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Kevin Hassett and Irwin Steltzer Join in on the Fiscal Dishonesty

Kevin Hassett and Irwin Steltzer Join in on the Fiscal Dishonesty

Brad DeLong is annoyed at the latest from Irwin Stelzer:

Hassett and others in the administration point out that despite a hefty reduction in the corporate tax rate from 35 percent to 21 percent, government revenues rose by $3.3 trillion in the fiscal year just ended. In part this is because the economy is growing at around a 4 percent rate in response to the tax cuts and to a revival of animal spirits as entrepreneurs and corporate chieftains wake up in the morning wondering not what the government is going to do to them, but what it might do for them. So Trump may yet be proven right. And if that proof does not emerge by 2020, he an always blame the Fed. The problem, says Trump, is that spending rose even more, by $4.1 trillion.

Hassett is lying but let’s note so are the OMB Director and the Treasury Secretary as well as Speaker Paul Ryan:

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues.

Yes nominal government spending rose by 3.2%, which represents only a 0.7% real increase. Spending and revenues both fell relative to GDP. Brad correctly notes:

his claim that under Trump economic growth is “around… 4%”. It is not. GDP growth under Trump has been and is widely projected to be roughly 2.7% per year, not “around… 4%”. Irwin Stelzer is a liar. Liars are not worth reading.

While true – Trump’s entire economic team has been lying but quoting nominal changes rather than real changes. So maybe Stelzer was talking about the increase in nominal GDP. Yes – that is dishonest but hey – everyone on Team Trump is doing this.

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Fiscal Dishonesty from Paul Ryan (Surprise!)

Fiscal Dishonesty from Paul Ryan (Surprise!)

We earlier noted that when our Treasury Secretary wrote this:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

He was basically lying to us hoping the public would be too stupid to realize that when the price level rose by 2.5% during the same period, we are talking about a 2% real decrease in tax revenues. And it seems that some nitwit at CNBC was indeed that stupid. Yesterday I endured an appearance by Paul Ryan on CBS This Morning. No surprise that this dishonest weasel repeated the same lie:

Revenues are up this year. Believe it or not, we cut taxes at the beginning of the year, and we have higher revenues this year. Why do we have higher revenues? Because we have faster economic growth, higher wages, more taxes are coming into the government.

But let’s give credit to John Dickerson for calling Ryan on this intellectual garbage:

Dickerson pushed back, pointing out that when you account for inflation, some of the revenues from the previous tax policy, and the revenue that would increase from population, the revenues are lower than they should be.

I would say Dickerson nailed this liar but how did Ryan respond?

Let me just say it this way. We cut taxes and we have higher revenues coming into the government today still.

Got that? He just repeated his debunked lie. After all Paul Ryan has such total disdain for the public that he simply doubled down on this incredibly stupid dishonesty.

 

 

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Fiscal Dishonesty from CNBC and Our Treasury Secretary

Fiscal Dishonesty from CNBC and Our Treasury Secretary

Is Jacob Pramuk on the White House payroll?

US budget deficit expands to $779 billion in fiscal 2018 as spending surges. The federal budget deficit rose 17 percent in fiscal 2018, according to the Trump administration. Spending jumped, and revenue only increased slightly following the GOP tax cuts. The Trump administration has pushed for dramatic budget cuts at several agencies and supported massive increases in military spending.

And that was just his headlines!

The deficit increased by $70 billion less than anticipated in a report published in July, according to the two officials. Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2 percent.

He is getting his numbers from this report:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

I have skipped the chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala CNBC. Real government spending barely kept pace with inflation, which is why outlays relative to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since Kudlow and his ilk tried to pull this intellectual garbage in the 1980’s. Does anyone at CNBC not realize the Trump White House is playing the same games with numbers? Never mind that the Treasury Department has decided to lead the way on some good old fashion rightwing nonsense.

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U.S. Saudi Trade

U.S. Saudi Trade

Donald Trump appears to be reluctant to investigate the murder of Jamal Khashoggibecause of an alleged trade deal?

Donald Trump has said US investigators are looking into how Jamal Khashoggi vanished at the Saudi consulate in Istanbul, but made clear that whatever the outcome, the US would not forgo lucrative arms deals with Riyadh. The president’s announcement raised concerns of a cover-up of evidence implicating Saudi Arabia’s powerful crown prince, Mohammed bin Salman, in plans to silence the dissident journalist…Any sense that the administration might seek to impose serious consequences on Saudi Arabia was dispelled by the president. Asked at an impromptu press conference in the Oval Office whether the US would cut arms sales if the Saudi government was found to be responsible for Khashoggi’s disappearance, the president demurred, saying the US could lose its share of the huge Saudi arms market to Russia or China. In the Oval Office Trump pointed out that the disappearance took place in Turkey and that Khashoggi was not a US citizen.

He may not be a citizen but he did hold a green card and worked for the Washington Post. Credit to the Republicans in Congress for pressing on the appropriate investigation of this matter. My only comment today will be to challenge Trump’s argument that our trade with Saudi Arabia is more important than sanctioning the Saudi government for this murder likely ordered by Mohammed bin Salman. The Census Bureau reports on both our imports from Saudi Arabia and our exports to them. Over the last decade, imports have varied from less than $17 billion per year to over $55 billion. These imports are predominantly been oil of course. Exports have never reached $20 billion per year so we have run persistent and sometimes large deficits with the Saudis. In Trumpian “logic” – aren’t we losing to them? To be fair, we choose to import Saudi oil but then again, the kingdom is not the only supplier of this commodity. But Trump is telling us that we may have yuuuge exports of military goods:

I know they’re [Senators] talking about different kinds of sanctions, but they’re [Saudi Arabia] spending $110 billion on military equipment and on things that create jobs, like jobs and others for this country. I don’t like the concept of stopping an investment of $110 billion into the United States.

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The Susan Collins Excuse

The Susan Collins Excuse

I listened very carefully to Senator Collins as she detailed her excuses for letting Brett Kavanaugh become a Supreme Court Justice. Two aspects of her speech were particularly absurd and kind of appalling. Her claims that Kavanaugh is a moderate akin to Justice Stevens were beyond absurd. The most appalling aspect of her speech was how she dismissed the claims that Kavanaugh sexually abused women in high school and/or college:

Some of the allegations levied against Judge Kavanaugh illustrate why the presumption of innocence is so important. I am thinking in particular not at the allegations raised by professor Ford, but of the allegations that when he was a teenager Judge Kavanaugh drugged multiple girls and used their weakened state to facility gang rape. This outlandish allegation was put forth without any credible supporting evidence and simply parroted public statements of others. That’s such an allegation can find its way into the Supreme Court confirmation process is a stark reminder about why the presumption of innocence is so ingrained in our a American consciousness. Mr. President, I listened carefully to Christine Blasey Ford’s testimony before the Judiciary Committee. I found her testimony to be sincere, painful, and compelling. I believe that she is a survivor of a sexual assault and that this trauma has upended her life.

She believes Dr. Ford but then she went on and on like a defense attorney why she did not believe her when she clearly said it was Kavanaugh. But the real stunner was when she said this:

I do not believe that the claims such as these need to be proved beyond a reasonable doubt. Nevertheless, fairness would dictate that the claims at least should meet a threshold of more likely than not as our standard. The facts presented do not mean that Professor Ford was not sexually assaulted that night or at some other time, but they do lead more to conclude that the allegations fail to meet the more likely than not standard.

I guess “the facts presented” is the key aspect as we know the FBI was not allowed to pursue corroborating evidence, which is why this episode is clearly absurd. But does Senator Collins truly grasp this more likely than not concept? I’m an economist not a lawyer but I have worked with tax attorneys and accountants on the transfer pricing aspects of tax provisions under FIN 48:

Under the Interpretation, absent the existence of a widely understood administrative practice and precedent of the taxing authority, an enterprise cannot recognize a tax benefit in its financial statements unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority, based solely on the technical merits of the associated tax position. In this evaluation, an enterprise must assume that the position (1) will be examined by a taxing authority that has full knowledge of all relevant information and (2) will be resolved in the court of last resort.

Let’s key in on “full knowledge of all relevant information”. I have seen multinationals trying to convince financial auditors not to impose tax reserves based on some suspect report that key intercompany prices are arm’s length and where material information was not disclosed. In my experience, the financial auditors would refuse to give FIN 48 clearance until this information was disclosed and properly evaluated. It is well known that the latest FBI inquiry literally ran away from material information that may have corroborated Dr. Ford’s testimony. So when Senator Collins raises this More Likely Than Not standard – she should know better given the fact relevant information was not properly explored. Nicole Belle makes a strong case that the Republicans even knew ahead of time that Dr. Ford’s allegations are true:

Don’t Kid Yourself. The GOP KNOWS Kavanaugh Tried To Rape Someone … The FBI notifies the White House of the letter to see if they want follow-up. The White House declines further investigation. But now they know. And now they pass it on to GOP operatives. Early August. So now, Kavanaugh, the FBI, the White House AND GOP operatives all know. BEFORE the hearing even begins. So now the PR campaign goes into overdrive.

Read the entire thing as it explains a lot of the Republican fake anger at Senator Feinstein, which was all a gigantic smoke screen to disguise the fact that the Republican operatives were doing all they could to demean Dr. Ford, pump up Kavanaugh, and evade any real investigation. Senator Collins little More Likely Than Not sort of puts this in the domain of civil litigation rather than criminal charges where the standard is:

preponderance of the evidence – n. the greater weight of the evidence required in a civil (non-criminal) lawsuit for the trier of fact (jury or judge without a jury) to decide in favor of one side or the other. This preponderance is based on the more convincing evidence and its probable truth or accuracy, and not on the amount of evidence. Thus, one clearly knowledgeable witness may provide a preponderance of evidence over a dozen witnesses with hazy testimony, or a signed agreement with definite terms may outweigh opinions or speculation about what the parties intended.

Suppose Dr. Ford chooses to file a civil lawsuit against Brett Kavanaugh and Mark Judge. What then? We would have actual discovery if this lawsuit is allowed. Then again I bet Kavanaugh would hire some slime ball lawyers to squash this lawsuit even if they had to take it to the Supreme Court where Justice Kavanaugh could file the fifth vote in favor of his own motion.

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A Weak Defense of Citizen United: Ownership v. Control

A Weak Defense of Citizen United: Ownership v. Control

Many thanks to Peter Dorman for highlighting Citizens United As Bad Corporate Law. I guess we had to endure this comment, which is a really weak rebuttal:

Corporate shareholders are most definitely owners; they alone have the authority to sell their shares or the company’s assets. Their rights are based not on contract law but statutory rules of franchise. They are guaranteed rights of assembly abd representation, and they cannot legally surrender those rights even if they elect Directors who vote to do so.

My first thought to this attempted rebuttal was the complaints of condominium owners in San Francisco. They may own the rights to what is effectively an apartment but they have to deal with management as they really do not own the land. And even the land owner does not have that much control in a city where regulations control land use. My second thought involved the minority shareholders of Yukos Oil during Yeltsin’s Russia, which I noted in this related post:

AB noted yesterday that some of Sinclair Broadcasting’s shareholders were upset the decision of management to aid the Bush-Cheney ’04 campaign with free air time for another smear of John Kerry. Their stock, which was around $10 a share in early August, is trading now for about $7.30 a share.

Now I get that the corporate governance rules in the U.S. are not as pathetic as they were during Yeltsin’s Russia but the idea that an individual shareholder has any real control of how a corporation is run is quite naïve. Peter asked this commenter if he had read the paper. Had he done so, he might have noticed footnote 34 on page 19, which included a seminal paper by Ronald Coase entitled “the Nature of the Firm”. This paper initiated an entire literature on what this recent paper calls the “nexus of contracts theory”. If our commenter has not read this literature, he should.

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Trump Wants to Lower Drug Prices

Trump Wants to Lower Drug Prices

I just now got around to reading some May 11 speech by Donald Trump who says he wants to reign in the high price of drugs. A laudable goal and Trump said some things that got applause. But ahem – he may no clue especially when he says things like this:

We’re very much eliminating the middlemen. The middlemen became very, very rich. Right? (Applause.) Whoever those middlemen were — and a lot of people never even figured it out — they’re rich. They won’t be so rich anymore.

Nancy L. Yu, Preston Atteby, and Peter B. Bach did some excellent research on where our drug money goes:

As a starting point, we relied on IQVIA’s 2016 estimate of the net revenue received by drug manufacturers … For 2016, IQVIA reported $323 billion in company-recognized net revenues.

Yea – this sector is characterized by huge profit margins so someone is getting rich. The large pharmaceutical manufacturers also have a knack for shifting income to tax havens. To his credit – Trump talked about generic competition and ending the lobbying efforts of those in this sector. But let’s turn to those middlemen:

The PBMs and wholesaler-distributors are extraordinarily concentrated, with the three largest companies dominating the market share within these segments…United Healthcare reports OptumRx’s revenues, to which we applied a 5 percent margin (comparable to CVS Caremark’s) to estimate its gross profits, bringing total profits for the “big three” to a little more than $17 billion. Assuming lower profitability margins for the remaining smaller players, we grossed up to an estimate of $22.6 billion in gross profits for the PBMs. The three largest pharmaceutical wholesalers, McKesson, AmerisourceBergen, and Cardinal …After aggregating the gross profits for these three dominant companies, we extrapolated the remaining 15 percent to come up with an estimate of $17.7 billion in gross profits for the overall segment.

They estimate that the gross margins for the PBMs and wholesaler/distributors were just over $40 billion. Net profits would be less as these companies bear at least a modest amount of operating expenses. While more competition might drive down these gross margins, the very high gross margins for the manufacturers would be a better starting point. Just saying.

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Kevin Hassett Needs Remedial Arithmetic

Kevin Hassett Needs Remedial Arithmetic

Kevin DOW 36000 Hassett was sent out to the White House press to lie about real wage growth. Or maybe he just proved he seriously needs remedial math for another reason besides one that Brad DeLong notes:

Glassman and Hassett get the math of the Gordon equation for valuing the stock market simply wrong. It’s not the earnings yield that shows up in the numerator, it’s the dividend yield. The book should have been called Dow 22000.

I would put this in a slightly different way. We use the discounted cash flow model not some discounted profits model and anyone who knows anything about basic financial modeling realizes that cash flows equal profits minus the investment in new tangible assets required for growth. But Hassett did not appear to get this basic point back in 1999. Flash forward to today when he was echoing some disinformation written in this report. Credit goes to Jared Bernstein and Larry Mishel for a point by point take down of the intellectual garbage from the Council of Economic Advisers which included this gem:

The most commonly cited wage and compensation data come from the Employment Cost Index (ECI), and these data show, for example, that over the past two years, nominal wages (private sector workers) are up 5.4 percent while fringe benefits are up 5.1 percent. Thus, in these data, adding in benefits doesn’t change the wage growth story.

Hassett admitted inflation is up but argued real compensation growth is growing faster than real wages because of something to do with fringe benefits. Over the past 24 months, the consumer price index has increased by 4.7% so real fringe benefits are only marginally higher whereas real wages grew by a very modest 0.7%. So fringe benefits have actually fallen relative to wages but Hassett told the press that including fringe benefits makes compensation growth appear higher. OK – maybe Hassett was not intending to deceive the press but if he really does not get this simple point, I suspect a few first graders could explain this to him.

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The Soybean Boom

The Soybean Boom

Via TalkingPointsMemo AP notes:

Private forecasters cautioned that the April-June pace is unsustainable because, they say, it stems from temporary factors, including a rush by exporters of soybeans and other products to get their shipments out before retaliatory tariffs took effect. They predicted the rest of the year is likely to see solid, but slower growth of around 3 percent. The transformation is also not as dramatic as Trump claims — and in many ways the 4.1 percent annualized growth during the second quarter is in line with an economic expansion that just entered its tenth year. During Barack Obama’s presidency, there were four quarters when annualized growth exceeded the level that Trump praised on Friday. And in 2015, full-year economic growth nearly reached the 3 percent level being targeted by the Trump administration this year when it hit 2.9 percent.

Is this “fake news” being peddled by those socialists at TPM? What do these private forecasters know anyway! Well AP does lead with what the White House wanted to emphasize:

President Donald Trump on Friday celebrated the release of new economic data, claiming the U.S. is now the “economic envy of the entire world.” Trump was responding to new growth numbers announced on Friday that show the U.S. economy surged in the April-June quarter to an annual growth rate of 4.1 percent — the fastest pace since 2014. “We’ve accomplished an economic turnaround of historic proportions,” Trump told reporters during hastily arranged remarks on the South Lawn of the White House, where he was joined by Vice President Mike Pence and flanked by members of his economic team. “Once again, we are the economic envy of the entire world,” Trump said, adding that “America is being respected again.”…Trump, who has repeatedly attacked the economic record of his predecessor’s administration, pledged during the 2016 campaign to double growth to 4 percent or better. And he has been tring to highlight economic gains ahead of the midterm elections. But Trump, ever the salesman, predicted even higher growth as he renegotiates the nation’s trade deals, saying, “We’re going to go a lot higher than these numbers.” And he insisted the economic numbers are “very sustainable” and not “a one-time shot.”

Now that’s telling it like Sean Hannity and Fox & Friends would do! OK – time to listen to an actual economist such as James Hamilton:

Growth in consumption, nonresidential fixed investment, and net exports helped produce the strong numbers. Higher oil prices stimulated a big boost in spending on mining exploration, shafts, and wells. That was one factor in higher investment spending; growing business confidence may have also played a role. Tax cuts likely contributed to the growth in both consumption and investment. Some of the export growth may have come in anticipation of coming tariffs. I count the contribution from exports as a soon-to-disappear plus, though it’s balanced by a big minus in inventory investment that’s also likely transient.

We’ll get back to the soybean boom which led to real exports growing by more than 9% per annum last quarter. While residential investment fell a wee bit, nonresidential fixed investment has been growing at a 9% per annum clip for the past two quarters. Is this due to temporary facts (see the Econobrowser comment section for more) or is it sustainable as Trump argued? We shall see but permit me to repeat what I said on this in the comment section:

Trump lies about everything. He correctly noted that real business fixed investment has been growing by 9% over the past two quarters but then we have not seen this for decades? Really? We had this rate of growth back over the 2011/2012 two year period. From 1995 to 2000, real business fixed investment grew by about 10% per year. We had double digit growth rates both during the 1976 to 1978 period and the 1964 to 1966 period. I guess it does not count if the President during these periods was a Democrat.

OK now that I got that out of my system, I want to turn to Trump’s argument that we can sustained high growth if we can get a large boost in net exports. Never mind the fact that the soybean boom will turn to a soybean bust now that China’s tariffs on our soybeans are in place. Of course there are other aspects to this stupid trade war but focusing on that may be missing the point that Menzie Chinn articulated last fall:

 

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How Much Do the NATO Members Spend on National Defense?

How Much Do the NATO Members Spend on National Defense?

Josh Marshall provides a nice discussion of the difference between how NATO is funded versus how much each of its members spends on national defense, which begins with:

As we move toward the NATO Summit and the Putin-Trump summit, I thought it made sense to review some of the details behind the President’s demands that NATO member countries pay up and stop doing what he regards as freeloading on the US taxpayer dime. Most people have a general sense that Trump doesn’t seem to grasp how an alliance works, that it’s not meant to function as a protection racket. But the actual details are both sillier and more significant than it may seem on the surface.

While I applaud his discussion, something is amiss here:

The vastly greater amount is the combined military budgets of all the member countries combined, which was $921 billion in 2017. The great majority of that is made up of the US military budget. In 2017 the US military budget was $610 billion. The coming fiscal year puts it at $700 billion. (That big run-up is significant and we’ll return to it.) Some of that difference is driven by the fact that the US economy is far larger than any individual NATO member state. But the US also spends much more on a per capita basis. Staying with the 2017 numbers, the US spends 3.61% of GDP on defense. The next major NATO member is the UK down at 2.36% while most other major NATO powers are significantly under 2%. (Examples: France, 1.79%; Germany, 1.2% Canada, 1.02%)

Actually, U.S. national defense spending was over $744 billion in 2017, which came to 3.8% according to this source. Call me a pacifist but maybe we should all be spending less on the ability to wage war.

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