Danger Will Robinson! Shut down, Slowing World Growth, Tax Impact Wearing off, Etc.

A few weeks ago my wife and I were going out to dinner. It was dark and cold, and she was going to drive. We left home and were several miles out when a large object smashed into the windshield and bounced off. We were both startled.

 At first, I thought a dumb kid had thrown a rock or something at us. Then I thought it was a bird. We discussed it for the next couple of miles, and I relaxed and went to grab my computer tablet so I could read a little and relax.

 I always put the tablet on the dashboard but when I reached for it, I came up empty. I knew I was in trouble. I remembered leaving the house and getting to the car and realized I had forgotten my wallet. I laid the tablet on the hood of the car and went back into the house.

It dawned on me at that point that it was my tablet that hit the windshield.

I spent the next half hour walking on the side of a busy Route 30 with a flashlight scanning for my tablet. To my surprise, I found it in the middle of the road unharmed. It was a miracle the thing wasn’t crushed by the numerous speeding cars and trucks.

Now, the moral of this story is that if you are going to do dumb things, there are consequences to pay and only a miracle will save you from disaster.

That’s precisely what we are going to need if the President doesn’t start listening to his economic advisors and fellow Republicans. Stop, maybe I should say, to good advice. (One of his top economic advisors this week declared affected federal workers were better off from the shutdown. He reasoned that they would get back pay and a $500 bonus announced by the TSA top administrator.)

Now some of you are going to point out my bias in blaming the President and not the Democrats for the shutdown, but when the President speaking to Democratic leaders Nancy Pelosi and Chuck Schumer in the Oval Office, said on December 11, “I am proud to shut down the government for border security, Chuck. … I will take the mantle. I will be the one to shut it down. I’m not going to blame you for it.” Later he adds that he will be ‘proud’ to shut down the government.

If it walks like a duck, quacks like a duck, then I think it’s a duck.

Okay, let’s not quibble about whose fault it is and see what the major problems we have going right now.

The Shut down Impact

Kevin Hassett, the chairman of the Council of Economic Advisers, announced that the administration now calculates that the shutdown reduces quarterly economic growth by 0.13 percentage points for every week that it lasts — the cumulative effect of lost work from contractors and furloughed federal employees who are not getting paid and who are investing and spending less as a result. That means that the economy has already lost nearly half a percentage point of growth from the four-week shutdown. (Last year, economic growth for the first quarter totaled 2.2 percent.)

The Trump Administration is trying to limit the impact by designating more and more workers to be essential. That allows the agencies to recall the workers, but they are not being paid. Their checks are guaranteed, but they have to wait for the shutdown to end. (That should really improve work ethic).

There are 800,00 workers affected by the shutdown.  There are now 450,000 workers working without pay. Business pressure is helping to force the administration to recall workers.

 Examples include:

Initially, about 70,000 IRS employees – roughly 88 percent of the workforce – have been furloughed, according to the IRS’ shutdown contingency plan. Issuing tax refunds is not among the agency tasks that would be allowed during a shutdown, which are limited by law to activities that are “necessary for the safety of human life or protection of government property,” the November 29 contingency report said.

But an outcry about the effects of delaying issuing tax refunds led the Trump Administration to declare last week it was changing course. The Office of Management and Budget cited a law that it said created a permanent appropriation for the payment of tax refunds, and the IRS announced it “will be recalling a significant portion of its workforce” to come back to work. Of course, they are coming back without pay.

Interesting to note. When the mortgage industry faced the prospect of issuing fewer mortgages because employees of the IRS income verification service were furloughed, potentially slowing home purchases, the mortgage industry complained and the IRS decided to get the service back up and running and allow those few workers to collect paychecks by diverting fees the service collects.

(Overall, the IRS issued about 112 million refunds in 2017. The average refund was $2,895, according to the IRS.)

Homeland Security’s contingency plan has deemed that 92 percent of its 60,000-plus employees are essential workers. The Transportation Department will likely keep on about two-thirds of its workforce of about 50,000. So, Transportation Security Administration personnel and air-traffic controllers will be on the job—without receiving a paycheck—during the busy holiday travel season.

In summary, that’s one strike against the humming economy.

Tax Cut impact working itself out

The impact of a change in tax law generally works itself out over a six to nine month period. So corporate profits increased, wage increased and the economy kept humming when the bill came into effect, but sadly good things don’t last forever.

Strike Two for a growing economy.

The increase in debt from the tax cut is beginning to happen

The nonpartisan Congressional Budget Office (CBO) reported that under the Act individuals and pass-through entities like partnerships and S corporations would receive about $1,125 billion in net benefits, over 10 years, while corporations would receive around $320 billion in profits. The CBO estimated that the Act would add an estimated $2.289 trillion to the national debt over ten years. Current debt is $21 trillion. This is in addition to the $9.8 trillion increase already projected.

The result may to the crowding out effect which means government debt refinancing demand may crowd out any decrease in the interest caused by increased saving and capital investment that resulted from the tax cut.

The net result is an increase in the interest rate.

This is a foul ball and not a strike.

Slowing World Economic Growth

The Chinese are reporting slower growth. This impacts their economy and has a ripple effect. China’s economic slowdown affects different regions of the world in different ways depending on their exposure. In countries dependent on commodity exports, like Australia, Brazil, Canada, and Indonesia, the slowdown could have a negative impact on their GDP growth as demand slows.

The latest economic reports from Germany are sparking concerns. The slowdown in the 3rd quarter of 2018 could very well extend into the 4th quarter as well. The slowdown signaled by economic indicators comes as the ECB is looking to tighten its monetary policy.

German Industrial production figures released over the week showed an unexpected decline in November. The data reflected a mix of headwinds facing Europe’s largest economy amid rising trade tensions and softer global demand.

Strike three!

Trump Tariffs

          As I explained in Memo #60, this is an awful mistake that leads to economic slowdown now and for a long time in the future. This is another self-inflicted wound.

Strike four!

Under Trump all the rules change.

About Larry Hill

Dr. Larry Hill is Chair and Professor of Economics. Areas of interest include economic analysis, energy economics cost benefit analysis and economy. To subscribe to the email list of Dr. Larry Hill's Economic Memos, contact Tracey O'Brien at obrientr@lewisu.edu. Credentials include 1967 B.S., Indiana State University, 1968 M.S., Indiana State University, 1976 Ph.D., Northern Illinois University He is a member of honorary fraternities in economics and social science. He is currently writing a book on Managerial Economics and revising previous book, "The Basic Macroeconomics of the American Economy"

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