Josh Boak

Progress or gridlock? How midterm vote could affect US economy

WASHINGTON (AP) — President Donald Trump has warned that if Democrats regain political power in the midterm elections, the U.S. economy would essentially implode. Democrats, he insists, would push tax hikes and environmental restrictions that stifle growth. Undocumented immigrants would steal jobs and unleash a crime wave that would halt commerce. Health insurance would devolve into a socialist program offering shoddy care at unsustainable cost. “At stake in this election,” Trump declared at a rally in Houston, “is whether we continue the extraordinary prosperity that we’ve all achieved or whether we let the radical Democrat mob take a giant wrecking ball and destroy our country and our economy.” Almost no private economist agrees with Trump’s portrait of a financial apocalypse. If Democrats win control of the House in next week’s congressional elections, their legislative priorities wouldn’t likely much alter a $20 trillion economy. For one thing, Trump would remain able to block Democratic initiatives — just as they could stop his plans for more tax cuts and a 5 percent cut to Cabinet department budgets. What instead would likely result is continued gridlock — perhaps even more entrenched than what exists now in Washington. Arrayed against a stout Republican majority in the Senate, a Democratic House majority couldn’t do much to reorder the economy, which typically hinges more on the willingness of consumers and businesses to spend and on the state of the global economy than on government policy priorities. “It’s probably not that much of a change,” Beth Ann Bovino, chief U.S. economist at S&P Global, said of the likely outcome. “While you might see further gridlock if the Democrats take the House, that doesn’t mean it would tip the boat and slow growth.” Many polls and analyses suggest — though hardly assure — that the Democrats could regain a majority in the House if their voters turn out in sufficient numbers in key races. If so, Trump would have to contend with a divided government instead of one with Republicans in complete control. Yet depending on voter turnout, it’s also possible that the Republicans could maintain their hold on both the House and the Senate. Analysts at Goldman Sachs and Morgan Stanley foresee a divided government as most probable. So do their peers at Oxford Economics and Keefe Bruyette &Woods. “The most likely political consequences would be an increase in investigations and uncertainty surrounding fiscal deadlines,” Goldman Sachs concluded in a client note. Oxford Economics’ senior economist, Nancy Vanden Houten, has suggested that the Republicans’ legislative agenda would stall if they lost the House. “A Democrat-controlled House would, in our view, be a line of defense against further tax cuts, reduced entitlement spending and efforts to repeal the Affordable Care Act,” she said. The economy has enjoyed an acceleration in growth this year — to a gain estimated to be 3 percent after tax cuts. Unemployment is at a 49-year low of 3.7 percent, and employers continue to post a record number of jobs openings. The economic expansion is already the second-longest on record. But annual growth is widely expected to dip back to its long-term average of near 2 percent by 2020. It’s even possible that the economy could slip into a recession within a few years as growth inevitably stalls — for reasons unrelated to who controls the White House or Congress. A global slowdown could, for example, spill over into the United States. Or higher interest rates, spurred by the Federal Reserve, might depress economic activity. Trump would still have plenty of discretion on some key economic issues. His trade war with China and his drive to reduce regulations are two of them. The president has managed to pursue those priorities without Congress’ involvement, though his updated trade agreement with Canada and Mexico would need congressional approval. “Trade stuff is being done administratively; regulatory stuff is being done administratively,” said Douglas Holtz-Eakin, president of the right-of-center American Action Forum. “There’s just not that much on the table legislatively.” In an appearance this month at Harvard University, the House Democratic leader, Nancy Pelosi, outlined her agenda should her party regain the chamber’s majority and she the speakership. Within the first 100 days, Pelosi said, she would seek to reduce the influence of large campaign donors and groups that aren’t legally required to disclose their funding sources. She would also push for infrastructure funding — to rebuild roadways, rail stations or airports, for example — and seek protections for undocumented immigrants who came to the United States as children, among other priorities. Any such initiatives, though, could be blocked by a Republican Senate — or by Trump. Budget and deficit issues will also surface after the election. Congress will likely need to raise the government’s debt limit and approve spending packages before October 2019. And mandatory government spending caps are set to kick in for the 2020 fiscal year after having been suspended for two years. Those spending limits could dampen economic growth. Lewis Alexander, chief U.S. economist at Nomura, said Republicans might renew their focus on reducing the national debt, after having approved tax cuts last year that swelled annual budget deficits by $1.5 trillion over the next decade. Alexander noted that shrinking the deficit has historically become a higher priority when competing parties have controlled the White House and Congress. If the government seeks to pare the deficit, it could possibly slow the economy, which in the past year has been fueled in part by government spending. It’s likely Trump would blame Democrats if growth falters, just as he might absorb criticism for his economic stewardship as Democratic presidential campaigns accelerate into a higher gear. The hostile rhetoric makes it unlikely that Democrats and Republicans would join to pass any meaningful legislation for the economy, such as for infrastructure rebuilding. “The way parties are talking about it right now, I don’t think anybody is dying to cooperate,” said Michael Madowitz, chief economist at the Center for American Progress, a liberal think tank. Still, if Democrats regain the House, the president might feel pressure to produce some tangible legislative results ahead of his own quest for re-election in 2020. “Trump is the wild card here,” said Jason Rosenstock, a financial industry lobbyist with Thorn Run Partners. “He may want to be seen as a deal-cutter going into the 2020 election.”

Trump’s economic gamble: Solid job gains vs. risky trade war

WASHINGTON (AP) — From the safety of a resilient U.S. economy, President Donald Trump lit the fuse July 6 on a high-risk trade war with China. History suggests that a cycle of tariffs and retaliations can eventually choke economic growth. But for now, employers, investors and U.S. consumers are weighing the perils of a prolonged rift between the world’s two largest economies against a far more positive backdrop: America’s healthiest job market in years. Evidently confident despite the risks ahead, U.S. employers have added jobs this year at a robust monthly average of 214,500. Many businesses say they’ve reached the point where they can’t even find enough people to fill jobs. Unemployment is at a low 4 percent. All that hiring is occurring in an economic expansion that is entering its 10th year — the second-longest streak on record. The U.S. financial markets, while wary of the trade fights Trump has pursued, have swung this year between modest gains and losses but have avoided any sustained panic. “The robustness of the economy — and it’s stronger than it has been in decades — inoculates Trump’s trade policy moves from closer scrutiny,” said Daniel Ikenson, director for trade policy studies at the libertarian Cato Institute. Most employers see the economy as having achieved a comfortable cruising speed and have kept hiring. In surveys of business sentiment, they have expressed concerns about the tariffs, but their wariness has yet to disrupt their business plans. The United States added 213,000 jobs in June, and an influx of new jobseekers, seemingly optimistic about their prospects but not finding work right away, lifted the unemployment rate from 3.8 percent to 4 percent, the government reported July 6. Helping propel growth, business and consumers have received a $136 billion stimulus this year from tax cuts. Quarterly economic growth is on track to be the strongest since 2014. Housing starts are up 11 percent so far this year. From this position of strength, Trump is gambling that he can deploy tariffs to his advantage even though they will inflict some pain on businesses and consumers that backed him in 2016. The Trump team’s calculation appears to be that foreign countries have no choice but to trade with the world’s largest economy and will ultimately have to yield. The president hopes to extract concessions not only from China but also from such long-standing allies as the European Union, Canada and Mexico. His stated goal is to reduce U.S. trade imbalances and create more U.S. manufacturing jobs. So far, the economy can absorb the costs of the new tariffs, including separate steel and aluminum import taxes, without suffering a crushing hit. But the pain could intensify. Trump has threatened a 20 percent tariff on roughly $50 billion of auto imports from the European Union. Those tariffs could lead to reciprocal taxes from other countries that could hurt U.S. automakers and lead to layoffs. Trump has warned that he may eventually impose tariffs on more than $500 billion of Chinese imports. He said in a speech in Montana last week that other countries will agree to his terms — “and if they don’t, we’ll actually do better.” “Our allies, in many cases, were worse than our enemies,” the president said. “We opened our country to their goods, but they put up massive barriers to keep our products and our goods the hell out of their country because they didn’t want that competition.” From soybean farmers and pork producers to the motorcycle manufacturer Harley Davidson, numerous American exporters are facing upheavals from the tariffs. Still, some U.S. companies are benefiting. Braidy Industries, for example, just broke ground on an aluminum mill near Ashland, Kentucky. It says it’s already sold twice the plant’s capacity for the first seven years of production after actions by the U.S. government to protect America’s aluminum industry. Craig Bouchard, Braidy’s CEO, said an expansion of U.S. tariffs on imported aluminum is helping to allow for the 600 mill jobs he’s adding in Appalachia and the thousands of jobs indirectly supported by the plant. “It’s 10,000 families resting on my shoulders,” he said. So far, most economists view Trump as jockeying for more favorable trade rules rather than welcoming a prolonged conflict with America’s trading partners. Administration officials have encouraged this view. “He’s going to deliver better deals,” Kevin Hassett, chairman of the White House Council of Economic Advisers, said on FOX Business Network. “He’s called the bluff of other countries that have basically been abusing … our workers for a long time and — but he wants better deals.” Bill Adams, a senior economist at PNC Financial Services, said that a truly destructive trade war is “still not our base case expectation, but it is less farfetched than it seemed” earlier this year. A calamitous trade war would likely be the “result of miscalculation or unintended consequences, rather than an explicit goal,” Adams added. If it happened, the Trump-led economy could eventually buckle under the weight of protectionist trade policies. “The longer tariffs last and the wider they become, the more they will dampen hiring and investment by U.S. businesses engaged in global value chains,” Adams said.

Questions remain over Trump’s tax plan

WASHINGTON (AP) — President Donald Trump wants to close a frustrating 2017 with the first overhaul of the tax code in more than three decades. Yet after seven months of work, Trump’s plan remains little more than a rough sketch. Despite the haziness of the blueprint, administration officials have held to their pledges that lowering tax rates would spur the creation of millions of jobs and faster economic growth. The White House maintains that the House and Senate will begin considering a detailed tax overhaul after the August recess with final passage scheduled for November. But after the Republican drive to repeal the 2010 health care law collapsed this summer, Senate Majority Leader Mitch McConnell declared that the president had “excessive expectations about how quickly things happen in the democratic process.” The president told reporters last week, “I’m very disappointed in Mitch.” Here are the open questions about taxes that will be decided in the coming months: Tax cuts or tax reform? They’re not the same thing, though Trump seems to use the terms interchangeably. Tax cuts mean that people simply pay less money to the government. Reform is more complex and more difficult to achieve. It generally involves simplifying the tax code by erasing breaks. With tax reform, the government can, in theory, collect taxes from a broader base of incomes and that enables lower rates. Tax reform is difficult because the deductions and tax breaks generally have vocal and well-financed supporters who will fight to preserve those benefits. “From a political standpoint, the perceived losers are more vocal and louder than the perceived winners,” said Mark Mazur, director of the nonpartisan Tax Policy Center and a former Treasury Department official in the Obama administration. This is why the administration might ultimately decide to cut taxes in hopes of boosting the economy, rather than wading through an overhaul. What’s in store for the middle class? Trump has said he wants tax relief for the middle class. He has supported doubling the “standard deduction.” This essentially means that a greater amount of income would be treated as tax-free and that would help the middle class. But many elements of the outline the White House submitted in April, like eliminating the estate tax, favor the wealthiest 1 percent of earners. This group would see their after-tax incomes shoot up on average 17.8 percent under the plan, while the middle fifth of taxpayers would get a boost of only 3.3 percent, according to an analysis by the Tax Policy Center. Some people who perceive of themselves as middle class could be surprised by tax hikes. This is because the White House wants to shrink the number of personal tax brackets to three from seven, but it hasn’t set the income levels for the new brackets. Marc Short, the White House director of legislative affairs, said the income levels will be set by the House Ways and Means Committee, which will draft and hold hearings on the bill. So will the deficit rise? Trump and congressional leaders have kept quiet about just how much a tax overhaul could increase the budget deficit. Outside analysts have estimated that the known changes could cause the debt to climb by several trillions of dollars over the next decade. A joint White House and congressional statement released in July says their priority is keeping the deficit at its current projections. Congress could use accounting gimmicks in the budget process to create space for large tax cuts before the new fiscal year starts in October. However, the gimmicks aren’t a long-term solution to a revenue shortfall. Lawmakers could change how the deficit gets calculated in future years by treating tax breaks that are set to expire this year as permanent. This could add $450 billion to the baseline over 10 years, said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. The budget instructions could also allow lawmakers to make both permanent and temporary changes to the tax code. “This is one way that they get some of their priorities” without having to eliminate popular tax breaks, said Kyle Pomerleau, director of federal projects at the right-leaning Tax Foundation. Will the plan mostly benefit the rich? One way White House aides say that growth will be improved is by reducing taxes for smaller firms in which a company’s profits double as the owner’s personal income. These are commonly known as “pass-through” businesses — and they’re linked with rising income inequality. Trump’s April guidelines would have this income taxed at a rate as low as 15 percent, the same as its intended rate for all corporate income. The top corporate tax rate is now 35 percent, relatively high compared with similar nations. The administration has also said it would create rules to keep the wealthy from exploiting the lower pass-through rate as a way to reduce their tax rates. Pass-throughs play a key role in widening income inequality. Research by economists Thomas Piketty and Emmanuel Saez found that the top 1 percent of earners accounted for more than 20 percent of total U.S. income in 2013, up from 10 percent in 1980. Of that increase in share of income, 41 percent was due to wealthier people earning money via pass-through firms. But so far, Trump aides say they have yet to finalize a plan that would support small businesses instead of the rich.

Despite friendly talk, US-China trade rifts resurface

WASHINGTON (AP) — Cake and conversation, it seems, can go only so far to mend longstanding economic rifts between the United States and China. Three months after President Donald Trump and his Chinese counterpart, Xi Jinping, shared chocolate cake at an amiable summit in Florida, tensions between the world’s two biggest economies are flaring again. As officials of the two sides began meeting July 19, Chinese Vice Premier Wang Yang said the two countries depend on each other economically and warned that “confrontation will immediately damage the interests of both.” Obstacles to cooperation loom. The Trump administration is considering slapping tariffs on steel imports, a step that risks igniting a trade war. For the United States, it’s a perilous option to address a problem caused largely by China’s overproduction of steel. And Trump is criticizing China again for failing to use its economic leverage to rein in its neighbor and ally, the nuclear rogue state North Korea. Could this week’s U.S.-China Comprehensive Dialogue produce a meaningful breakthrough in economic relations? Most China watchers are skeptical. “I’m not looking for anything worthwhile,” says Derek Scissors, a China specialist at the conservative American Enterprise Institute. For one thing, the points of difference between the two countries run deep. For another, Xi faces political pressures at home and won’t want to cause a stir in Beijing. For all the tensions between the two nations, Trump’s words about Xi himself have remained warm. He has suggested that the personal bond he formed with Xi when the two met April 6-7 at Trump’s Mar-a-Lago resort can overcome fundamental differences on trade and national security. Last week, the president called his Chinese counterpart a “friend of mine,” ”a terrific guy” and “a very special person.” At a White House event July 17, Trump suggested that the relationship is so strong that he asked during the Florida summit to start exporting U.S. beef to China and that the request was quickly granted. Trump said that the beef industry was so pleased to return to China after a 14-year ban that one executive from Nebraska “hugged me, he wanted to kiss me so badly.” “We welcome this opportunity,” Kenny Graner, a North Dakota cattle farmer who is president of the U.S. Cattlemen’s Association, says of the China market. “They have a middle class that’s growing in income. It’s big, a lot of people.” After the meeting, the president softened his accusations of abusive Chinese practices, dropped his threat to label China a currency manipulator and expressed optimism that China would pressure North Korea to scale back its nuclear program. Still, the Trump-Xi relationship has yet to deliver the substantive changes that Trump the candidate had promised voters — a core piece of his mantra to put “America first.” The economic irritants are likely to vex U.S. and Chinese officials this week. Trump had campaigned on a promise to shrink America’s trade deficits, which he blames for wiping out American factories and manufacturing jobs. The United States last year ran a trade deficit in goods with China of $347 billion, the amount by which imports exceeded exports. It’s by far the widest gap that the U.S. has with any country. “If (the gap) was just the product of free-market forces, we could understand,” Commerce Secretary Wilbur Ross said at the opening of the dialogue July 19. “But it’s not.” The Trump administration argues that China unfairly subsidizes its exports. Take steel. From 2000 to 2016, China accelerated steel production, raising its share of the world market from 15 percent to nearly 50 percent. As Chinese steel poured into the market, global prices fell, hurting American steelmakers. Scissors notes that China has long promised to stop subsidizing steel and to slow production but hasn’t delivered. The Trump administration responded by invoking a little-used weapon in American trade law that lets the president tax or restrict imports — if a U.S. Commerce Department investigation finds that they imperil national security. (The result of Commerce’s investigation of steel imports is expected soon.) The rationale was that the American military relies on steel for airplanes, ships and other equipment. Steel also goes into roads, bridges and other infrastructure. The problem is that the United States already blocks most Chinese steel imports. So any tariffs or limits on imports would instead hurt other countries, including such staunch allies as Canada and South Korea. Scissors says the United States could try to coordinate sanctions against China by countries that do import Chinese steel. David Dollar, a former World Bank and U.S. Treasury official who is now at the Brookings Institution, thinks Xi isn’t likely to make a bold move to cut Chinese steelmaking capacity — or enact other economic reforms — in advance of the Chinese communist party’s National Congress this fall. At the meeting, Xi will want to further tighten his grip on the party. What’s more, the European Union and others are likely to lash back if the U.S. imposes sanctions on foreign steel, thereby running the risk of a broader trade war. Then there’s North Korea. As a presidential candidate, Trump attacked China for refusing to pressure Pyongyang to back off from developing nuclear weapons. After the Mar-a-Lago summit, though, Trump praised Beijing for agreeing to help deal with North Korea. As a reward, he abandoned his vow to accuse China of manipulating its currency to benefit Chinese exporters. This month, North Korea defiantly proceeded with its first launch of an intercontinental ballistic missile. Trump tweeted his complaint: “Trade between China and North Korea grew almost 40% in the first quarter. So much for China working with us — but we had to give it a try!” Overall, Brookings’ Dollar expects more turbulence between Washington and Beijing. The Obama administration, he notes, had kept the relationship stable despite economic differences by working with China on such issues as the Paris climate agreement and the Iran nuclear deal. But Trump has pulled out of the Paris deal and denounced the Iran pact. “We’re going to see more volatility in the U.S.-China relationship than we’ve seen in years,” Dollar said.
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