This isn’t supposed to happen. The U.S. economy is humming, and a hot economy is supposed to translate into higher tax revenue and very tiny deficits. In fact, the last time unemployment was around this level — in 2000 and 1969 — the U.S. government ran a surplus.
President Trump vowed to eliminate the debt in eight years while he was campaigning for president. Instead, he is presiding over ballooning deficits, an unprecedented situation during strong economic times. In fiscal 2018, which concluded at the end of September, spending jumped 129 percent while tax receipts rose 0.4 percent.
The GOP tax cuts are a key part of the story. Corporate tax receipts were down almost a third, the CBO said, noting that “half of the decline has occurred since June” as the Republican tax cuts took effect. In fiscal 2018, corporate tax revenue was $205 billion, which Wall Street Journal tax reporter Richard Rubin tweeted is lower than it was in 2000 (even without adjusting for inflation).
Budget guru Brian Riedl, a senior fellow at the Manhattan Institute and former chief economist for Sen. Rob Portman (R-Ohio), points out that the lower corporate tax revenue could be stemming partly from some quirks in the new tax code.
Businesses get eight years to pay their “toll charge” for bringing money back from overseas, and they can take advantage of expensing equipment and some other purchases now. He says it’s possible that the corporate tax receipts won’t look quite as low down the line, but it’s still a warning sign that the $1.5 trillion tax cut almost certainly won’t pay for itself.
The other eye-popping number in the report was how much America spends on interest payments on its growing debt. In fiscal 2018, interest hit nearly $325 billion, the CBO said, more money than Congress gave the FBI to combat Russian hacking.
Interest payments have never topped $300 billion before and as a percentage of GDP, they're likely to be the highest since the Great Recession. “Interest costs are the fastest-growing part of the federal budget,” says Michael Peterson, head of the nonprofit Peterson Foundation, which educates people about the debt. “Over the next decade, interest costs will total nearly $7 trillion, rising to become the third-largest ‘program’ in the federal budget.”
Trump is fond of telling Americans not to worry about the debt because he’s getting the Chinese, Europeans and Canadians to help pay for it with his tariffs. He’s right that there is some money coming into the U.S. Treasury from the tariffs, although many U.S. companies and consumers are ultimately paying this cost, not foreigners. The Washington Examiner reported Monday that Trump's tariffs have raised $4.4 billion, which won’t make a dent in the annual deficit, let alone the more than $21 trillion debt.
The reality is big deficits are here to stay, cementing Trump’s legacy as the “king of debt.” The CBO projects the deficit will hit $1 trillion in 2020 (and it’s going to be close in 2019). The International Monetary Fund’s new World Economic Outlook this week says this is causing “elevated risks” to the United States and global economies since it means fewer dollars left to fight a downturn.
The question is: Does anyone really care? Experts as varied as conservative commentator George F. Will and former Clinton treasury secretary Robert E. Rubin have pondered that in recent weeks. Most evidence points to “no.”
The last time the nation ran a trillion-dollar deficit was in 2011 and 2012, when America was trying to climb out of a deep crisis. Republicans insisted on spending cutbacks, but that mentality is gone now.
Occasionally, voters say the debt matters to them. The WSJ's Rubin spoke to a voter in Plymouth, Minn., who is voting against Rep. Erik Paulsen (R-Minn.) because “In the long run, we shouldn’t pass a tax cut if we can’t pay for it.”
But the reality is that economic issues are not as dominant in the midterms as they normally are. As a new Washington Post-Schar School poll out Monday of people in the 69 swing House districts shows, voters rate health care, immigration and Supreme Court nominees right up there in importance with the economy this year.
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
Keeping up with the news in President Trump’s Washington is exhausting — whether you live here, work in the nation’s capital, or are just watching from afar. That’s why next Tuesday, we’re launching Power Up by Jacqueline Alemany. It's a new newsletter from The Washington Post that will land in your inbox before you reach for that first cup of coffee. It will bring you Washington, fast.
Click here to sign up.
— Fed's Bullard: Growth requires productivity. Bloomberg News: “The better-than-expected growth rates in the U.S. economy are set to dissipate unless productivity picks up, Federal Reserve Bank of St. Louis President James Bullard said. ‘The U.S. will likely need faster productivity growth in order to maintain current real GDP growth rates,’ Bullard said Monday during a talk in Singapore. ‘This is a possibility if U.S. investment improves and technological diffusion begins to improve business processes at a faster pace.’ Bullard, who is among the Fed’s most dovish policy makers, said faster-than-expected growth over the last year-and-a-half allowed the U.S. central bank to continue raising interest rates even as inflation was lower than Fed officials expected.”
— Nasdaq falls. Reuters's April Joyner: “The tech-heavy Nasdaq fell on Monday for the third straight day as a sell-off in Chinese markets sparked concerns about slowing global economic growth, though the S&P 500 pared losses to end nearly flat. Beijing announced a steep cut in the level of cash that banks must hold as reserves, aimed at lowering financing costs and spurring growth amid the trade spat. In Monday’s trading session, the first trading session for mainland China investors since new U.S. and Chinese tariffs went into effect, both Chinese stocks and the yuan slid. The possibility of tapering global growth, led by China’s slowdown, spurred a retreat from the high-flying tech sector, which declined 1.2 percent.”
— Global bonds drop. Bloomberg News's Sid Verma: “Global bonds are hitting fresh milestones of misery. Strong U.S. data, a tighter-than-expected monetary trajectory, rising commodity prices and brewing wage pressures are conspiring to push Treasury yields to cycle-highs, hitting money managers of all stripes. The value of the Bloomberg Barclays Multiverse Index, which captures investment-grade and high-yield securities around the world, slumped by $916 billion last week, the most since the aftermath of [Trump’s] election victory in November 2016. American high-grade obligations are down 2.53 percent in 2018 — a Bloomberg Barclays index tracking the debt has dropped in just three years since 1976. ‘Bond investors have rarely seen losses like this over the past 40+ years,’ Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, wrote in a blog post. ‘Any further moves higher in rates could lead to the worst year since 1976 in terms of overall bond returns.’”
— Traders expect oil prices to rise. The Wall Street Journal's Gunjan Banerji: “A hot streak in the oil market is setting off a wave of bets on how high prices can go. With crude prices rallying for four straight weeks, trading of oil options — contracts that give the right but not the obligation to buy or sell — has surged. The number of bullish contracts that pay out if Brent futures surpass $100 a barrel by January — up 19% from the current level — has more than doubled since the beginning of September, data from Intercontinental Exchange analyzed by QuikStrike show. Shrinking supplies from Iran, along with strong global growth, has fired up bullish sentiment in the oil market. Uncertainty over how much politically troubled OPEC members can pump to make up for production shortfalls could propel prices to $100, say analysts and officials in the Organization of the Petroleum Exporting Countries.”
— China seeks to boost growth. The Washington Post's David J. Lynch and Danielle Paquette: “China is redoubling efforts to protect its slowing economy from the effects of a trade war with the United States, providing fresh ammunition for [Trump’s] claim that Washington enjoys the upper hand in the deepening commercial conflict. The modest slowdown stands in contrast to the surging U.S. economy, which boasts an unemployment rate near half-century lows. ... The Chinese moves to boost growth are seen at the White House as evidence that the president’s hard-nosed approach will pay dividends if the administration keeps its nerve and Chinese officials come to recognize the cost of their refusal to change course. ... Chinese officials, meanwhile, appear to be chafing under Washington’s inflexible approach. Foreign Minister Wang Yi on Monday clashed in Beijing with visiting Secretary of State Mike Pompeo, accusing the United States of ‘constantly escalating trade friction toward China.’”
U.S. worries about Chinese currency. CNBC's Patti Domm and Hailey Lee: “U.S. officials are concerned about the recent depreciation in China's currency and plan to lay out details on China's policies in an upcoming foreign exchange report, according to a senior U.S. Treasury official. The official was speaking ahead of Treasury Secretary Steven Mnuchin's participation at the IMF-World Bank meeting in Bali this week. As trade tensions have risen and China prepares to retaliate against U.S. tariffs, the yuan's fall against the dollar has accelerated recently and is near a 21-month low. U.S. officials have refrained from calling China a currency manipulator in the past. But with trade issues straining relations, there have been rising concerns that China is intentionally weakening its currency to deflect the impact of tariffs on its goods. The official said the U.S. is ‘broadly concerned about China's turn away from market-oriented policies and continued reliance on non-market policies.’ ”
Tariff dodging increases. WSJ's Chuin-Wei Yap: “Every product imported into the U.S. carries a 10-digit designation called an HTS code, of which there are 18,927 in all. Like a taxonomic version of Noah’s Ark, the code provides a common language to bridge disparate markets and identify products in all their variety. In a world of increasing tariffs, the code has another function: evading those levies. The business of code-fudging is expanding in step with tariff increases, undermining U.S. efforts to shield American business from foreign competition, according to importers, customs officials, trade attorneys and shipping brokers. As trade conflict grows between the two largest economies, these professionals say, code misclassification is starting to compete with transshipment — the rerouting of goods through third countries — as a way to duck tariffs . . . ‘What comes along with dumping orders is often a significant increase in the duty rate, and anytime you have that, there is much more incentive to change classification,’ said Brenda Smith, executive assistant commissioner for U.S. Customs and Border Protection.”
Pence's accusations against China. WSJ's Gerald F. Seib: “Last Thursday, while the Capitol was consumed with the Brett Kavanaugh Supreme Court nomination debate, a few blocks away an event with at least as much long-term significance was unfolding, to relatively little notice. Vice President Mike Pence walked to a podium at the Hudson Institute and delivered a remarkable, 40-minute broadside against China. The speech is worth a deeper look, because there was nothing casual about it . . . In surprisingly blunt terms, Mr. Pence accused China of abusing its economic power, stealing American technology, bullying the very American companies that have helped in its economic rise, intimidating its neighbors, militarizing the South China Sea and persecuting religious believers at home . . . The Trump administration sees Chinese practices not merely as an attempt to gain an economic upper hand, but as a part of a kind of broad struggle over global dominance, in which the Chinese are pulling every lever at their disposal in a quest to prevail.”
— GM sales in China slip. Reuters: “General Motors Co’s quarterly sales in China fell for the first time in over a year, hit by faltering economic growth and a wider slowdown in the world’s biggest auto market amid a whipsawing trade war with the United States. The U.S. carmaker sold 835,934 vehicles in the third quarter ended September, down a sharp 14.9 percent from a year earlier, which the firm said was due to a ‘softening’ vehicle market and issues shifting to a new engine system with its Buick brand. ‘The major reasons are a softening market, slowing lower-tier cities, Buick’s engine change-over and a strong Q3 last year,’ a Shanghai-based GM spokeswoman said. She added the fall was not linked to trade tensions.”
- “Trump team’s contact with Mueller targets could taint findings.” Politico's Darren Samuelsohn.
- “Trump says he expects to be ‘treated very fairly’ in Russia probe, has no plans to fire Rosenstein.” The Washington Post's Devlin Barrett and John Wagner.
- “Trump stokes tensions of confirmation battle as Kavanaugh prepares to take seat.” The Post's Ashley Parker and John Wagner.
— Trump used uncommon tactics to grow his business. The Post's David A. Fahrenthold and Jonathan O'Connell: “In 2005, Donald Trump kicked off a decade-long buying and spending spree, vastly expanding his hotel and golf-course empire and cementing his image as a brash impresario. The unorthodox approach Trump took in making those bold bets — racing through hundreds of millions in cash and drawing loans from the private-wealth office of Deutsche Bank — came when he was on new terrain as a developer. For the first time, he was operating without the safety net of his late father Fred’s real estate empire, which had been sold off in 2004, according to a New York Times investigation published last week. That means that between 2005 and 2015, when Trump expanded his hotel chain from three locations to 12 and increased his golf courses from four to 15, he was finally on his own . . . Trump’s unusual financial tactics — about which the Trump Organization has provided few details — are poised to come under scrutiny from Congress next year if Democrats take over one or both chambers.”
— Hope Hicks heads to Fox. The New York Times's Michael M. Grynbaum and Maggie Haberman: “The Murdoch family, in the throes of reshaping its media empire, is bringing on a lieutenant with experience in chaotic environments: [Trump’s] former communications director, Hope Hicks. Starting next year, Ms. Hicks, one of the most recognizable alumni of Mr. Trump’s White House, will become the chief communications officer of Fox, the new entity to be spun out of the Walt Disney Company’s acquisition of most of 21st Century Fox. She plans to move to Los Angeles in connection with her new job. . . . Her new role also signals the ambitions of Lachlan Murdoch, the elder son of the mogul Rupert Murdoch, as he prepares to lead the next version of his family’s empire.”
— Airbus A380 order in jeopardy. Bloomberg News's Benjamin D Katz and Layan Odeh: “Airbus SE’s latest order for the A380 superjumbo has reached an impasse amid drawn-out talks involving the engines, according to people familiar with the matter, possibly imperiling a crucial deal seen as a life-saver for the giant aircraft. The $16 billion accord for as many as 36 additional double-decker aircraft has hit a snag as Emirates negotiates with Rolls-Royce Holdings Plc on price and fuel burn on an engine that’s already falling short of performance parameters, said the people, who asked not to be named discussing confidential information. The companies have missed a deadline to select the engines, possibly delaying first delivery in 2020 — and even threatening the deal outright. . . . Airbus separately on Monday named commercial-aviation chief Guillaume Faury as its next chief executive officer, succeeding outgoing Tom Enders next year. With talks with Emirates stalled, the final decision could fall to Faury on whether to scrap the superjumbo program.”
— Ryan predicts battle over border wall funding. The Post's Erica Werner: “House Speaker Paul D. Ryan said Monday there will be ‘a big fight’ after the midterm elections over funding [Trump’s] border wall, but he said he doesn’t know how the issue will be resolved. ‘We intend on having a full-fledged discussion about how to complete this mission of securing our border, and we will have a big fight about that,’ Ryan (R-Wis.) said at the National Press Club. ‘We’ll figure out how to do it in December,’ Ryan added. ‘I can’t speak to what the outcomes will be.’ ... Ryan and other GOP leaders had urged Trump to postpone a fight over the border wall until after the election. Trump last month signed legislation that funds about 75 percent of the government, including the Pentagon, through Sept. 30, 2019.”
— Bloomberg's super PAC backs Democratic women. CNBC's Brian Schwartz: “A super PAC funded almost entirely by billionaire and former New York Mayor Mike Bloomberg has opened up its coffers to seven women running to unseat veteran Republican incumbents in the House of Representatives. The super PAC, called Independence USA, has spent just more than $2 million this month in backing the Democratic challengers, according to a new Federal Election Commission filing submitted late Friday . . . Most of the seven candidates are in districts favorable to Democrats, who are trying to flip the House out of GOP control . . . Before the PAC's most recent investment, it had spent $568,982 for Democrats and $1.4 million against Republicans, according the nonpartisan Center for Responsive Politics.”
- Kevin Hassett, chairman of the Council of Economic Advisers, delivers a speech on U.S. economic policy at the Council on Foreign Relations.
— From the New Yorker's Gahan Wilson:
Republicans stoke image and fear of Democratic “mob”:
Kids explain trade deals using Halloween candy:
Late-night laughs: Kavanaugh confirmation: