President Trump’s top economist raised eyebrows Monday when he acknowledged from the White House podium the president had tweeted a falsehood about the economy.
But the hubbub over the rare admission from Council of Economic Advisers Chairman Kevin Hassett eclipsed some questionable arguments he himself made about the performance of the Republican tax cut.
Hassett led off a news briefing by delivering a 23-minute, chart-heavy presentation (see it here) on what he argued has been the success of the GOP overhaul. His key claim: Trump’s election marked a turning point for the economy, attributable to the president’s success cutting regulations and taxes. “I can promise you that economic historians will 100 percent accept the fact that there was inflection at the election of Donald Trump and a whole bunch of data items started heading north,” Hassett said.
More specifically, Hassett argued the tax cut has unleashed a business investment boom. That spending, he said, is already boosting worker productivity, leading to higher wages “because people have better machines to work with. … That means the recovery can last longer, and that’s really, really good for workers.” The claim built on a report the CEA released last week using its own method for measuring wages to argue they have climbed 1.4 percent over the last year — rather than stagnating, as traditional measures show.
But outside economists say it’s far too early for the tax cut to be yielding that kind of effect — a virtuous cycle of outcomes that will take years, not months, to manifest. “The data in the CEA charts are correct,” Joel Prakken, chief U.S. economist for Macroeconomic Advisers by IHS Markit, emails. “Context and interpretation ... are, of course, another thing.”
For example, Hassett pointed to some V-shaped charts depicting investment, in a few categories, turning sharply upward around Trump’s election victory:
But extending the first chart to 2003 presents an altogether different picture:
That look comes courtesy of Kyle Pomerleau, director of the Tax Foundation’s Center for Quantitative Analysis. He notes that while late 2016 looks like a reversal of the trend, so does the fourth quarter of 2013. “It takes time for these things to materialize,” Pomerleau says of the effect of the tax cut. “The magnitude of the effects aren’t necessarily all that large, and it’s hard to distinguish those effects from random noise in the data.” Or, as he put it on Twitter:
I do think the corporate reforms will yield a larger capital stock and a larger economy.— Kyle Pomerleau (@kpomerleau) September 10, 2018
I don't think that that simply looking at BEA investment provides enough information to prove it.
Pomerleau's group released a report last month arguing the tax cut won't yield a meaningful bump in business investment for years. “That’s because rather than sharing in the immediate windfall that shareholders and executives are seeing from stock buybacks and dividend payments, employees will only see their benefit fully realized once businesses complete a lengthy cycle of investment,” as we wrote here at the time. “Even then, the think tank calculates, workers will collect a 1.5 percent wage gain over the long run — or a bump of $1,247 for a household earning $83,143 a year, the average income in 2016. That is a fraction of the $4,000 to $9,000 boost that Trump administration economists touted when they were selling the tax cuts last fall.”
And there are other forces at work in the recent data that have nothing to do with the change in power in Washington.
For one, a recovery in oil prices has helped boost capital spending by energy companies — probably an important driver of the uptick in investment that Hassett highlighted. “Part of this is an energy story. We had higher global oil prices that boosted some investment in energy-related products,” says Ryan Sweet, director of real-time economics for Moody’s Analytics. Capital spending overall, he says, has been solid. “But I wouldn’t describe it as surging. Going back to the 1990s, we’ve had periods of much stronger investment.”
On the other hand, Trump policies haven't been purely stimulative. “The other thing that needs to be considered is that business investment could be stronger from the tax cuts if it weren’t for the trade tensions,” Sweet notes. “Businesses don’t like the uncertainty, and that could be weighing on capital expenditure plans.”
The media focus yesterday, however, was on Hassett’s break with Trump over the president’s claim on Twitter that the GDP rate is outstripping the unemployment rate for the “first time in over 100 years!”
Hassett said he wasn’t sure how Trump came up with the number, which is off by an order of magnitude. “The history of thought about how errors happen is not something I can engage in, because from the initial fact to what the president said, I don't know the whole chain of command,” Hassett said. The economist added he is not “the chairman of the council of Twitter advisers.”
From The Washington Post's Heather Long:
Trump's own top economist -- Kevin Hassett -- just said this is flat out wrong. It's the best in 10 years.... NOT 100 years.— Heather Long (@byHeatherLong) September 10, 2018
"What is true is it’s the highest in 10 years. At some point someone conveyed it to him adding a zero to that and he shouldn’t have done that." - Hassett https://t.co/QRcdqarve5
No less than Fox News chimed in to correct the record:
Since 1948, there have been 63 quarters with a GDP growth rate higher than avg quarterly unemployment rate— Fox News Research (@FoxNewsResearch) September 10, 2018
Recent Quarters with GDP Growth higher than Unemployment Rate:
•Q2 1996 https://t.co/xc873PMf6K
“It also wasn’t clear why Trump focused on those numbers,” my colleagues Damian Paletta and Jeff Stein write. “Economists do not usually compare the GDP rate, which measures the pace of economic growth, with the unemployment rate in that way.”
The bigger picture is a mounting urgency for Trump — and his White House — to claim credit for the economy’s success. The president’s approval rating is sliding weeks from midterms that will serve as a referendum on his leadership, even as voters give the economy high marks. A Quinnipiac University poll released Monday found voters disapprove of Trump’s performance, 54 percent to 38 percent, though 70 percent rate the economy as either excellent or good. Said Tim Malloy, assistant director of the poll, “The economy booms, but [Trump's] numbers are a bust.”
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— E.U. progress. Bloomberg News's Andrew Mayeda: “The Trump administration said it will seek fast-track approval from Congress for a trade deal being negotiated with the European Union, suggesting the two sides are hoping to make substantial changes to their commercial relationship. The U.S. Trade Representative’s office said Monday it will begin consultations with Congress on a trade deal with Europe under Trade Promotion Authority, a legislative tool that allows the president to seek a simple yes-or-no vote by lawmakers on a final deal."
But a quick win is unlikely. “When it comes to trade negotiations, there is Trump speed, and then there is Brussels speed,” the New York Times's Milan Schreuer and Jack Ewing write. “Reconciling the two will be more laborious and hazardous than expected, exposing the world’s biggest trade partnership to further turmoil in the months ahead ... If the president runs out of patience, there is a high risk the talks could fall apart entirely, disrupting the $1 trillion in goods and services that flow across the Atlantic every year.”
Autos emerge as early sticking point. Per the NYT: “The European Union appeared to step back from a major concession it made in August. [European trade commissioner Cecilia] Malmstrom said then that the bloc was willing to cut tariffs on motor vehicles to zero, if the United States did the same. The president, his bluff called, immediately declared that the concession was inadequate. Now, the European line is that Ms. Malmstrom will need the approval of the union’s 28 member states before further talks on the issue.”
— Trump brings Russia and China closer. The Associated Press's James Ellingworth: “When Russian President Vladimir Putin and Chinese President Xi Jinping meet this week, they will have plenty to talk about thanks to [Trump]. Xi is traveling to Vladivostok, in the Russian Far East, on Tuesday and Wednesday for an economic conference, where he’s expected to meet with Putin, while China joins vast Russian war games for the first time. Neither side has said what they’ll discuss, but Trump’s policies on trade and North Korea are topics of interest to both Russia and China. ... Russia and China have a growing trade relationship, with Russian oil, gas and foodstuffs moving in one direction, and Chinese consumer goods in the other. ... U.S. policy has also driven Russia and China closer together commercially.”
— Inflation worries in China. The New York Times's Keith Bradsher: “Chinese officials said Monday that an index of consumer prices rose in August for the third consecutive month. The increases are not particularly sharp, and Chinese economists point to a number of temporary factors pushing up prices... Higher prices could cause problems for [Xi]... They would mean China’s leaders would have to be careful as they sought ways to bolster slowing growth, lest their efforts drive up prices still further. The trade war with the United States could also lead to higher prices for Chinese consumers and companies with tariffs raising the cost of imported goods.”
JPMorgan: China risks 700,000 jobs in trade war. Bloomberg: "The job losses would come if the U.S. imposes 25 percent tariffs on $200 billion in Chinese exports and China retaliates by devaluing its currency by 5 percent and adding to levies on U.S. goods, according to economists led by Haibin Zhu at JPMorgan Chase & Co. If China doesn’t retaliate at all, 3 million people could lose their jobs, they wrote in a research note Tuesday."
— NAFTA talks resume. The Hill's Vicki Needham: "The U.S. and Canada will resume high-level talks on Tuesday, which is earlier than expected, on the North American Free Trade Agreement. Canadian Foreign Minister and U.S. Trade Representative Robert Lighthizer will meet to try to hammer out the final complex details of a North American agreement with the aim of including all three countries in the 24-year-old deal... Discussions weren't expected to get going again until the end of the week."
— Trump chides Obama. The Hill's Sylvan Lane: “In a Monday tweet, Trump misquoted Obama’s June 2016 criticism of his economic agenda that came shortly after Trump had all but officially clinched the Republican presidential nomination. ... ‘“President Trump would need a magic wand to get to 4% GDP,” stated President Obama,’ Trump tweeted. ‘I guess I have a magic wand, 4.2%, and we will do MUCH better than this! We have just begun.’ Trump appeared to be referencing remarks Obama made about manufacturing employment, not economic growth, during the 2016 town hall.”
“President Trump would need a magic wand to get to 4% GDP,” stated President Obama. I guess I have a magic wand, 4.2%, and we will do MUCH better than this! We have just begun.— Donald J. Trump (@realDonaldTrump) September 10, 2018
— Investors should worry. The Wall Street Journal's James Mackintosh: “Rarely have gauges of the American economy been stronger. It’s time for investors to worry. ... The problem is well-studied and should be obvious, yet continues to be ignored: When the economy is strong, stocks soar as confident investors bet that the good times will keep on rolling. When the economy struggles, investors assume it will never recover. Rather than look to the future, investors tend to extrapolate the recent past, and mostly get it wrong. ... But if you buy because of what the economy did over the past year or the past quarter, you’re making a big mistake. There’s essentially no link between what U.S. GDP did, and what stocks do over the next quarter or the next year, because what matters is what the economy will do in future.”
— Emerging markets struggle. WSJ's Joe Wallace and Manju Dalal: “The steep falls in emerging markets have hurt the ability of developing-world companies and governments to issue bonds overseas, making it harder to pay back existing debt and putting potential pressure on economic growth there. After a record 2017, emerging-market debt issuers raised less money abroad in June, July and August than in any summer since 2013 and the so-called taper tantrum, when concern that the U.S. was rolling back monetary stimulus triggered a selloff across bond markets. ... Now, U.S. interest rates are rising and the dollar is surging, making debt more expensive at a time of heightened concern over trade protectionism and domestic problems in giants like Turkey and Argentina.”
— What's changed since 2008. Bloomberg News's Yalman Onaran: “Ten years ago this week, Lehman Brothers Holdings Inc. collapsed, triggering the worst financial crisis in almost a century, a seismic event that still reverberates today. ... A decade later, amid signs of new asset bubbles, a big question is whether the steps taken after the crisis have made that system strong enough to withstand the next shock. While banks are safer on many counts than before the crisis, the economic and political repercussions are still being felt. Leverage has shifted to companies from consumers, and some risk has migrated to shadow banks from traditional lenders. Links between shadow and mainstream banks persist, and taxpayer bailouts, though less likely, are still possible.”
Fire sale risk remains. Bloomberg: "The threat of cascading failures has now diminished after clearing banks stopped extending intraday credit to repo dealers, which at the height of the crisis left them exposed to as much as $1 trillion worth of funding. The market is also more transparent and smaller in scale. Yet a key systemic risk still worries Fed and industry observers: The potential that a party may abruptly dump repo collateral in a so-called fire sale should another large firm go under. And there are new wrinkles to worry about -- the regulatory burdens on banks have reduced activity and left only one firm in the business of clearing deals.
— Goldman exec raised ethics concerns. Now he's gone. NYT's Emily Flitter, Kate Kelly and David Enrich: "James C. Katzman, a Goldman partner and the leader of its West Coast mergers-and-acquisitions practice, dialed the bank’s whistle-blower hotline in 2014 to complain about what he regarded as a range of unethical practices... The complaints were an extraordinary example of a senior employee’s taking on what he perceived to be corporate wrongdoing at an elite Wall Street bank. But they were never independently investigated or fully relayed to the Goldman board... Senior investment-banking executives at the firm — including David M. Solomon, now Goldman’s incoming chief executive — urged Mr. Katzman to move past his complaints... Mr. Katzman refused. In 2015, he left Goldman and was required to sign a confidentiality agreement that he believed prevented him from sharing his concerns with board members or regulators."
— Questions over Moonves's severance. The Post's Jena McGregor: “CBS said in a regulatory filing Monday that it would contribute $120 million to a trust that could pay a massive severance — or none at all — to its departing chief executive, Leslie Moonves, depending on the results of an investigation into allegations of sexual misconduct. The filing follows the company's announcement Sunday that its powerful longtime chief executive was resigning amid allegations of a range of misdeeds, including harassment, assault and career retaliation. The filing says that if the CBS board finds that the company can fire Moonves ‘for cause’ and he does not demand arbitration, he would not be paid the severance money. But if the board finds that the company is not entitled to dismiss Moonves for those reasons, Moonves would receive the $120 million in the trust's assets.”
— Say goodbye to big deals. Bloomberg News's Dinesh Nair and Ruth David: “Large cross-border deals, which fueled the mergers and acquisitions boom for the last five years, will be harder to come by in the future due to the impact of trade wars and regulatory risks, according to JPMorgan Chase & Co. ‘Larger deals are harder and harder to get over the line due to increased regulatory hurdles and prolonged trade wars,’ said David Lomer, co-head of M&A for Europe, the Middle East and Africa at the bank. ... Companies announced $2.1 trillion of transactions in the first half of 2018, putting this year on track to beat 2007’s $4.1 trillion total, according to data compiled by Bloomberg. Mega deals included Takeda Pharmaceutical Co.’s $62 billion purchase of Shire Plc and T-Mobile US Inc.’s $26.5 billion takeover of Sprint Corp., both of which JPMorgan advised on.”
— Meet Alibaba's next chairman. WSJ's Liza Lin: “The man who has been anointed as the next executive chairman of Alibaba Group Holding Ltd. chose ‘Free and Noncooperative Person’ as his company nickname. It might have been wishful thinking. Daniel Zhang, 46 years old, an accountant by training and chief executive officer at one of China’s largest internet companies, works most nights till 11 p.m. and spends many weekends networking with other executives, according to a person familiar with Mr. Zhang. On Monday, Alibaba founder Jack Ma announced that Mr. Zhang would succeed him as executive chairman when Mr. Ma steps down one year from now. It was hardly a surprising choice: Mr. Zhang has been the chief executive officer since 2015, and he is widely respected for helping the company continue its growth during that time, with net income last year of $10.2 billion.”
— House GOP unveils tax package. Bloomberg's Laura Davison and Allyson Versprille: "House Republican lawmakers introduced legislation Monday that would make the 2017 tax cuts for individuals permanent in a bid to highlight their signature economic policy achievement ahead of the November elections. The legislation -- released as Republicans are at risk of losing their majority in the House -- is seen as a last-ditch effort by GOP lawmakers to convince voters of the benefits of their new tax code. Polls consistently show less than half of Americans approve of the tax cut."
— Romney: Rs silent on deficit. The Post's Felicia Sonmez: "Mitt Romney, the former Republican presidential nominee and current Senate hopeful in Utah, on Monday called out members of his party for putting their long-espoused goal of deficit reduction on the back burner once President Trump won the White House, in a rare mention of the issue by a candidate in this year’s midterm elections. In a message posted on his Senate campaign website, Romney said that Republicans 'have been shouting about this as long as I can remember... But now that Republicans are in charge in Washington, we appear to have become silent about deficits and debt.'"
- Senate Banking Committee hearing on “countering Russia” tomorrow.
- Commission on Security and Cooperation in Europe briefing on free-trade zones tomorrow.
- Senate Banking Committee hearing on the “implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act” on Thursday.
- Senate Agriculture Committee hearing on U.S. agricultural trade on Thursday.
- Senate Budget Committee hearing on transparency at the Congressional Budget Office on Thursday.
From The Washington Post's Tom Toles: “Did Obama just threaten Trump?”
Jim Carrey: “We have to say yes to socialism:"
Key moments from John Bolton's speech at the Federalist Society:
Sarah Huckabee Sanders asks the Justice Department to investigate New York Times op-ed: