Smith: "New York Attorney General Eric Schneiderman is demanding transparency from bitcoin and other cryptocurrencies. Schneiderman said on Tuesday that his office reached out to 13 trading platforms, including the popular Coinbase, seeking information on their operations, internal controls, and safeguards for investors. 'With cryptocurrency on the rise, consumers in New York and across the country have a right to transparency and accountability when they invest their money,' ... said Schneiderman in a statement."
Happy #TaxDay2018! Are you looking for that perfect chart? That report that answers all your questions about the new GOP tax bill? We've got all those and more: https://t.co/Qf63Wo4QXa pic.twitter.com/Cjh8wyAGTq— Center on Budget (@CenterOnBudget) April 17, 2018
- The Senate Commerce, Science and Transportation Committee holds a hearing on robocalls.
- The Securities and Exchange Commission holds an open meeting.
- The Senate Appropriations Subcommittee on Transportation, Housing and Urban Development and Related Agencies holds a hearing on the 2019 budget for the Housing and Urban Development Department.
- The House Agriculture Committee holds a markup.
- The Consumer Advisory Board Consumer Lending holds a subcommittee meeting.
- The Senate Finance Committee holds a hearing on the opioid epidemic on Thursday.
- The American Enterprise Institute holds an event on the future of corporate taxation on Thursday.
- The Senate Banking, Housing and Urban Affairs Committee holds a hearing on the Federal Reserve's supervision and regulation of the financial system on Thursday.
- Vice chairman of the Federal Reserve Randal Quarles testifies before the Senate Banking, Housing and Urban Affairs on Thursday.
- The American Bankruptcy Institute’s annual spring meeting starts on Thursday.
From the New Yorker:
Senate Minority Leader Charles E. Schumer (D-N.Y.) walks back his criticism of the Wall Street Journal:
Former FBI director James Comey tells Stephen Colbert about Trump: "I’m like a breakup he can’t get over:"
Untangling the web of Michael Cohen, President Trump's lawyer: