A Shameful Boast

2019 began with U.S. companies short of the capital they need to entertain their own stated expansion goals – assuming that now that the federal government shutdown has ended, a trade agreement with China is finally settled and Brexit woes do not tank the global economy. A lot of assumptions with a volatile President in office. If the economy were to settle down, now with projected growth under the earlier 3% GDP estimate, why in the world would corporate America lack growth capital after the massive governmental give-away masquerading as the much-touted, GOP-passed Tax Cuts and Jobs Act of 2018, dropping the federal corporate tax rate from 35% to 21% in one fell swoop?

About 6% of the additional revenue retained by corporate America went into new jobs, mostly high-salary professional/STEM employment. The balance went into dividends for shareholders but mostly for stock buybacks that enhanced the value of the holdings of existing shareholders. About three quarters of a trillion dollars’ worth. That tax-related corporate cash is long gone. That promised “trickle down” benefit from the mega-rich to the rest simply did not happen. 

A few in red states (state and local taxes, no longer deductible, are much lower than blue urban states) got very small middle-class tax breaks; those in urban blue states got shocking increases in their federal taxes. And sure, there are lots of new lower level jobs as the unemployment numbers suggest, but those promised plum-pay jobs… not so much. More gig work too… without those coveted corporate fringe benefits like paid vacation, solid healthcare and retirement accounts.

The stock market went from a 2018 high to a roller-coaster of volatility, effectively losing all of the share gains by the end of the year. But what all Americans really got, once considered a sacrilege to Republicans, was a whopping increase in the federal deficit without the level promised offsets from a stronger economy. Even as this tax reform act passed and was smilingly signed by the President last year, as companies cheered the result, more sober voices suggested that what looked good now was likely to turn into a disaster in the coming years.

Ironically released on the Ides of March (March 15, 2018), Fortune Magazine warned: “Trump’s heady economic potion, however, is masking misguided policies that could leave those same [joyful U.S.] businesses with a severe hangover from today’s celebration. The U.S. government’s huge and growing budget deficits have become gargantuan enough to threaten the great American growth machine. And Trump’s policies to date—a combination of deep tax cuts and sharp spending increases—are shortening the fuse on that fiscal time bomb, by dramatically widening the already unsustainable gap between revenues and outlays. On our current course, we’re headed for a morass of punitive taxes, puny growth, and stagnant incomes for workers—a future that’s the precise opposite of what Trump champions.

“By 2028, America’s government debt burden could explode from this year’s $15.5 trillion to a staggering $33 trillion—more than 20% bigger than it would have been had Trump’s agenda not passed. At that point, interest payments would absorb more than $1 in $5 of federal revenue, crippling the government’s capacity to bolster the economy, and constraining the private sector too. Contrary to the claims of the President and his supporters, the U.S. can’t grow fast enough to shed this burden; indeed, Trump’s agenda on immigration and trade looks likely to stunt that growth. (More on that later.) ‘This is almost like climate change,’ says Mark Zandi, chief economist at Moody’s Analytics. ‘It doesn’t do you in this year, or next year, but you’ll see the ill effects in a day of reckoning.’”

That we have just added the additional interest we have to pay every year to maintain the federal deficit is bad enough, but with this massive flood of new government debt seeking global lenders, those lenders seem to want higher interest rates. While the United States has an enviable AAA rating, the government shutdown coupled with an irrational and unpredictable president who has lost massive international credibility, the possibility of a reduction in that rating (which would further kick-up those interest rates) looms large. Should that occur, the strength of the U.S. dollar will obviously fall against other currencies, which will add a further press for higher interest rates to place our deficit debt.

You can witness that upward pressure in federal bond auctions, where the government seeks to place some of its deficit debt. “Of the $2.4 trillion of notes and bonds the Treasury Department offered last year, investors submitted bids for just 2.6 times that amount, data compiled by Bloomberg show. That’s less than in any year since 2008 when the financial crisis was in full swing. The bid-to-cover ratio, as it’s known, fell even as benchmark Treasury yields soared to multiyear highs in October, before falling back to their lows last month [December]…

“Debt supply jumped in 2018 largely because of the Trump administration’s tax cuts. Forecasts show the deficit could soon swell past a trillion dollars and stay that way for years to come… The weakness ‘doesn’t matter until it suddenly does,’ says Torsten Slok, Deutsche Bank’s chief international economist. ‘A declining bid-to-cover ratio increases the vulnerability and probability that investors suddenly will begin to think that a falling bid-to-cover ratio is important. Put differently, all fiscal crises begin with a declining bid-to-cover ratio.’

“The first note auction of 2019 did little to ease those worries. The Treasury sold $38 billion of three-year notes Tuesday [1/8], matching the biggest sale since 2010. The bid-to-cover ratio was the lowest since 2009… It will follow up Wednesday [1/16, it did], with a $24-billion sale of 10-year notes, which yield 2.73%.

“The Treasury has enlarged its auctions for four straight quarters, surpassing levels last seen in 2009. What’s more, the U.S. has grown more reliant on the public to finance its deficit as the Federal Reserve scales back its purchases of Treasurys [sic] to shrink its $4 trillion of crisis-era bond holdings.” Los Angeles Times (from Bloomberg), January 10^th. The first four months of 2019 have already produced a 77% increase in the deficit from the same time last year!

Not to worry as the GOP has a simple solution, one that has zero chance of passing through a Democrat-majority House: cut Social Security, Medicare, Supplemental Nutritional Assistance Program (SNAP – food stamps), Medicaid, coverage under the Affordable Care Act, etc. But if the Republicans were to regain control of both houses of Congress and the presidency in 2020, guess what retirees and those in need will get?

              I’m Peter Dekom, and the Tax Cuts and Jobs Act of 2018 may turn out to be the biggest disaster of the Trump presidency, eclipsing both his scandals and his appointment of unqualified and biased activist right-wing judges.